To Our Shareholders



Letter









<PAGE>


                    ============        ----------------
                       LETTER                TO OUR                          11.
                                        ----------------
                                           SHAREHOLDERS
                    ============        ----------------


In my letter to you last year I noted that our challenge was to deliver and
support the new products that we announced in FY97 to make faster growth for
N.E.T. a reality. In FY98 we accepted this challenge and began installing the
products that are steering our company into new market areas.


Our Promina 800 Series has been shipping for three quarters, with revenue
growing significantly each quarter. We are both deploying new networks and
upgrading our customer base. The Promina 800 Series is Year 2000 compliant,
provides access to carrier ATM services, and is our multiservice access platform
to migrate enterprise networks to virtual private network services.


Our PrimeVoice compression products are achieving success with many
international voice carriers. We are able to offer highly compressed
toll-quality voice while transporting the fax and modem data common on
international circuits. Our PrimeSwitch(TM) module complements our
voice-compression capabilities and allows us to offer a unique portfolio of
voice products that is the most comprehensive in the industry. Voice
applications on the Promina 800 Series are expected to be increasingly important
to our revenue stream in FY99 and beyond.


<PAGE>


                    ============        ----------------
12.                    LETTER                TO OUR                          
                                        ----------------
                                           SHAREHOLDERS
                    ============        ----------------


We extended our packet products with a new switching engine and new versions of
our frame relay and routing software. Our packet products allow us to address
the migration of data traffic to frame relay and Internet Protocols as an
integral part of the multiservice capabilities of our Promina 800 Series.


Our Promina 4000 multiservice ATM edge switch is in field trials and will soon
be available for customer shipment. We are confident that this new platform
raises the bar with its advanced traffic management capabilities. It allows
carriers to differentiate their service offerings with quality of service
guarantees while at the same time offering a cost-effective, high-utilization
platform for a variety of services.


The past two years have encompassed a major business transition for our company.
Our development organization has delivered a new product portfolio with very
high initial quality. We are "revenue ready" on the Promina product line and are
moving on with our development plans to add both features and capabilities as
well as new platforms. Today, our products address the requirements of
substantially larger and potentially more profitable markets than was possible
before this transition began.


I am proud that we accomplished these changes while maintaining profitability
and significantly improving every aspect of our balance sheet. However, the
transition did affect our overall performance. In FY98 we suffered a decline in
the revenue from our IDNX(R) product line that more than offset the growth of
revenue from our new products. Conse-

<PAGE>


                    ============        ----------------
                       LETTER                TO OUR                          13.
                                        ----------------
                                           SHAREHOLDERS
                    ============        ----------------


quently, top-line revenue declined from $324 million to $309 million
year-over-year, resulting in earnings of $14 million or a fully diluted 65(cent)
per share for FY98. One big plus was that we ended the year with a record
bookings quarter, driven by demand for our new products, and our cash reserves
increased to $161 million. We are financially strong and well-positioned to take
advantage of the new market opportunities created by our Promina products.


Finally, we've moved our headquarters. We had been in our Redwood City,
California location for ten years. After examining both our requirements and our
options, we chose to relocate to a new, custom-built campus in Fremont, just
across the San Francisco Bay from our previous location. This state-of-the-art
facility offers an extremely attractive work environment, access to world-class
talent, and room to grow with our business.


We've embarked on a new year with a revitalized product line and a broader set
of market opportunities. In a way, our new home provides a metaphor for the
change we've created, symbolizing both a summary of our accomplishments and the
beginning of a new era for N.E.T.


Sincerely,


/s/ JOSEPH J. FRANCESCONI
--------------------------------------------------------------------------------
Joseph J. Francesconi
President and Chief Executive Officer

<PAGE>

                    ============        ----------------
                     FINANCIAL               REVIEW
                    ============        ----------------


FINANCIAL REVIEW

QUARTERLY FINANCIAL DATA                                                   15.

FIVE YEAR FINANCIAL SUMMARY                                                15.

MANAGEMENT'S DISCUSSION AND ANALYSIS                                       16.

CONSOLIDATED BALANCE SHEETS                                                24.

CONSOLIDATED STATEMENTS OF INCOME                                          25.

CONSOLIDATED STATEMENTS OF CASH FLOWS                                      26.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                            27.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 28.

INDEPENDENT AUDITORS' REPORT                                               41.

COMMON STOCK DIVIDENDS AND PRICE RANGE                                     42.

CORPORATE DIRECTORY AND INFORMATION                                        43.


<PAGE>


                    ============        ----------------
                      QUARTERLY             FINANCIAL                        15.
                                        ----------------
                                        DATA (UNAUDITED) 
                    ============        ----------------


<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)          FIRST          SECOND           THIRD          FOURTH
----------------------------------------------------------------------------------------
<S>                              <C>             <C>             <C>             <C>    
Fiscal Quarter 1998
Revenue                          $79,973         $77,847         $71,956         $78,945
Gross margin                      42,475          42,018          37,364          41,079
Net income                         5,655           5,759           2,477             459
Diluted earnings per share           .26             .26             .11             .02

Fiscal Quarter 1997
Revenue                          $76,469         $78,398         $83,302         $86,269
Gross margin                      39,373          37,825          41,728          43,369
Net income                         4,478           5,589           6,620           7,305
Diluted earnings per share           .21             .26             .31             .34
</TABLE>

Results for the fourth quarter of fiscal 1998 include a charge of $3.3 million,
or $0.10 per share, related to the relocation of the Company's facilities. See
the Facility Relocation Costs section in Note 1 in the Notes to Consolidated
Financial Statements and in the Management's Discussion and Analysis.


                    ============        ----------------
                     FIVE YEAR              FINANCIAL
                                        ----------------
                                             SUMMARY 
                    ============        ----------------

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,           1998         1997         1996         1995         1994 
-----------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>          <C>          <C>      
Revenue                     $308,721     $324,438     $338,899     $284,036     $237,672 
Net income (loss)             14,350       23,992       31,350       27,070       (6,324)
Diluted earnings (loss)
per share                        .65         1.11         1.50         1.39         (.38)
7 1/4% convertible
subordinated debentures       25,821       25,821       33,526       68,625       68,625
Total assets                 334,557      301,653      281,957      232,046      187,015
</TABLE>
<PAGE>


                    ============        ----------------
16.                 MANAGEMENT'S           DISCUSSION 
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes. The Company's future operating
results may be affected by a number of factors, trends, and risks -- many beyond
the Company's control. These factors are discussed further within Business
Environment and Risk Factors below and include, among others: advances and
trends in new technologies; competitive pressures in the form of new products or
price reductions on current products; industry consolidation; changes in product
mix; changes in domestic and international economic and/or political conditions
or regulations; ability to develop and deliver new products; customer acceptance
of existing and new products and services; and other factors identified herein.


RESULTS OF OPERATIONS

The following table depicts data derived from the Consolidated Statements of
Income expressed as a percentage of revenue for each of the three years in the
period ended March 31.

<TABLE>
<CAPTION>
                                                   1998            1997            1996
-----------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>  
Product revenue                                     64.8%           66.2%           66.7%
Service and other revenue                           35.2            33.8            33.3
                                                   -----           -----           -----

  Total revenue                                    100.0           100.0           100.0
                                                   -----           -----           -----

Product gross margin                                60.8            58.2            59.9
Service and other revenue gross margin              38.0            33.9            31.6
                                                   -----           -----           -----

  Total gross margin                                52.8            50.0            50.5
                                                   -----           -----           -----

Sales and marketing                                 28.3            23.8            22.2
Research and development                            14.1            12.7            10.8
General and administrative                           3.8             3.5             3.5
Facility relocation costs                            1.1             0.0             0.0
                                                   -----           -----           -----

  Total operating expenses                          47.3            40.0            36.5
                                                   -----           -----           -----

   Income from operations                            5.5            10.0            14.0

Interest income                                      2.2             1.9             1.8

Interest expense                                    (0.6)           (0.7)           (1.4)
Other                                               (0.3)           (0.2)           (0.2)
                                                   -----           -----           -----

   Income before income taxes                        6.8            11.0            14.2
Income tax provision                                 2.2             3.8             4.9
Extraordinary gain                                   0.0             0.2             0.0
                                                   -----           -----           -----

Net income                                           4.6%            7.4%            9.3%
                                                   -----           -----           -----
</TABLE>

<PAGE>


                    ============        ----------------
                    MANAGEMENT'S           DISCUSSION                        17.
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

COMPARISON OF 1998 AND 1997

Revenue Total revenue in fiscal 1998 decreased $15.7 million, or 4.8% from
fiscal 1997. Product revenue and service and other revenue decreased $14.7
million and $1.0 million, respectively, for the year. The 6.8% decrease in
product revenue was principally due to a 28.6% decline in sales in the North
America channel caused by new product transition issues in the first half of the
fiscal year. In the fourth quarter of fiscal 1998, total product sales of the
Company's new Promina product line were 27.0% of product sales. Total product
sales in the N.E.T. Federal channel, which includes U.S. government sales and
sales to U.S. government contractors, increased 10.9% in fiscal 1998. Strong
fourth quarter product sales in the Asia Pacific/Latin America channel,
principally in China, contributed to a 5.3% increase for the year. Product sales
in Europe were down 4.3% in the year and offset the increase in the Asia
Pacific/Latin America channel. International product sales were 48.1% of total
product sales in fiscal 1998.

