<PAGE>   1
                       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 July 28, 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 September 6,
2001; 6,972,700 shares of Non-Voting Common Stock, $0.01 par value, as of
September 6, 2001.





<PAGE>   2
                                NETSILICON, INC.

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I.   FINANCIAL INFORMATION

ITEM 1.   Financial Statements

          Condensed Consolidated Balance Sheets
          July 28, 2001 and January 31, 2001 ...............................   1

          Condensed Consolidated Statements of Operations
          Three Months and Six Months Ended July 28, 2001 and
          July 29, 2000 ....................................................   2

          Condensed Consolidated Statements of Cash Flows
          Six Months Ended July 28, 2001 and July 29, 2000 .................   3

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

ITEM 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations ..............................   7

ITEM 3.   Quantitative and Qualitative Disclosure About Market Risk ........  23

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings ................................................  23

ITEM 2.   Changes in Securities and Use of Proceeds ........................  24

ITEM 3.   Defaults Upon Senior Securities ..................................  24

ITEM 4.   Submission of Matters to a Vote of Security Holders ..............  24

ITEM 5.   Other Information ................................................  24

ITEM 6.   Exhibits and Reports on Form 8-K .................................  24

Signatures .................................................................  25





<PAGE>   3



                          PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

                                NETSILICON, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     JULY 28,        JANUARY 31,
                                                                       2001             2001
                                                                   -----------       -----------
                                                                   (Unaudited)
<S>                                                                <C>               <C>
                              ASSETS

CURRENT ASSETS
      Cash and equivalents                                         $ 8,173,200       $ 5,999,200
      Short-term investments                                         3,112,500         6,794,400
      Accounts receivable, net                                       3,831,600         4,660,300
      Inventory, net                                                 5,084,500         6,707,000
      Prepaid expenses and other current assets                        866,700         1,628,600
                                                                   -----------       -----------
          TOTAL CURRENT ASSETS                                      21,068,500        25,789,500
PROPERTY AND EQUIPMENT, NET                                          2,184,600         2,335,200
INTANGIBLE ASSETS, NET                                               1,680,800         1,351,800
OTHER ASSETS                                                         2,719,100         1,924,600
                                                                   -----------       -----------
TOTAL ASSETS                                                       $27,653,000       $31,401,100
                                                                   ===========       ===========


               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable                                             $ 1,642,000       $ 2,787,100
      Deferred revenue                                                 401,900           343,000
      Other current liabilities, including short-term
         portion of capital lease obligation                         4,034,000         3,557,700
                                                                   -----------       -----------
          TOTAL CURRENT LIABILITIES                                  6,077,900         6,687,800
                                                                   -----------       -----------
          TOTAL LIABILITIES                                          6,077,900         6,687,800
                                                                   -----------       -----------
STOCKHOLDERS' EQUITY
      Preferred stock, $0.01 par value; 5,000,000 shares
         authorized; none issued                                            --                --
      Common stock, $0.01 par value; 35,000,000 shares
         authorized; issued and outstanding:
            Voting (7,064,400 and 6,810,100 shares)                     70,600            68,100
            Non-voting (6,972,700 shares)                               69,700            69,700
      Additional paid-in capital                                    29,495,700        28,187,400
      Accumulated other comprehensive income (loss)                    (68,500)           26,500
      Accumulated deficit                                           (7,992,400)       (3,638,400)
                                                                   -----------       -----------
          TOTAL STOCKHOLDERS' EQUITY                                21,575,100        24,713,300
                                                                   -----------       -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $27,653,000       $31,401,100
                                                                   ===========       ===========
</TABLE>




     See accompanying notes to condensed consolidated financial statements.



                                       1


<PAGE>   4


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


<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED                  SIX MONTHS ENDED
                                              -----------------------------      -----------------------------
                                                JULY 28,          JULY 29,        JULY 28,          JULY 29,
                                                  2001             2000             2001              2000
                                              -----------       -----------      -----------       -----------
<S>                                           <C>               <C>              <C>               <C>