Service and other revenue decreased 1.0% from the prior year. A $2.8 million
decrease in systems integration services in support of product sales to the U.S.
government offset the growth in revenue of $1.8 million generated from both
traditional and expanded service offerings.

Overall, revenue in the N.E.T. Federal channel increased 2.3% over last year and
increased as a percentage of total revenue from 31.2% in fiscal 1997 to 33.6% in
fiscal 1998. Total international revenue increased 1.3% over last year, and in
fiscal 1998, it represented 37.3% of the Company's total revenue as compared to
35.0% in fiscal 1997.

Management expects revenue to increase in fiscal 1999 based largely upon the
acceptance of the Company's new products as well as the Company's entry into
new, larger markets.

Gross Margin Total gross margin as a percentage of total revenue increased to
52.8% in fiscal 1998 from 50.0% in fiscal 1997. Product gross margin increased
to 60.8% in fiscal 1998 from 58.2% in fiscal 1997. This increase primarily
resulted from a more favorable product mix, most notably in the shift to newer
products with higher gross margins. Product margins also increased in part due
to favorable manufacturing variances as a result of manufacturing efficiencies
and cost reductions.

The gross margin for service and other revenue increased to 38.0% in fiscal 1998
from 33.9% in fiscal 1997. The increase is primarily the result of cost
reductions and consolidation of the Company's service operations.

Management expects total gross margin in fiscal 1999 to remain fairly constant.

Operating Expenses Operating expenses increased $15.9 million in fiscal 1998 and
increased as a percentage of total revenue to 47.3% in fiscal 1998 from 40.0% in
fiscal 1997. Operating expenses include a $3.3 million charge related to the
relocation of the Company's facilities. Excluding this charge, operating
expenses would have increased $12.6 million and increased as a percentage 


<PAGE>


                    ============        ----------------
18.                 MANAGEMENT'S           DISCUSSION 
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

of total revenue to 46.2%. Management expects operating expenses in fiscal 1999
to continue to increase to support planned growth, while decreasing as a
percentage of total revenue.

Sales and marketing expense increased $9.9 million in fiscal 1998 due to the
addition of personnel to support continued expansion of the sales and marketing
infrastructure. The increase in spending also resulted from increased trade
show, advertising and travel expenses in conjunction with new product launches.
As a percentage of total revenue, sales and marketing expense increased to 28.3%
in fiscal 1998 from 23.8% in fiscal 1997, primarily due to the increased
expenses and lower sales volume. Management expects sales and marketing expense
to increase in fiscal 1999 to support continued expansion of the field sales
infrastructure, while decreasing as a percentage of planned revenue.

Research and development expense increased $2.4 million in fiscal 1998 due to
employment and capital equipment increases to support product development. As a
result of this increased spending, research and development expense also
increased as a percentage of total revenue to 14.1% in fiscal 1998 from 12.7% in
fiscal 1997. In fiscal 1998, $3.2 million of software costs were capitalized as
compared to $2.8 million in fiscal 1997 as more projects reached technological
feasibility in line with planned new product introductions in fiscal 1998 and
1999. Management plans to continue funding research and development efforts at
levels necessary to advance product programs and expects research and
development spending to increase in fiscal 1999, while decreasing as a
percentage of planned revenue.

General and administrative expense increased $0.3 million year-over-year, and
increased to 3.8% of total revenue as compared to 3.5% in fiscal 1997.
Management expects general and administrative expense to increase in fiscal
1999, while decreasing slightly as a percentage of planned revenue.

In the fourth quarter of fiscal 1998, the Company recorded a $3.3 million charge
related to the relocation of the Company's facilities to Fremont, California,
approximately 12 miles from its previous site in Redwood City. This charge is
composed primarily of the remaining lease commitment on the Redwood City
facility for the period when the facility will be vacant. The $3.3 million
charge had an impact of $0.10 on diluted earnings per share. In the first
quarter of fiscal 1999, the Company expects to incur moving expenses of
approximately $1.0 million.

Non-operating Items Interest income in fiscal 1998 increased from fiscal 1997
due to higher cash balances, offset partially by lower rates resulting from
investment in tax-free securities. Interest expense, primarily related to the
7 1/4% convertible subordinated debentures, decreased slightly as a result of
repurchases of the Company's convertible debentures during fiscal 1997.

For the fiscal year ended March 31, 1998, the Company recorded income tax
expense of $6.8 million as compared to $12.5 million for fiscal 1997, at an
effective rate of 32% and 35% for fiscal 1998 and fiscal 1997, respectively. See
Note 8 to the Consolidated Financial Statements.


<PAGE>


                    ============        ----------------
                    MANAGEMENT'S           DISCUSSION                        19.
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

COMPARISON OF 1997 AND 1996

Revenue Total revenue in fiscal 1997 decreased $14.5 million, or 4.3% from
fiscal 1996. Product revenue and service and other revenue decreased $11.2
million and $3.3 million, respectively, for the year. The 5.0% decrease in
product revenue was principally due to a decline in domestic product sales.
Total product sales in the N.E.T. Federal channel, which includes U.S.
government sales and sales to U.S. government contractors, decreased 25.3% in
fiscal 1997. This decrease in U.S. government product revenue was primarily due
to the substantial completion in fiscal 1996 of the deployment of a Department
of Defense worldwide network. Increased international product sales
substantially offset the domestic decline, growing 25.3% over the prior year to
45.0% of product revenue. This increase in international product sales was
primarily attributable to the Company's expansion of its international sales and
marketing infrastructure coupled with the economic growth experienced in these
regions. Both factors significantly impacted the Company's Asia Pacific/Latin
America channel, which grew product sales 54.5% year-over-year.

Service and other revenue decreased 2.9% from the prior year. This decrease was
attributable to a 17.6% decrease in systems integration services in support of
product sales to the U.S. government, partially offset by growth in revenue
generated from both traditional and expanded service offerings.

Overall, revenue in the N.E.T. Federal channel decreased 17.9% over fiscal 1996
and decreased as a percentage of total revenue from 36.4% in fiscal 1996 to
31.2% in fiscal 1997. Total international revenue increased 23.6% over the prior
year, and in fiscal 1997, it represented 35.0% of the Company's total revenue as
compared to 27.1% in fiscal 1996.

Gross Margin Total gross margin as a percentage of total revenue decreased to
50.0% in fiscal 1997 from 50.5% in fiscal 1996. Product gross margin decreased
to 58.2% in fiscal 1997 from 59.9% in fiscal 1996. This decrease primarily
resulted from a less favorable sales channel mix, most notably in the shift from
domestic to international product sales, which typically have lower margins due
to a significantly higher percentage sold through distributors. Product margins
also decreased in part due to a shift in product mix toward lower gross margin
products.

The gross margin for service and other revenue increased to 33.9% in fiscal 1997
from 31.6% in fiscal 1996 as a result of a decreased percentage of systems
integration services provided under a U.S. government contract. In addition, the
gross margin on these systems integration services increased to 19.8% in fiscal
1997 from 14.8% in fiscal 1996 due to changes in the mix of OEM products and
services provided.

Operating Expenses Operating expenses increased $6.2 million in fiscal 1997 and
increased as a percentage of total revenue to 40.0% in fiscal 1997 from 36.5% in
fiscal 1996.


<PAGE>


                    ============        ----------------
20.                 MANAGEMENT'S           DISCUSSION 
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

Sales and marketing expense increased $2.0 million in fiscal 1997 due to the
addition of personnel to support continued expansion of the sales and marketing
infrastructure, increased travel expenses and increased advertising and
promotional expenses, offset partially by decreased sales commissions. As a
percentage of total revenue, sales and marketing expense increased to 23.8% in
fiscal 1997 from 22.2% in fiscal 1996, primarily due to the lower sales volume.

Research and development expense increased $4.6 million in fiscal 1997 due to an
increase in direct project funding, primarily salary-related expenses, and
purchases of direct materials and hardware and software tools to support product
development. As a result of this increased spending, research and development
expense also increased as a percentage of total revenue to 12.7% in fiscal 1997
from 10.8% in fiscal 1996. In fiscal 1997, $2.8 million of software costs were
capitalized as compared to $1.9 million in fiscal 1996 as more projects reached
technological feasibility in line with planned new product introductions in
fiscal 1997 and 1998.

General and administrative expense decreased $0.4 million year-over-year and
remained flat as a percentage of total revenue at 3.5%.

Non-operating Items Interest income in fiscal 1997 increased slightly from
fiscal 1996 due to higher cash balances, offset partially by lower rates
resulting from investment in tax-free securities. Interest expense, primarily
related to the 7 1/4% convertible subordinated debentures, decreased by over 50%
to $2.3 million for fiscal 1997 as a result of the prior year partial call and
current year repurchases of the Company's convertible debentures. Other expense
remained flat from the prior year at $.5 million.

For the fiscal year ended March 31, 1997, the Company recorded income tax
expense of $12.5 million as compared to $16.9 million for fiscal 1996, at an
effective rate of 35% for both years. See Note 8 to the Consolidated Financial
Statements.

The results for fiscal 1997 included an extraordinary gain of $0.7 million, or
three cents on diluted earnings per share, arising from the repurchase of $7.7
million of convertible subordinated debentures. See Note 6 to the Consolidated
Financial Statements.


BUSINESS ENVIRONMENT AND RISK FACTORS

All statements in this Annual Report that are not historical are forward-looking
statements that involve risks and uncertainties including, but not limited to,
the risks and uncertainties detailed in the Company's filings with the
Securities and Exchange Commission. Actual results may differ materially from
those projected.

Historically, the majority of the Company's revenue in each quarter results from
orders received and shipped in that quarter. Because of these ordering patterns
and potential delivery schedule 


<PAGE>


                    ============        ----------------
                    MANAGEMENT'S           DISCUSSION                        21.
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

changes, the Company does not believe that backlog is indicative of future
revenue levels. In addition, because a large portion of the Company's orders
historically have been received and filled in the last month of the quarter,
forecasting sales during a quarter is difficult, and there is a significant risk
of excessive or inadequate inventory if orders do not match forecast.
Furthermore, if large orders do not close when forecasted or if near-term demand
weakens for the products the Company has available to ship, the Company's
operating results for that or subsequent quarters would be adversely affected.
Economic volatility in Asia and Latin America and other parts of the world may
have a significant impact on future performance.

Expense levels are relatively fixed and are set based on expectations regarding
future revenue and margin levels. These expectations derive from making
judgments on issues such as planned revenue, future technology trends,
competitive products and services, pricing and customer requirements, a process
that involves evaluation of information that is often unclear and in conflict.
All markets for the Company's products are very competitive and dynamic and many
are susceptible to changing regulations and political conditions. The Company
has limited visibility into factors that could influence its revenue, mix of
product orders and other revenue sources and margins, particularly in
international markets that are served primarily by non-exclusive resellers.

The Company's products incorporate intellectual property and technology owned by
the Company or licensed from third parties. The Company's ability to maintain
and enhance the value of its intellectual property and technology and
third-party licenses will affect future product and service offerings. Moreover,
the Company believes that operating results will depend on successful
development and introduction of new products and enhancements to existing
products and service offerings. The Company's Promina and PanaVue products are
targeted at markets that include, and are much broader than, the Company's
traditional Multiservice Bandwidth Manager customers. The Company's ability to
maintain profitability and to achieve revenue growth is dependent on
successfully managing this product transition by migrating existing key
customers to the new products and successfully gaining sales volume from new
customers in the expanded markets. There can be no assurance that the Company
will succeed in such efforts or that customers will accept new, enhanced and
existing products and services in quantities and at prices and margins that are
consistent with the Company's expectations. The Company's success also depends
on its ability to attract and retain employees necessary to support planned
growth.

The Company's products include components, assemblies and subassemblies that are
currently available from single sources and, in some cases, are in short supply.
Testing and manufacturing of products designed by N.E.T. have generally been
outsourced to third parties. Final test and assembly is generally performed at
the Company's Fremont, California, facility. Pursuant to several types of
agreements, the Company also integrates into its products and resells technology
and products designed or manufactured by third parties, and the Company relies
to a significant degree on such third parties for quality control and support of
their products and for order 


<PAGE>


                    ============        ----------------
22.                 MANAGEMENT'S           DISCUSSION                        
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

fulfillment. Such technology and products are generally available to end users
from sources other than the Company, and are generally sold or licensed by the
Company at gross margins that are lower than products designed and manufactured
by the Company. There can be no assurance that these third-party manufacturers
will perform as expected or that the Company's gross margins on these products
will not be lowered further. Product availability limitations, price increases
or business interruptions could adversely impact revenue, margins and earnings.

The Company has distribution, product and technology relationships with a number
of significant customers and entities that are considered by the Company to be
strategic. Most of the Company's competitors have similar relationships with
their respective customers and other parties. Changes in the Company's
relationships or changes in similar relationships among competitors, including
industry consolidation, could have a material impact on competitive and other
factors described above, including the Company's operating results. Also,
litigation or other claims based on securities, intellectual property, patent,
product, regulatory or other issues or factors could materially adversely affect
the Company's business, operating results and finances.

A significant portion of the Company's revenue comes from contracts with the
U.S. government, most of which do not include purchase commitments. There can be
no assurance that orders from the U.S. government, or from other customers, will
continue at historical levels, or that the Company will be able to obtain orders
from new customers.

The Company established a Year 2000 compliance team in early 1997 to identify
and take reasonable steps to minimize the effect of Year 2000 issues that may
impact the Company's products and business operations. The Company developed its
N.E.T. Products Year 2000 Compliance Program, which is posted on the Company's
Web site (www.net.com). This Compliance Program provides N.E.T. customers and
partners with information on the Year 2000 compliance status of N.E.T. products
and identifies solutions for achieving network system and application compliance
prior to the year 2000. In addition, the Year 2000 compliance team has been and
is evaluating Year 2000 issues relating to the Company's internal systems and
third-party capabilities upon which the Company relies in conducting its
business, including financial systems, manufacturing applications, customer
service and support, desktop applications and infrastructure such as networks,
telecommunications products, banking and financial services, service providers
and security systems. Although the Company has not yet determined whether all of
the foregoing systems and applications are fully Year 2000 compliant, based upon
the information currently available, the Company believes that the costs
associated with the Year 2000 issue, and the consequences of incomplete or
untimely resolution of the Year 2000 issue, will not have a material adverse
effect on its business, operating results or financial condition.


<PAGE>


                    ============        ----------------
                    MANAGEMENT'S           DISCUSSION                        23.
                                        ----------------
                                          AND ANALYSIS
                    ============        ----------------
                                         

Because of the factors described above, as well as others that may affect the
Company's operating results, past financial results may not be an accurate
indicator of future performance.


LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1998, the Company had cash, cash equivalents and temporary cash
investments of $161.5 million, as compared to $138.7 million at the end of
fiscal 1997. Cash provided by operations was $53.7 million in fiscal 1998, a
$5.6 million increase over the prior year. This increase was principally due to
a significant decrease in accounts receivable and a large increase in accrued
liabilities, partially offset by a smaller decrease in inventories and lower net
income.

Net cash used for investing activities in fiscal 1998 consisted primarily of
purchases of property and equipment of $30.3 million and additions to software
production costs of $3.2 million. Additionally, net purchases of temporary cash
investments of $2.2 million were made as increased cash generated in the year
was invested.

Net cash provided by financing activities in fiscal 1998 was composed of $4.5
million from the issuance of Common Stock related to the employee stock benefit
plans.

As of March 31, 1998, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed borrowing facility are available
through May 1999 and bear interest at the bank's base rate (which approximates
prime). At March 31, 1998, there were no outstanding borrowings under this
facility.

In April 1997, the Company announced a 12-year operating lease agreement
pursuant to which construction began on a new corporate headquarters facility in
Fremont, California. In conjunction with the project management and design and
construction of the new facility, the Company incurred $11.6 million, net of
landlord contributions, in fiscal 1998, most of which has been capitalized. The
Company estimates that approximately $13.0 million will be spent related to this
new facility in the first half of fiscal 1999. Approximately $1.0 million of
this amount is related to the physical move and is expected to be expensed in
the first quarter of fiscal 1999. The Company's old headquarters' lease expires
in October 1998.

The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through fiscal 1999.