NET SALES                                     $ 7,052,600       $ 9,857,200      $14,029,700       $18,866,900
COST OF SALES                                   3,410,600         4,128,900        6,380,500         7,640,400
                                              -----------       -----------      -----------       -----------
GROSS MARGIN                                    3,642,000         5,728,300        7,649,200        11,226,500
                                              -----------       -----------      -----------       -----------
OPERATING EXPENSES
   Selling and marketing                        2,480,200         2,764,300        5,369,000         5,332,100
   Engineering, research and development        1,963,800         1,399,400        3,832,000         2,793,400
   General and administrative                   1,429,400         1,059,500        2,704,100         2,039,500
   Amortization of intangibles                    154,200                --          304,800                --
                                              -----------       -----------      -----------       -----------
       TOTAL OPERATING EXPENSES                 6,027,600         5,223,200       12,209,900        10,165,000
                                              -----------       -----------      -----------       -----------
OPERATING INCOME (LOSS)                        (2,385,600)          505,100       (4,560,700)        1,061,500
   Interest income, net                           112,100           240,700          271,900           464,900
                                              -----------       -----------      -----------       -----------
INCOME (LOSS) BEFORE TAXES
   ON INCOME                                   (2,273,500)          745,800       (4,288,800)        1,526,400
   Taxes on income                                 22,100                --           65,200                --
                                              -----------       -----------      -----------       -----------
NET INCOME (LOSS)                             $(2,295,600)      $   745,800      $(4,354,000)      $ 1,526,400
                                              ===========       ===========      ===========       ===========
NET INCOME (LOSS) PER COMMON SHARE
       Basic                                  $     (0.16)      $      0.05      $     (0.31)      $      0.11
       Diluted                                $     (0.16)      $      0.05      $     (0.31)      $      0.10
SHARES USED IN PER SHARE CALCULATION
       Basic                                   14,036,490        13,620,780       14,014,201        13,594,968
       Diluted                                 14,036,490        15,927,588       14,014,201        15,910,216

</TABLE>




     See accompanying notes to condensed consolidated financial statements.



                                       2
<PAGE>   5


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


<TABLE>
<CAPTION>
                                                                                      SIX MONTHS ENDED
                                                                                -----------------------------
                                                                                  JULY 28,         JULY 29,
                                                                                   2001              2000
                                                                                -----------       -----------
<S>                                                                             <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                          $(4,354,000)      $ 1,526,400
     Adjustments to reconcile net income (loss) to
     net cash used in operating activities:
         Depreciation and amortization                                            1,165,900           662,100
         Changes in operating assets and liabilities, net of
              effects of acquisition:
            Accounts receivable                                                   1,846,600        (2,596,800)
            Inventories                                                           1,677,100        (1,215,400)
            Other current assets                                                    (64,700)          289,500
            Accounts payable                                                     (1,714,100)          927,800
            Other current liabilities                                               217,700          (339,100)
            Deferred revenue                                                         58,900           253,000
                                                                                -----------       -----------
                NET CASH USED IN OPERATING ACTIVITIES                            (1,166,600)         (492,500)
                                                                                -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of (purchase of) short-term investments                   3,655,000        (1,997,300)
     Purchases of property and equipment                                           (495,200)       (1,371,900)
     Cash acquired in acquisition (net of cash paid and
         direct acquisition costs of $347,800)                                      413,600                --
     Software development costs                                                     (63,000)         (304,100)
     Other assets                                                                  (147,400)         (308,700)
                                                                                -----------       -----------
                NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES               3,363,000        (3,982,000)
                                                                                -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of notes receivable to officer                                             --          (621,200)
     Repayments of affiliate advances                                                    --           (55,800)
     Repayments of short-term debt                                                       --          (779,700)
     Payments of capital lease obligation                                            (7,300)         (184,100)
     Proceeds from issuance of stock                                                 53,000                --
     Proceeds from exercise of stock options                                             --           734,900
                                                                                -----------       -----------
                NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  45,700          (905,900)
                                                                                -----------       -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS                             (68,100)               --
                                                                                -----------       -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                       2,174,000        (5,380,400)

CASH AND EQUIVALENTS - BEGINNING OF PERIOD                                        5,999,200        11,096,500
                                                                                -----------       -----------
CASH AND EQUIVALENTS - END OF PERIOD                                            $ 8,173,200       $ 5,716,100
                                                                                ===========       ===========

</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   6

                                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:

                                               July 28,     January 31,
                                                2001           2001
                                             ----------     ----------

          Raw material                       $4,711,300     $6,543,000
          Work in process                        68,000        118,100
          Finished Goods                        305,200         45,900
                                             ----------     ----------
          Total Inventory                    $5,084,500     $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>   7
          The following is a reconciliation of the numerator and denominators of
          the basic and diluted per share computations:

<TABLE>
<CAPTION>
                                                       Three months ended           Six months ended
                                                   --------------------------    --------------------------
                                                    July 28,       July 29,       July 28,      July 29,
                                                      2001           2000           2001          2000
                                                   -----------    -----------    -----------    -----------
         <S>                                      <C>            <C>            <C>            <C>
          Net income (loss) available to common
          shareholders, basic and diluted          $(2,295,600)   $   745,800    $(4,354,000)   $ 1,526,400
                                                   ===========    ===========    ===========    ===========
          Weighted-average number of
          common shares used in basic
          earnings per share                        14,036,490     13,620,780     14,014,201     13,594,968

          Effect of dilutive securities - stock
          options                                           --      2,306,808             --      2,315,248
                                                   -----------    -----------    -----------    -----------
          Weighted-average number of
          common shares and dilutive
          potential common stock used in
          dilutive earnings per share               14,036,490     15,927,588     14,014,201     15,910,216
                                                   ===========    ===========    ===========    ===========
</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 six months ended July 28, 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 July 28, 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 product 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
                                                                ==========

          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

<PAGE>   8

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            Six Months Ended
                                                       -----------------------     ------------------------
                                                        July 28,      July 29,      July 28,      July 29,
                                                          2001          2000          2001          2000
                                                       -----------    --------     -----------   ----------
          <S>                                          <C>            <C>          <C>           <C>
          Net income (loss)..........................  $(2,295,600)   $745,800     $(4,354,000)  $1,526,400
                                                       -----------    --------     -----------   ----------
          Foreign currency translation adjustments...      (12,600)         --         (68,100)          --

          Unrealized gain (loss) on investments......      (22,200)      7,500         (26,900)      23,300
                                                       -----------    --------     -----------   ----------
          Other comprehensive income (loss)..........      (34,800)      7,500         (95,000)      23,300
                                                       -----------    --------     -----------   ----------
          Total comprehensive income (loss)..........  $(2,330,400)   $753,300     $(4,449,000)  $1,549,700
                                                       ===========    ========     ===========   ==========
</Table>

6.   Contingencies:

          On August 31, 2000, Websprocket, LLC filed a suit against the Company
          in the United States District Court for the Northern District of
          California (Websprocket, LLC v. NetSilicon, Inc., Civil Action No.
          C-00-20915), claiming breach of contract. The complaint alleges that
          the Company breached a technology development contract that was
          executed between the Company and Websprocket, LLC in December 1999.
          Websprocket, LLC seeks relief including alleged damages of $2,000,000
          plus attorney's fees, a declaration of its rights under the technology
          development contract and an injunction requiring the Company to cease
          using and return all property of Websprocket, LLC. The Company
          believes that it has meritorious defenses to the claims and intends to
          contest the lawsuit vigorously. On or about October 31, 2000, the
          Company filed an Answer and Counterclaim denying the allegations in
          Websprocket, LLC's complaint and asserting counterclaims against
          Websprocket, LLC that included breach of contract, fraud, and
          negligent misrepresentation. Websprocket, LLC filed a reply to the
          Company's counterclaims on November 25, 2000, denying the allegations.
          An unfavorable resolution of the action could have a material adverse
          effect on the business, results of operations or financial condition
          of the Company.

          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. A second, nearly identical
          complaint was filed in the same Court on or about August 15, 2001 in a
          lawsuit captioned "Michael Rasner v. NetSilicon, Inc., et al."
          (01-CV-7651). 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 recission or recissory 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 complaint are without merit and intend to contest
          them vigorously. An unfavorable resolution of the action could have a
          material adverse effect on the business, results of operations or
          financial condition of the Company.

7.   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 purchase 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 July 28, 2001, the net carrying amount of
          intangible assets is $1,680,800. Amortization expense during the
          six-month period ended July 28, 2001 was $304,800. 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.


                                       6
<PAGE>   9
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
          six month periods ended July 28, 2001 and July 29, 2000.

<TABLE>
<CAPTION>
                                                       Three Months Ended       Six Months Ended
                                                     ---------------------    --------------------
                                                     July 28,     July 29,    July 28,     July 29,
                                                       2001        2000         2001         2000
                                                     --------     --------    --------     --------
          <S>                                         <C>          <C>          <C>          <C>