<PAGE>


                    ============        ----------------
24.                 CONSOLIDATED             BALANCE                    
                                        ----------------
                                             SHEETS
                    ============        ----------------

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31,                                                           1998            1997
----------------------------------------------------------------------------------------
<S>                                                             <C>             <C>     
Assets
  Current assets:
  Cash and cash equivalents                                     $ 59,512        $ 39,141
  Temporary cash investments                                     101,990          99,581
  Accounts receivable, net of allowances of $3,926 in 1998
    and $3,910 in 1997                                            71,714          82,986
  Inventories                                                     19,713          22,662
  Deferred income taxes                                            9,836           7,418
  Prepaid expenses and other assets                                7,254           6,679
                                                                --------        --------

     Total current assets                                        270,019         258,467
                                                                --------        --------

Property and equipment:
  Machinery and equipment                                        105,128          96,011
  Furniture and fixtures                                           2,881           6,508
  Leasehold improvements                                           2,803          11,885
  Construction in progress                                        14,104             318
                                                                --------        --------

                                                                 124,916         114,722
  Less accumulated depreciation and amortization                 (82,259)        (84,713)
                                                                --------        --------

     Property and equipment, net                                  42,657          30,009
Software production costs, net                                     5,491           4,616
Other assets                                                      16,390           8,561
                                                                --------        --------

                                                                $334,557        $301,653
                                                                ========        ========

Liabilities and Stockholders' Equity 

Current liabilities:
  Accounts payable                                               $21,890         $23,758
  Accrued liabilities                                             48,239          39,174
                                                                --------        --------

     Total current liabilities                                    70,129          62,932
                                                                --------        --------

Deferred income taxes                                              1,954              --
7 1/4% convertible subordinated debentures                        25,821          25,821
Stockholders' equity:
  Preferred Stock, $.01 par value
    Authorized: 5,000,000 shares
    Outstanding: none                                                 --              --
  Common Stock, $.01 par value
    Authorized: 50,000,000 shares
    Outstanding: 21,454,000 shares in 1998 and 21,049,000
     shares in 1997                                                  215             210
  Additional paid-in capital                                     176,452         172,038
  Treasury stock                                                  (1,430)         (2,545)
  Net unrealized gain (loss) on available-for-sale securities      3,759             (56)
  Cumulative translation adjustment                                 (436)           (490)
  Retained earnings                                               58,093          43,743
                                                                --------        --------

     Total stockholders' equity                                  236,653         212,900
                                                                --------        --------

                                                                $334,557        $301,653
                                                                ========        ========
</TABLE>

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


<PAGE>


                    ============        ----------------
                    CONSOLIDATED           STATEMENTS                        25.
                                        ----------------
                                            OF INCOME
                    ============        ----------------

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,                               1998            1997            1996 
----------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>     
Revenue:
  Product revenue                               $200,199        $214,862        $226,070
  Service and other revenue                      108,522         109,576         112,829
                                                --------        --------        --------

     Total revenue                               308,721         324,438         338,899
                                                --------        --------        --------

Cost of sales:
  Cost of product revenue                         78,468          89,746          90,588
  Cost of service and other revenue               67,317          72,397          77,150
                                                --------        --------        --------

     Total cost of sales                         145,785         162,143         167,738
                                                --------        --------        --------

Gross Margin                                     162,936         162,295         171,161
                                                --------        --------        --------

Operating expenses:
  Sales and marketing                             87,248          77,382          75,432
  Research and development                        43,442          41,054          36,437
  General and administrative                      11,815          11,494          11,884
  Facility relocation costs                        3,289              --              --
                                                --------        --------        --------

     Total operating expenses                    145,794         129,930         123,753
                                                --------        --------        --------

       Income from operations                     17,142          32,365          47,408
Interest income                                    6,726           6,284           6,044
Interest expense                                  (1,968)         (2,310)         (4,713)
Other                                               (797)           (522)           (508)
                                                --------        --------        --------

       Income before income taxes                 21,103          35,817          48,231
Income tax provision                               6,753          12,515          16,881
                                                --------        --------        --------

       Income before extraordinary gain           14,350          23,302          31,350
Extraordinary gain on repurchase of debentures        --             690              --
                                                --------        --------        --------

Net income                                      $ 14,350        $ 23,992        $ 31,350
                                                --------        --------        --------

Basic earnings per share:
  Income before extraordinary gain              $    .68        $   1.12        $   1.58
                                                --------        --------        --------
                                                                                   
  Net income                                    $    .68        $   1.15        $   1.58
                                                --------        --------        --------
                                                                                   
Diluted earnings per share:                                                        
  Income before extraordinary gain              $    .65        $   1.08        $   1.50
                                                --------        --------        --------
                                                                                   
  Net income                                    $    .65        $   1.11        $   1.50
                                                --------        --------        --------
                                                                                   
Shares used in per share computation:
  Basic                                           21,246          20,888          19,825
                                                --------        --------        --------

  Diluted                                         22,034          21,637          20,877
                                                --------        --------        --------
</TABLE>

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



<PAGE>


                    ============        ----------------
26.                 CONSOLIDATED           STATEMENTS                        
                                        ----------------
                                          OF CASH FLOWS
                    ============        ----------------

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31,                                  1998                 1997                 1996
-----------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>                  <C>      
Cash and cash equivalents at beginning of year    $  39,141            $  52,319            $  33,886
                                                  ---------            ---------            ---------

Net cash flows from operating activities:
  Net income                                         14,350               23,992               31,350
  Adjustments required to reconcile net income
    to cash provided by operations:
     Extraordinary credit--gain on repurchase
       of debentures                                     --                 (690)                  --
     Facility relocation costs                        3,289                   --                   --
     Depreciation and amortization                   19,206               17,429               15,481
     Restricted stock compensation                      401                  379                  368
     Deferred income taxes                           (2,418)               4,412               (1,930)
     Changes in assets and liabilities:
       Accounts receivable                           11,128               (5,816)             (20,839)
       Inventories                                    2,953                9,156                  506
       Prepaid expenses and other assets               (594)                (927)              (1,185)
       Accounts payable                              (1,841)               2,158                3,356
       Accrued liabilities                            7,193               (2,005)              13,099
                                                  ---------            ---------            ---------

     Net cash provided by operations                 53,667               48,088               40,206
                                                  ---------            ---------            ---------

Cash flows from investing activities:
  Purchases of temporary cash investments           (84,526)            (159,095)             (85,960)
  Proceeds from maturities of temporary
    cash investments                                 82,304              119,362               78,800
  Purchases of property and equipment               (30,322)             (13,910)             (17,165)
  Additions to software production costs             (3,160)              (2,792)              (1,875)
  Other                                              (2,217)                (316)                 955
                                                  ---------            ---------            ---------

     Net cash used for investing activities         (37,921)             (56,751)             (25,245)
                                                  ---------            ---------            ---------

Cash flows from financing activities:
  Sale of Common Stock                                4,485                4,617               12,684
  Repurchase of convertible subordinated
    debentures                                           --               (6,419)             (10,117)
  Purchase of Common Stock                               --               (2,722)                  --
                                                  ---------            ---------            ---------

     Net cash provided by (used for)
       financing activities                           4,485               (4,524)               2,567
                                                  ---------            ---------            ---------

Effect of exchange rate changes on cash                 140                    9                  905
                                                  ---------            ---------            ---------

     Net increase (decrease) in cash
       and cash equivalents                          20,371              (13,178)              18,433
                                                  ---------            ---------            ---------

Cash and cash equivalents at end of year          $  59,512            $  39,141            $  52,319
                                                  ---------            ---------            ---------

Other cash flow information:
  Cash paid during the year for:
    Interest                                      $   1,932            $   2,477            $   4,136
    Income taxes                                  $   5,989            $   4,050            $   5,496
  Non-cash investing and financing activities:
    Net unrealized gain (loss) on
      available-for-sale securities               $   3,815            $     (44)           $      (2)
    Income tax benefit arising from employee
      stock option plans                          $     648            $   1,807            $  12,972
    Conversion of convertible subordinated
      debentures into Common Stock
      (including accrued interest and debenture
      offering costs)                             $      --            $      --            $  25,532
</TABLE>

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


<PAGE>


                    ============        --------------------
                    CONSOLIDATED            STATEMENTS OF                    27.
                                        --------------------
                                        STOCKHOLDERS' EQUITY
                    ============        --------------------

<TABLE>
<CAPTION>
                                                                                        NET UNREALIZED
                                         COMMON                                         GAIN (LOSS) ON
                                          STOCK              ADDITIONAL                     AVAILABLE-   CUMULATIVE     RETAINED
                                          TO BE     COMMON      PAID-IN       TREASURY        FOR-SALE  TRANSLATION     EARNINGS
(DOLLARS IN THOUSANDS)                   ISSUED      STOCK      CAPITAL          STOCK      SECURITIES   ADJUSTMENT     (DEFICIT) 
---------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>      <C>          <C>            <C>             <C>          <C>          <C>      
Balances, March 31, 1995                 $   32   $    187     $114,445       $   (599)       $    (10)    $   (794)    $(11,599)
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Sale of 1,314,000 shares of                                                                   
  Common Stock under employee                                                                   
  stock benefit plans                        --         13       13,040             --              --           --           --
Conversion of convertible                                                                     
  subordinated debentures into                                                                  
  802,078 shares of Common                                                                      
  Stock, including accrued interest                                                             
  and offering costs                         --          8       25,524             --              --           --           --
Stock issued in connection                                                                    
  with merger                               (32)        --           32             --              --           --           --
Income tax benefit arising from                                                               
  employee stock option plans                --         --       12,972             --              --           --           --
Net unrealized loss on securities            --         --           --             --              (2)          --           --
Cumulative translation adjustment            --         --           --             --              --         (137)          --
Net income                                   --         --           --             --              --           --       31,350
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Balances, March 31, 1996                     --        208      166,013           (599)            (12)        (931)      19,751
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Sale of 303,000 shares of                                                                     
Common Stock under employee                                                                   
stock benefit plans                          --          3        3,591             --              --           --           --
Purchase of 205,000 shares of                                                                 
Common Stock                                 --         (2)          --         (2,720)             --           --           --
Reissuance of 113,000 shares of                                                               
treasury stock under stock plans             --          1          627            774              --           --           --
Income tax benefit arising from                                                               
employee stock option plans                  --         --        1,807             --              --           --           --
Net unrealized loss on securities            --         --           --             --             (44)          --           --
Cumulative translation adjustment            --         --           --             --              --          441           --
Net income                                   --         --           --             --              --           --       23,992
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Balances, March 31, 1997                     --        210      172,038         (2,545)            (56)        (490)      43,743
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Sale of 242,000 shares of                                                                     
  Common Stock under employee                                                                   
  stock benefit plans                        --          3        2,815             --              --           --           --
                                                                                              
Reissuance of 163,000 shares of                                                               
  treasury stock under stock plans           --          2          951          1,115              --           --           --
Income tax benefit arising from                                                               
  employee stock option plans                --         --          648             --              --           --           --
Net unrealized gain on securities            --         --           --             --           3,815           --           --
Cumulative translation adjustment            --         --           --             --              --           54           --
Net income                                   --         --           --             --              --           --       14,350
                                         ------   --------     --------       --------        --------     --------     -------- 
                                                                                              
Balances, March 31, 1998                 $   --   $    215     $176,452       $ (1,430)       $  3,759     $   (436)    $ 58,093
                                         ------   --------     --------       --------        --------     --------     -------- 
</TABLE>

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


<PAGE>


                    ============        --------------------
28.                    NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

one

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business Network Equipment Technologies, Inc. ("N.E.T." or "the
Company"), headquartered in Fremont, California, is a leading designer,
developer, manufacturer and supplier of multiservice wide area networks and
associated services used by enterprises, government organizations and carriers
worldwide.

Principles of Consolidation The Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries. Intercompany accounts
and transactions have been eliminated.

Revenue Recognition The Company recognizes product revenue and accrues related
warranty expense upon shipment. At the time of sale, no material vendor or post
contract support obligations remain outstanding. Revenue from service contracts
is recognized ratably over the contract period. Revenue from other services,
such as systems integration, installation and training, is recognized when the
service is performed.

Cash and Cash Equivalents Cash and cash equivalents include highly liquid
investments with original maturities of three months or less at the time of
acquisition.

Temporary Cash Investments Temporary cash investments are primarily composed of
highly liquid investments with original maturities of greater than three months
at the time of acquisition.

Inventories Inventories are stated at lower of cost (first-in, first-out) or
market and include material, labor and manufacturing overhead costs. Inventories
at March 31 consisted of the following:


(DOLLARS IN THOUSANDS)                                     1998            1997
--------------------------------------------------------------------------------
                                                    
Purchased components                                     $4,340         $ 6,710
Work-in-process                                          13,371          13,675
Finished goods                                            2,002           2,277
                                                        -------         -------
                                                        $19,713         $22,662
                                                        =======         =======
                                                   
Property and Equipment Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over estimated useful lives of
generally three to five years. Leasehold improvements are amortized over the
shorter of the respective lease terms or estimated useful lives.

Software Production Costs Capitalization of software production costs begins
upon the establishment of technological feasibility for the products, and
amortization begins when the products are available for release to customers.
The Company assesses the recoverability of capitalized software production costs
in light of many factors, including anticipated future revenues, estimated
economic useful lives and changes in software and hardware technologies.
Capitalization of software production costs amounted to $3.2 million, $2.8
million and $1.9 million in fiscal 1998, 1997 and 1996, respectively. Software
production costs are amortized over the lives of the products, generally three
years. Amortization amounted to $2.3 million, $2.3 million and $2.4 million in
fiscal 1998, 1997 and 1996, respectively. Accumulated amortization was $8.3
million and $6.0 million at March 31, 1998 and 1997, respectively.


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  29.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

Foreign Currency Translation The functional currency for the Company's foreign
subsidiaries is the local currency. Assets and liabilities of foreign
subsidiaries are translated into dollars at the rates of exchange in effect at
the end of the period. Revenues and expenses are translated at the average
exchange rate during the period. Gains and losses from foreign currency
translation are included in a separate account in stockholders' equity in the
Consolidated Balance Sheets. Foreign currency transaction gains or losses are
included in the Consolidated Statements of Income. The Company enters into
foreign exchange contracts to hedge certain intercompany balances and balance
sheet exposures against future movements in foreign exchange rates. Gains and
losses on the foreign exchange contracts are included in other income and
expense, which offset foreign exchange gains or losses from revaluation of
foreign currency-denominated intercompany balances and balance sheet exposure
items. At March 31, 1998, the Company had outstanding foreign exchange contracts
of $5.1 million. The contracts require the Company to exchange foreign
currencies for U.S. dollars and generally mature in one month.

Stock-Based Compensation The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans. A summary of the pro forma
effects to reported net income and earnings per share as if the Company had
elected to recognize compensation cost based on the fair value of the options
granted as prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) has been disclosed in Note
7 to the Consolidated Financial Statements.

Earnings Per Share (EPS) Basic earnings per share has been computed based upon
the weighted average number of common shares outstanding for the periods
presented. For diluted earnings per share, shares used in the per share
computation include weighted average common and potentially dilutive shares
outstanding. Potentially dilutive shares consist of shares issuable upon the
assumed exercise of dilutive stock options. Basic and diluted EPS for the years
ended March 31 are calculated as follows (in thousands, except per share data):

                                                    1998        1997        1996
--------------------------------------------------------------------------------

Basic EPS:
  Income before extraordinary gain               $14,350     $23,302     $31,350

  Weighted average shares outstanding             21,246      20,888      19,825

    Basic EPS                                    $   .68     $  1.12     $  1.58
                                                 -------     -------     -------

Diluted EPS:
  Income before extraordinary gain               $14,350     $23,302     $31,350

  Weighted average shares outstanding             21,246      20,888      19,825
  Dilutive effect of options                         788         749       1,052
                                                 -------     -------     -------

    Total                                         22,034      21,637      20,877

     Diluted EPS                                 $   .65     $  1.08     $  1.50
                                                 -------     -------     -------


<PAGE>


                    ============        --------------------
30.                     NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

Significant Risks and Uncertainties The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such management estimates include the allowance for
doubtful accounts receivable, the valuation of inventory, the valuation
allowance on deferred tax assets and certain reserves and accruals. Actual
results could differ materially from those estimates.

The Company sells its products primarily to large organizations in diversified
industries worldwide. Credit risk is further mitigated by the Company's credit
evaluation process and the reasonably short collection terms. The Company
typically does not require collateral or other security to support accounts
receivable. The Company maintains allowances for estimated credit losses.

The Company participates in a very dynamic high technology telecommunications
industry and believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position, results of
operations or cash flows: advances and trends in new technologies; competitive
pressures in the form of industry consolidation; new products or price
reductions on current products; changes in product mix; changes in the overall
demand for products and services offered by the Company; changes in certain
strategic partnerships or customer relationships; litigation or claims against
the Company based on securities, intellectual property, patent, product,
regulatory or other issues or factors; risks associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components; performance of third-party suppliers and
vendors; Year 2000 compliance issues; and the Company's ability to attract and
retain employees necessary to support its growth.

Recently Issued Accounting Standards In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements; and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a company's business segments and related
disclosures about its products, services, geographic areas, and major customers.
The Company has not yet identified its SFAS 131 reporting segments. Adoption of
these statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for the
Company beginning April 1, 1998, with earlier application permitted.

Facility Relocation Costs In April 1997, the Company entered into a 12-year
operating lease agreement for the construction of a new corporate headquarters
facility. The new headquarters is located in Fremont, California, which is
approximately 12 miles from its previous site in Redwood City. The new
facilities were built to the Company's specification and will serve as home to
its marketing, engineering, manufacturing and administrative staff. Related to
the project management and design and construction of this new facility, the
Company incurred $11.6 million, net of landlord contributions, in fiscal 1998,
most of which has been capitalized. The Company expects to complete the move to
its new headquarters in the first quarter of fiscal 1999. In the fourth quarter
of fiscal 


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  31.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

1998, the Company recorded, in operating expense, a $3.3 million charge
primarily related to the remaining lease commitment on the Redwood City facility
for the period when the facility will be vacant. The Company estimates that
approximately $13.0 million will be spent related to this new facility in fiscal
1999, of which approximately $1.0 million will be related to the move and will
be expensed as incurred.