          Net sales                                   100.0%       100.0%       100.0%       100.0%
          Cost of sales                                48.4         41.9         45.5         40.5
                                                      -----        -----        -----        -----
          Gross margin                                 51.6         58.1         54.5         59.5
                                                      -----        -----        -----        -----
          Operating expenses:
            Selling and marketing                      35.2         28.0         38.3         28.3
            Engineering, research
              and development                          27.8         14.2         27.3         14.8
            General and administrative                 20.3         10.7         19.3         10.8
            Amortization of intangibles                 2.2           --          2.2           --
                                                      -----        -----        -----        -----
          Total operating expenses                     85.5         52.9         87.1         53.9
                                                      -----        -----        -----        -----
          Operating income (loss)                     (33.9)         5.2        (32.6)         5.6
          Interest income, net                          1.6          2.4          1.9          2.5
                                                      -----        -----        -----        -----
          Income (loss) before taxes on income        (32.3)         7.6        (30.7)         8.1
          Taxes on income                               0.3           --          0.5           --
                                                      -----        -----        -----        -----
          Net income (loss)                           (32.6)%        7.6%       (31.2)%        8.1%
                                                      =====        =====        =====        =====

</TABLE>



                                       7
<PAGE>   10

          Three and Six Months Ended July 28, 2001 compared to Three and Six
          Months Ended July 29, 2000:

          Net sales. Net sales were $7.1 million for the three months ended July
          28, 2001 compared to $9.9 million for the three months ended July 29,
          2000, representing a decrease of 28.5%. Net sales decreased to $14.0
          million for the six months ended July 28, 2001 from $18.9 million for
          the six months ended July 29, 2000, a decrease of 25.6%.

          The decrease in net sales in the three and six month periods was due
          primarily to an economic slowdown that has affected our imaging
          customers. Revenue from our imaging customers was $5.6 and $11.2 for
          the three and six month periods, respectively, ended July 28, 2001
          compared to $8.0 and $15.6 for the three and six month periods,
          respectively, ended July 29, 2000. Backlog for our products and
          service was approximately $4.5 and $8.1 million at July 28, 2001 and
          July 29, 2000, respectively, all of which was scheduled to be shipped
          within 12 months.

          Our embedded networking semiconductor and controller products
          accounted for 90.0% and 88.7% of total net sales for the six months
          ended July 28, 2001 and July 29, 2000, respectively. Software
          development tools and development boards accounted for 5.7% of total
          net sales for the six months ended July 28, 2001 and 5.3% of total net
          sales for the prior year six month period. Royalty, maintenance and
          service revenue was 4.3% and 6.0% of total net sales for the six
          months ended July 28, 2001 and July 29, 2000, respectively.

          During the six months ended July 28, 2001, international sales
          accounted for 51.8% of net sales compared to 52.9% of net sales for
          the six month period ended July 29, 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 $3.6 million, or 51.6% of net sales, for the three months
          ended July 28, 2001 from $5.7 million, or 58.1% of net sales, for the
          three months ended July 29, 2000, representing a decrease of 36.4%.
          Gross margin decreased 31.9% to $7.6 million, or 54.5% of net sales,
          for the six months ended July 28, 2001 from $11.2 million, or 59.5% of
          net sales, for the six months ended July 29, 2000.

          The decrease in gross margin percent for the three and six months
          periods ended July 28, 2001 from the prior year periods was due
          primarily to (i) a decrease in high-margin sales of software products
          and development kits; (ii) a decrease in royalty revenue; and (iii)
          the overall decrease in sales.

          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 28.0% of net
          sales, for the three months ended July 29, 2000 to $2.5 million, or
          35.2% of net sales, for the three months ended July 28, 2001,
          representing a decrease of 10.3%. Selling and marketing expenses were
          $5.4 million, or 38.3% of net sales, for the six



                                       8
<PAGE>   11
          month period ended July 28, 2001 compared to $5.3 million, or 28.3% of
          net sales, for the six month period ended July 29, 2000.

          The decrease in selling and marketing expenses for the three months
          ended July 28, 2001 compared to the three months ended July 29, 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.
          Selling and marketing expenses for the six month period ended July 28,
          2001 were consistent with selling and marketing expenses for the six
          month period ended July 29, 2000 due to the fact that the cost savings
          realized in the three month period ended July 28, 2001 were offset by
          increased costs in the three month period ended April 28, 2001
          compared to the prior year period ended April 29, 2000. These
          increased costs included (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.; (ii) payroll recruiting and other
          costs associated with investments made to expand our customer support
          department; and (iii) an increase in marketing costs associated with
          the introduction of new products, expanded advertising and publicity
          programs, and greater participation in trade shows.

          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 increased
          to $2.0 million, or 27.8% of net sales, for the three months ended
          July 28, 2001 from $1.4 million, or 14.2% of net sales, for the three
          months ended July 29, 2000, representing an increase of 40.3%.
          Engineering, research and development expenses increased 37.2% to $3.8
          million, or 27.3% of net sales, for the six months ended July 28, 2001
          from $2.8 million, or 14.8% of net sales, for the six months ended
          July 29, 2000.

          This increase is due primarily to increased payroll costs associated
          with an increase in headcount from 43 employees engaged in research
          and development activities at July 29, 2000 to 52 employees at July
          28, 2001. The increase in headcount includes the addition of 10
          engineers acquired in connection with our purchase of certain assets
          of Pacific Softworks in August 2000. In addition, the increase in
          engineering, research and development expenses is attributable to
          increases in recruiting costs, depreciation and amortization of
          purchased software tools, and amortization of purchased intangible
          assets related to our purchase of certain Pacific Softworks assets in
          August 2000. These increases were offset in part by decreases in
          several discretionary costs due to our cost reduction initiatives.

          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 $1.4 million, or
          20.3% of net sales, for the three months ended July 28, 2001 from $1.1
          million, or 10.7% of net sales, for the three months ended July 29,
          2000, an increase of 34.9%. General and administrative expenses
          increased 32.6% to $2.7 million, or 19.3% of net sales, for the six
          months ended July 28, 2001 from $2.0 million, or 10.8% of net sales,
          for the six months ended July 29, 2000.

          The increase in general and administrative expenses is attributable to
          an increase in legal, accounting and insurance costs, increases in
          rent expense related to our lease of additional space at our
          headquarters in Massachusetts and our new facilities in California and
          Japan. The increase is also due to higher employee-related expenses
          including payroll costs and



                                       9
<PAGE>   12
          severance costs for terminated employees. These increases were offset
          in part by decreases in several discretionary costs due to our cost
          reduction initiatives.

          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 $154,200, or
          2.2% of net sales, and $304,800, or 2.2% of net sales, for the three
          and six months ended July 28, 2001, respectively, from $0 for the
          three and six months ended July 29, 2000.

          Interest income, net. Interest income includes interest earned on cash
          and short-term investment balances. Net interest income was $112,100,
          or 1.6% of net sales, and $240,700, or 2.4% of net sales, for the
          three months ended July 28, 2001 and July 29, 2000, respectively. Net
          interest income was $271,900, or 1.9% of net sales, and $464,900, or
          2.5% of net sales, for the six months ended July 28, 2001 and July 29,
          2000, respectively. The decrease in interest income is due to a
          decrease in cash and short-term investments.

          Provision for income taxes. The provision for income taxes for the
          three and six months ended July 28, 2001 totaled $22,100, or 0.3% of
          net sales, and $65,200, or 0.5% of net sales, respectively, and
          related to foreign taxes for our Japanese subsidiary. There was no net
          provision for U.S. income taxes for the three and six months ended
          July 28, 2001 and July 29, 2000 due to the net losses in the periods
          ended July 28, 2001 and the utilization of available net operating
          loss carryforwards in the periods ended July 29, 2000.

          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 July 28, 2001, we
          had working capital of $15.0 million, cash and cash equivalents of
          $8.2 million and short-term investments of $3.1 million.

          Our operating activities used cash of $1.2 million and $492,500 for
          the six months ended July 28, 2001 and July 29, 2000, respectively.
          Cash used by operating activities in the six month period ended July
          28, 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
          six months ended July 29, 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.


                                       10
<PAGE>   13
          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 $3.3 million and used cash
          of $4.0 million during the six months ended July 28, 2001 and July 29,
          2000, respectively. Cash provided by investing activities during the
          six months ended July 28, 2001 related primarily to proceeds of $3.6
          million from short-term investments and net cash acquired in the
          acquisition of Dimatech Corporation of $413,600, offset in part by
          purchases of property and equipment of $495,200. Cash used in
          investing activities during the six months ended July 29, 2000 related
          primarily to the purchase of $2.0 million of short-term investments
          and purchases of $1.4 million of property and equipment.

          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 $45,700 and cash used by
          financing activities was $905,900 during the six months ended July 28,
          2001 and July 29, 2000, respectively. Cash provided by financing
          during the period ended July 28, 2001 related to proceeds from the
          issuance of stock. Cash used in financing activities in the period
          ended July 29, 2000 was attributable to repayments of short term debt
          of $779,700 and a loan to an officer of the Company in the amount of
          $621,200, offset in part by proceeds from the exercise of stock
          options of $734,900.

          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.

          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 July 28, 2001, the net carrying amount of
          intangible assets is $1,680,800. Amortization expense during the
          six-month period ended July 28, 2001 was $304,800. 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.