Reclassification Certain fiscal 1997 and 1996 amounts have been reclassified to
conform with fiscal 1998 presentation.


two

     Temporary Cash and Other Investments

The Company classifies its temporary cash investments as available-for-sale
securities. The carrying value of such securities is adjusted to fair market
value, with unrealized gains and losses, net of deferred taxes, being excluded
from earnings and reported as a separate component of stockholders' equity.
Temporary cash investments at March 31 consisted of the following:

<TABLE>
<CAPTION>
                                                        1998
                               ----------------------------------------------------------

                                                   GROSS           GROSS       ESTIMATED
                               AMORTIZED      UNREALIZED      UNREALIZED          MARKET
(DOLLARS IN THOUSANDS)              COST           GAINS          LOSSES           VALUE
-----------------------------------------------------------------------------------------
<S>                             <C>                 <C>             <C>         <C>     
U.S. government and
  municipalities                $ 60,891            $141            $(10)       $ 61,022
Corporate notes and bonds         20,354              43             (13)         20,384
Other debt securities             14,242              39              (9)         14,272
Foreign debt issues                6,314               1              (3)          6,312
                                --------            ----            ----        --------

                                $101,801            $224            $(35)       $101,990
                                ========            ====            ====        ========

<CAPTION>
                                                        1997
                               ----------------------------------------------------------

                                                   GROSS           GROSS       ESTIMATED
                               AMORTIZED      UNREALIZED      UNREALIZED          MARKET
(DOLLARS IN THOUSANDS)              COST           GAINS          LOSSES           VALUE
-----------------------------------------------------------------------------------------
<S>                             <C>                 <C>             <C>         <C>     
U.S. government and
  municipalities                $ 50,671            $ 80            $(86)       $ 50,665
Corporate notes and bonds         21,876              --             (35)         21,841
Other debt securities             13,996               5             (35)         13,966
Foreign debt issues                5,832              --             (14)          5,818
Commercial paper and
  banker's acceptances             5,291              --              --           5,291
Certificates of deposit            2,000              --              --           2,000
                                --------            ----            ----        --------

                                $ 99,666            $ 85           $(170)       $ 99,581
                                ========            ====            ====        ========
</TABLE>


<PAGE>


                    ============        --------------------
32.                     NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

At March 31, 1998, the Company held unregistered equity securities in a publicly
traded company which are subject to certain holding restrictions. The Company
may have piggyback registration rights for up to 33% of the shares as early as
September 1998, based upon certain events. Alternatively, demand registration
rights may be exercised at any time after August 1999. The equity securities are
recorded at an estimated fair market value of $7.6 million (cost of $2.0
million), and are classified in Other Assets in the Consolidated Balance Sheet.

At March 31, 1998, the estimated market value of available-for-sale securities
with maturities less than one year was $48.2 million, with maturities between
one year and five years was $49.7 million, and with maturities between five
years and ten years was $4.1 million. Any gains or losses on sales of securities
are computed on a specific identification basis. There were no material realized
gains or losses from the sale of securities in fiscal years 1998, 1997 and 1996.


three
       ACCRUED LIABILITIES

Accrued liabilities at March 31 were as follows:


(DOLLARS IN THOUSANDS)                                      1998            1997
--------------------------------------------------------------------------------

Accrued compensation                                     $18,581         $16,211
Income taxes payable                                      10,021           4,855
Unearned income                                            6,442           6,464
Other                                                     13,195          11,644
                                                         -------         -------

                                                         $48,239         $39,174
                                                         =======         =======


four

     FINANCING ARRANGEMENTS

The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1999 and bear interest
at the bank's base rate (which approximates prime). The terms of the agreement
require that the Company maintain certain financial covenants including a
minimum of $25.0 million in cash and short-term highly liquid investments, net
of any bank borrowings, no quarterly operating or net losses greater than 10% of
tangible net worth and no operating or net losses in any two consecutive
quarters of the fiscal year. The Company was in compliance with these covenants
at March 31, 1998. There were no outstanding borrowings under the line of credit
agreement at March 31, 1998.


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  33.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

five

     LEASE COMMITMENTS

The Company leases its facilities under operating leases. The minimum future
lease commitments under these leases as of March 31, 1998, were as follows:


(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------


1999                                                                     $ 9,204
2000                                                                       7,268
2001                                                                       7,085
2002                                                                       6,743
2003                                                                       5,950
After 2003                                                                38,565
                                                                         -------
                                                                     
                                                                         $74,815
                                                                         =======
                                                             

Rental expense under operating leases was $7.9 million, $7.7 million and $7.2
million for fiscal years 1998, 1997 and 1996, respectively. In April 1997, the
Company entered into a 12-year operating lease agreement for a new corporate
headquarters facility. The existing headquarters' lease expires in October 1998
and the Company expects to complete the move to the new facility in Fremont,
California, in the first quarter of fiscal 1999. Lease commitments under both
agreements have been included in the above amounts.

six

     CONVERTIBLE SUBORDINATED DEBENTURES

In May 1989, the Company issued $75.0 million of 7 1/4% convertible subordinated
debentures due May 15, 2014, in an underwritten public offering, with net
proceeds of $72.8 million. Each debenture is convertible at the option of the
holder into Common Stock at $31.50 per share and is redeemable at the option of
the Company at prices that decline from 100.73% of face value on May 15, 1998,
to 100% of face value on May 15, 1999. The debentures are entitled to a sinking
fund beginning May 15, 2000, of $3.8 million annually, calculated to retire 70%
of the debentures prior to maturity. Such required sinking fund payments will be
reduced by any redemption or conversion of debentures prior to the date of the
sinking fund payment.

In fiscal 1991, the Company repurchased debentures in the face amount of $6.4
million. In the third quarter of fiscal 1996, the Company completed a partial
call of its outstanding debentures, reducing debenture principal by an
additional $35.1 million, of which $9.8 million was redeemed and an additional
$25.3 million was converted into shares of Common Stock at a conversion price of
$31.50 per share.

In fiscal 1997, the Company repurchased debentures in the face amount of $7.7
million at a cost of $6.4 million, plus accrued interest. Accordingly, the
Company recorded a $690 thousand gain, net of taxes ($0.03 per diluted share),
as an extraordinary credit in the Consolidated Statement of Income.


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  34.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

seven

     CAPITAL STOCK

Stockholders' Rights Plan The Company's Board of Directors has approved a plan
to protect stockholders' rights in the event of a proposed takeover of the
Company. Under the plan, as amended in June 1990, a preferred share purchase
right ("Right") is attached to each share of Common Stock. The Rights are
exercisable only after a person or group acquires beneficial ownership of 15% or
more of the Company's Common Stock or commences a tender or exchange offer that
would result in 20% or more of Common Stock ownership. Each Right initially
entitles stockholders to buy one one-hundredth of a share of a new series of
participating Preferred Stock at an exercise price of $120. If the Company is
acquired in a merger or other transaction with a person or group, or sells 50%
or more of its assets or earning power to such a person or group, each Right not
owned by such acquiring person will entitle its holder to obtain on exercise of
the Right a number of the acquiring company's common shares having a market
value at the time of twice the Right's then-current exercise price. If a person
or group acquires 15% or more of the Company's outstanding Common Stock, each
Right will entitle its holder to obtain on exercise of the Right a number of
shares of Common Stock (or equivalent) having a market value of twice the
Right's then-current exercise price. After a person or group has acquired 15% of
the outstanding shares of Common Stock but before their acquisition of 50% or
more of the Common Stock, the Board of Directors may exchange one share of
Common Stock or equivalent fractions of Preferred Stock for each Right. The
Company can redeem the Rights at $0.01 per Right at any time until the tenth day
following the acquisition by a person or group of 15% of the Company's Common
Stock. The Rights are also redeemable thereafter in certain circumstances. The
Rights expire on August 24, 1999, unless earlier redeemed or exchanged.

Preferred Stock The Company has authorized 5,000,000 shares of $.01 par value
Preferred Stock. This stock, if issued, will carry liquidation preferences and
other rights, as determined by the Board of Directors. As of March 31, 1998, no
preferred shares were outstanding.

Reserved Stock As of March 31, 1998, the Company had reserved shares of its
Common Stock for the following purposes:

                                                                      RESERVED
------------------------------------------------------------------------------

Stock option plans:
  Outstanding (at $5.25 to $35.75 per share)                         4,696,469
  Available for grant                                                2,418,826
Convertible subordinated debentures                                    819,714
Employee Stock Purchase Plan                                           653,206


Employee Stock Purchase Plan Under the Employee Stock Purchase Plan, the
Company's employees, subject to certain restrictions, may purchase shares of
Common Stock at a price equal to at least 85% of the lower of the fair market
value of the Common Stock at the beginning of the 


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  35.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

offering period or the end of each quarter. During fiscal 1998, 1997 and 1996,
163,000, 224,000 and 142,000 shares were issued under this Plan, at weighted
average prices of $12.64, $13.43 and $21.67 per share, respectively. During
fiscal 1998, a new Employee Stock Purchase Plan was approved which replaces the
existing Plan. The offering period under the new Plan begins May 1, 1998, and
provides for Common Stock purchases every four months under the same terms
previously in effect.

Stock Options and Restricted Stock The Company grants options to purchase shares
of its Common Stock and is authorized to award restricted shares of Common Stock
pursuant to the terms of its 1993 Stock Option Plan and 1997 Stock Option
Program and grants options to purchase shares of its Common Stock pursuant to
the terms of its 1989 U.K. Stock Option Plan (collectively "option plans").
Stock options generally become exercisable ratably over a four-year period and
expire after seven to ten years. Options may be granted to officers, key
employees, directors and independent contractors to purchase Common Stock at a
price not less than 100% of the fair market value at the date of grant. No
restricted stock was awarded in fiscal 1998. Previously issued restricted stock
carries certain restrictions on transferability, which lapse over the vesting
period (generally two to four years). As of March 31, 1998, 239,500 restricted
shares at $.01 per share had been awarded and issued, and the Company had the
right to repurchase 30,250 shares from certain officers and employees at the
original purchase price. Such right expires ratably over the respective vesting
periods. Related compensation expense totaled $401 thousand, $379 thousand and
$368 thousand for the years ended March 31, 1998, 1997 and 1996, respectively.

Activity in the Company's option plans is summarized below:

<TABLE>
<CAPTION>
                                                                   WEIGHTED
                                                                    AVERAGE          SHARES
                                                  SHARES     EXERCISE PRICE     EXERCISABLE
-------------------------------------------------------------------------------------------
<S>                                           <C>                    <C>          <C>      
Options outstanding at March 31, 1995          3,012,462             $ 9.25       1,628,899
                                               ---------             ------       ---------
                                                                                 
  Granted                                        996,066              26.19      
  Exercised                                   (1,114,819)              8.63      
  Cancelled                                     (259,021)             14.57      
                                               ---------             ------       ---------
                                                                               
Options outstanding at March 31, 1996          2,634,688              15.39       1,080,002
                                               ---------             ------       ---------
                                                                                 
  Granted                                      3,514,470              18.15      
  Exercised                                     (183,189)              8.88      
  Cancelled                                   (2,388,722)             25.30      
                                               ---------             ------       ---------
                                                                                 
Options outstanding at March 31, 1997          3,577,247              12.00       1,149,338
                                               ---------             ------       ---------
                                                                                 
  Granted                                      1,835,059              13.87      
  Exercised                                     (242,185)              9.55      
  Cancelled                                     (473,652)             13.46      
                                               ---------             ------       ---------
                                                                                 
Options outstanding at March 31, 1998          4,696,469             $12.68       1,861,651
                                               ---------             ------       ---------
</TABLE>
                                                                               
                                                                               
<PAGE>                                                                         


                    ============        --------------------
36.                     NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

The following table summarizes information concerning options outstanding and
exercisable as of March 31, 1998:

<TABLE>
<CAPTION>
                                  Options Outstanding                        Options Exercisable
                   -----------------------------------------------       ---------------------------
                                         WEIGHTED                                                   
                                          AVERAGE         WEIGHTED                           WEIGHTED
RANGE OF                NUMBER   CONTRACTUAL LIFE          AVERAGE            NUMBER          AVERAGE
EXERCISE PRICES    OUTSTANDING         (IN YEARS)   EXERCISE PRICE       EXERCISABLE   EXERCISE PRICE
-----------------------------------------------------------------------------------------------------
<S>                   <C>                   <C>             <C>            <C>                 <C>   
$ 5.25 - $10.63       1,027,607             4.89            $ 8.31         1,020,352           $ 8.31
$10.75 - $11.63         950,091             8.79            $11.62            10,021           $10.75
$12.13 - $12.38       1,444,208             8.22            $12.37           588,265           $12.36
$12.75 - $18.00         950,706             8.94            $15.65           163,472           $15.26
$18.44 - $35.75         323,857             8.67            $22.41            79,541           $29.21
---------------       ---------             ----            ------         ---------          -------
                                                                                             
$ 5.25 - $35.75       4,696,469             7.78            $12.68         1,861,651           $11.11
---------------       ---------             ----            ------         ---------          -------
</TABLE>
                                                                              
                                                                              
During the second quarter of fiscal 1997, the Company approved a cancellation
and regrant program for outstanding options under the Company's stock option
plans. Under the program, holders of outstanding options with exercise prices in
excess of $12.38 per share were given the choice of retaining these options or
of obtaining in substitution repriced options for the same number of shares. The
repriced options are exercisable at a price of $12.38 per share, the fair market
value of the Common Stock on the regrant date. The repriced options have a
vesting schedule identical to the cancelled options, but beginning anew on the
date of regrant.

Stock-Based Compensation As discussed in Note 1, the Company continues to
account for its stock-based compensation using the intrinsic value method in
accordance with APB 25 and, accordingly, does not recognize compensation expense
for employee stock plans as they are granted at fair market value. However,
generally accepted accounting principles require disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
prescribed by SFAS 123. Under SFAS 123, the fair value of stock-based awards is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock-based awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. As the Company's employee stock-based
compensation plans have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the Company believes that the
existing option valuation models do not necessarily provide a reliable measure
of the fair value of awards from those plans.

The fair value of the options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998, 1997 and 1996, respectively: risk-free rates of
6.1%, 6.3% and 6.1%; stock price volatility factors of 50%, 52% and 52%;
expected option lives of three months, six months and six months following
vesting; and no dividends during the expected term. The Company's calculations
are based on a multiple option 


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  37.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

valuation approach and recognition of forfeitures as they occur. The weighted
average fair value of options granted during fiscal 1998, 1997 and 1996 was
approximately $5.08, $6.49 and $11.11, respectively. The fair value of the
employee purchase rights under the Employee Stock Purchase Plan was estimated
using the same model, but with the following weighted average assumptions for
fiscal 1998, 1997 and 1996, respectively: risk-free rate of 5.5%; stock price
volatility factor of 48%; and expected option life of six months. The weighted
average fair value of employee purchase rights granted in fiscal 1998, 1997 and
1996 was approximately $4.76, $6.16 and $8.73, respectively.

If the computed fair values of the fiscal 1998, 1997 and 1996 awards had been
amortized to expense, pro forma net income and earnings per share would have
been $8.0 million ($.36 per diluted share), $16.9 million ($.78 per diluted
share) and $26.7 million ($1.28 per diluted share) in fiscal 1998, 1997 and
1996, respectively. The impact of outstanding non-vested stock options granted
prior to fiscal 1996 has been excluded from the pro forma calculations; as such,
the pro forma adjustments above are not representative of such future
adjustments, which will include expense for more than three years of awards.


eight

     INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which prescribes an asset and liability method of
income tax accounting.

Income before income taxes and the provision (benefit) for income taxes consists
of the following:


(DOLLARS IN THOUSANDS)                       1998           1997           1996
--------------------------------------------------------------------------------

Income before income taxes:
  Domestic                               $ 16,135       $ 31,360       $ 46,674
  Foreign                                   4,968          4,457          1,557
                                         --------       --------       --------

                                         $ 21,103       $ 35,817       $ 48,231
                                         ========       ========       ========

Provision for income taxes:
  Current:
    Federal                              $  6,310       $  5,218       $ 16,595
    State                                   1,760          1,238          2,216
    Foreign                                 1,101          1,647             --
                                         --------       --------       --------

                                            9,171          8,103         18,811
                                         --------       --------       --------

  Deferred:
    Federal                                (1,591)         4,070         (1,643)
    State                                    (827)           342           (287)
                                         --------       --------       --------

                                           (2,418)         4,412         (1,930)
                                         --------       --------       --------

                                         $  6,753       $ 12,515       $ 16,881
                                         ========       ========       ========


<PAGE>


                    ============        --------------------
38.                     NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

The provision for income taxes reconciles to the amount computed by applying the
statutory U.S. federal rate of 35% to income before income taxes as follows:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)                              1998            1997            1996
-----------------------------------------------------------------------------------------
<S>                                               <C>            <C>             <C>    
Statutory federal tax provision                   $7,386         $12,536         $16,881
State taxes net of federal income tax benefit        823           1,397           1,929
Change in valuation allowance                     (1,044)           (115)         (3,504)
Foreign sales corporation benefit                   (913)         (1,440)             --
Other                                                501             137           1,575
                                                  ------         -------         -------

Provision for income taxes                        $6,753         $12,515         $16,881
                                                  ======         =======         =======
</TABLE>


Deferred tax assets (liabilities) are composed of the following at March 31:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)                                              1998            1997
----------------------------------------------------------------------------------------
<S>                                                              <C>            <C>     
Reserves not currently deductible for tax purposes               $ 8,079        $  7,770
Depreciation                                                        (591)           (280)
Credit carryforwards                                               6,240           3,500
Loss carryforwards                                                    --           1,044
                                                                 -------        --------

Gross deferred tax assets                                         13,728          12,034
Gross deferred tax liabilities--
  Capitalized software production costs                           (3,892)         (3,572)
  Unrealized gain on securities                                   (1,954)             --
Valuation allowance                                                   --          (1,044)
                                                                 -------        --------

Net deferred tax assets                                          $ 7,882        $  7,418
                                                                 =======        ========
</TABLE>


The net deferred tax assets shown above are presented in the Consolidated
Balance Sheet as current deferred tax assets of $9.8 million and noncurrent
deferred tax liabilities of $1.9 million.