                                       11
<PAGE>   14
                                  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 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;



                                       12
<PAGE>   15
               -    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

               -    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.



                                       13
<PAGE>   16
          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.

          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 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.

                                       14


<PAGE>   17
          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.

          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. In particular, we have dedicated significant
          resources to developing products based on the Linux operating system
          and on the Java programming language, and the failure of these
          products to achieve widespread acceptance 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


                                       15

<PAGE>   18
          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.

          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.

                                       16

<PAGE>   19
          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.

          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 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



                                       17
<PAGE>   20

          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.

          Our ability to compete depends in part on our proprietary rights and
          technology. We have no patents and rely primarily 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. While we have filed
          two patent applications and plan to file various additional
          applications, such applications may be denied. Any patents, once
          issued, may be circumvented by our competitors. 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



                                       18
<PAGE>   21
          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.

          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




                                       19
<PAGE>   22
          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; Executive Vice
          President, Finance and Operations 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 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



                                       20
<PAGE>   23
          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 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.


                                       21

<PAGE>   24
          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 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



                                       22

<PAGE>   25
          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
          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 August 31, 2000, Websprocket, LLC filed a suit against the Company
          in the United States District Court for the Northern District of
          California (Websprocket, LLC v. NetSilicon, Inc., Civil Action No.
          C-00-20915), claiming breach of contract. The complaint alleges that
          the Company breached a technology development contract that was
          executed between the Company and Websprocket, LLC in December 1999.
          Websprocket, LLC seeks relief including alleged damages of $2,000,000
          plus attorney's fees, a declaration of its rights under the technology
          development contract and an injunction requiring the Company to cease
          using and return all property of Websprocket, LLC. The Company
          believes that it has meritorious defenses to the claims and intends to
          contest the lawsuit vigorously. On or about October 31, 2000, the
          Company filed an Answer and Counterclaim denying the


                                       23


<PAGE>   26
          allegations in Websprocket, LLC's complaint and asserting
          counterclaims against Websprocket, LLC that included breach of
          contract, fraud, and negligent misrepresentation. Websprocket, LLC
          filed a reply to the Company's counterclaims on November 25, 2000,
          denying the allegations. An unfavorable resolution of the action
          could have a material adverse effect on the business, results of
          operations or financial condition of the Company.

          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. A second, nearly identical
          complaint was filed in the same Court on or about August 15, 2001 in a
          lawsuit captioned "Michael Rasner v. NetSilicon, Inc., et al."
          (01-CV-7651). 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 recission or recissory 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 complaint are without merit and intend to contest
          them vigorously. An unfavorable resolution of the action could have a
          material adverse effect on the business, results of operations or
          financial condition of the Company.


ITEM 2.   Changes in Securities and Use of Proceeds

               None

ITEM 3.   Defaults Upon Senior Securities

               None

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

          The following proposals were voted upon by the Company's stockholders
          at the Annual Stockholders' Meeting held on June 13, 2001.

          The following nominees were elected as Class II Directors of the
          Company to serve for a three year term or until their successors are
          elected and qualified.

                                 Total Votes          Total Votes Withheld
               Nominee           for Nominee              for Nominee
          -----------------      -----------          --------------------
          Francis E. Girard       6,347,874                 44,293
          F. Grant Saviers        6,347,874                 44,293


          The term of office for the following directors continued after the
          meeting: Michael K. Ballard (Class I), William Johnson (Class I),
          Edward B. Roberts (Class III) and Cornelius Peterson, VIII (Class
          III).

          A proposal to approve the Company's 2001 Stock Option and Incentive
          Plan was adopted and approved with 2,868,685 shares voting in favor;
          338,738 shares voting against; 7,756 shares abstaining; and
          3,176,988 shares not voting.

          The election of BDO Siedman, LLP as independent auditors for the
          fiscal year ending January 31, 2002 was ratified, with 6,371,839
          shares voting in favor, 11,720 voting against, and 8,608 abstaining.

ITEM 5.   Other Information

               None

ITEM 6.   Exhibits and Reports on Form 8-K

          a) Exhibits

               Exhibit
               Number    Description
               --------  -----------
                10.1     Employment Agreement Between NetSilicon, Inc. and
                         Cornelius Peterson, VIII

                10.2     Employment Agreement Between NetSilicon, Inc. and
                         Daniel J. Sullivan

          b) Reports on 8-K

               None

                                       24
<PAGE>   27
                                   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)

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


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



                                       25