The valuation allowance decreased $1.0 million in fiscal 1998 due to the
realization of the benefit of certain tax loss carryforwards. No valuation
allowance remains at March 31, 1998.

As of March 31, 1998, the Company has available federal tax credit carryforwards
of $1.0 million expiring in year 2011, and alternative minimum tax credit
carryforwards of $2.7 million available indefinitely. Also available at March
31, 1998, are state tax credit carryforwards of $2.5 million, also available
indefinitely.


nine

     SIGNIFICANT CUSTOMERS

Sales to the U.S. government and its agencies amounted to 33%, 29% and 34% of
revenue for fiscal years 1998, 1997 and 1996, respectively. These amounts
include sales, which amounted to 29%, 27% and 30% of revenue for fiscal years
1998, 1997 and 1996, respectively, under contracts with the 


<PAGE>


                    ============        --------------------
                        NOTES               TO CONSOLIDATED                  39.
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

Department of Defense under which various government agencies can order
products, installation and service from the Company. The Company had no other
customers that accounted for more than 10% of revenue during these same periods.


ten
       SEGMENT INFORMATION

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)                UNITED STATES          EUROPE     ELIMINATIONS    CONSOLIDATED
----------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>              <C>     
Year Ended March 31, 1998                                                                
  Sales to unaffiliated customers          $244,762        $ 63,959        $     --         $308,721
  Sales to foreign affiliates                32,754           4,063         (36,817)              --
                                           --------        --------        --------         --------
                                                                                         
  Total revenue                            $277,516        $ 68,022        $(36,817)        $308,721
                                           --------        --------        --------         --------
                                                                                         
  Operating income                         $ 11,561        $  5,218        $    363         $ 17,142
                                           --------        --------        --------         --------
                                                                                         
  Identifiable assets at year end          $328,509        $ 24,661        $(18,613)        $334,557
                                           --------        --------        --------         --------
                                                                                         
Year Ended March 31, 1997
  Sales to unaffiliated customers          $265,109        $ 59,329        $     --         $324,438
  Sales to foreign affiliates                28,294           4,764         (33,058)              --
                                           --------        --------        --------         --------
                                                                                         
  Total revenue                            $293,403        $ 64,093        $(33,058)        $324,438
                                           --------        --------        --------         --------
                                                                                         
  Operating income                         $ 27,616        $  4,921        $   (172)        $ 32,365
                                           --------        --------        --------         --------
                                                                                         
  Identifiable assets at year end          $299,686        $ 26,180        $(24,213)        $301,653
                                           --------        --------        --------         --------
                                                                                         
Year Ended March 31, 1996
  Sales to unaffiliated customers          $286,842        $ 52,057        $     --         $338,899
  Sales to foreign affiliates                21,409           4,316         (25,725)              --
                                           --------        --------        --------         --------
                                                                                         
  Total revenue                            $308,251        $ 56,373        $(25,725)        $338,899
                                           --------        --------        --------         --------
                                                                                         
  Operating income                         $ 43,607        $  2,560        $  1,241         $ 47,408
                                           --------        --------        --------         --------
                                                                                         
  Identifiable assets at year end          $283,453        $ 27,801        $(29,297)        $281,957
                                           --------        --------        --------         --------
</TABLE>
                                                                        
Sales to foreign affiliates represent products that are transferred on a basis
intended to approximate arms-length prices as negotiated by unrelated entities.
Domestic sales to unaffiliated customers include $51.0 million, $54.3 million
and $39.9 million of export sales in fiscal years 1998, 1997 and 1996,
respectively.


<PAGE>


                    ============        --------------------
40.                     NOTES               TO CONSOLIDATED                  
                                        --------------------
                                        FINANCIAL STATEMENTS
                    ============        --------------------

eleven

     EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 17% to a maximum of $10,000 per year). Company contributions are
discretionary and were $961 thousand, $860 thousand and $1.0 million for fiscal
1998, 1997 and 1996, respectively.


twelve

     FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE

The estimated fair values of the Company's financial instruments at March 31
were as follows:

                                          1998                     1997
                                  ---------------------    ---------------------
                                  CARRYING    ESTIMATED    CARRYING    ESTIMATED
(DOLLARS IN THOUSANDS)              AMOUNT   FAIR VALUE      AMOUNT   FAIR VALUE
--------------------------------------------------------------------------------
                                              
                                              
Assets                                        
  Cash and cash equivalents       $ 59,512     $ 59,512    $ 39,141    $ 39,141
  Temporary cash investments      $101,990     $101,990    $ 99,581    $ 99,581
  Equity securities               $  7,582     $  7,582    $     --    $     --
Liabilities                                   
  Foreign exchange contracts      $  5,097     $  4,984    $  2,882    $  2,898
  Convertible subordinated                    
    debentures                    $ 25,821     $ 24,530    $ 25,821    $ 22,464
                                             
The following methods and assumptions were used in estimating the fair values of
financial instruments:

Cash and cash equivalents--the carrying amounts reported in the balance sheets
for cash and cash equivalents approximate their estimated fair values.

Temporary cash investments, equity securities, foreign exchange contracts and
convertible subordinated debentures--fair values are based on quoted market
prices.


<PAGE>


                    ============        --------------------
                     INDEPENDENT              AUDITORS'                      41.
                                        --------------------
                                               REPORT
                    ============        --------------------

 
To the Stockholders and Board of Directors of Network Equipment Technologies,
Inc.

We have audited the accompanying consolidated balance sheets of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Network Equipment Technologies,
Inc. and subsidiaries at March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.



/s/ DELOITTE & TOUCHE LLP

San Jose, California
April 15, 1998


<PAGE>


                    ============        --------------------
42.                    COMMON              STOCK DIVIDENDS                  
                                        --------------------
                                           AND PRICE RANGE
                    ============        --------------------


DIVIDENDS

The Company has not paid cash dividends on its Common Stock, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.


MARKET PRICE

N.E.T.'s Common Stock is traded on the New York Stock Exchange under the symbol
NWK. The following table sets forth, for the quarterly periods indicated, the
high and low sale prices:


FISCAL 1998                                             HIGH             LOW
------------------------------------------------------------------------------

First quarter                                          $18.63          $11.25
Second quarter                                          22.38           17.13
Third quarter                                           20.19           12.75
Fourth quarter                                          16.88           11.63


FISCAL 1997                                             HIGH             LOW
------------------------------------------------------------------------------

First quarter                                          $31.63          $19.38
Second quarter                                          21.75           11.13
Third quarter                                           16.38           13.00
Fourth quarter                                          20.88           13.13

In addition, the Company's 7 1/4% convertible subordinated debentures trade in
the over-the-counter market.


<PAGE>


                    ============        --------------------
43.                  CORPORATE             DIRECTORY AND                  
                                        --------------------
                                            INFORMATION
                    ============        --------------------


CORPORATE DIRECTORY                            CORPORATE INFORMATION            
                                                                                
                                                                                
Corporate Officers                             Annual Meeting                   
                                                                                
Joseph J. Francesconi                          The annual meeting of            
President and Chief Executive Officer          stockholders will be held at     
                                               10:00 a.m. on August 11, 1998,   
Roger A. Barney                                at the Company's headquarters in 
Vice President,                                Fremont, California.             
Human Resources and Corporate Services                                          
                                               Investor Relations               
James B. De Golia                                                               
Vice President, General Counsel                N.E.T. welcomes inquiries from   
and Assistant Secretary                        its stockholders and other       
                                               interested investors. To receive 
Samuel H. Ezekiel                              the Company's Annual Report,     
Senior Vice President, Marketing               Form 10-K, quarterly financial   
                                               results, and other corporate     
Craig M. Gentner                               information, please dial our     
Senior Vice President, Chief Financial         hotline at 888.828.8080, or      
Officer and Corporate Secretary                write to Investor Relations at   
                                               N.E.T., 6500 Paseo Padre         
David P. Owen                                  Parkway, Fremont, CA 94555, or   
Vice President,                                visit our World Wide Web site.   
Strategy and Technology                                                         
                                               N.E.T. on the Internet           
Raymond E. Peverell                                                             
Senior Vice President, Sales and Support       N.E.T.'s home page on the World  
                                               Wide Web contains background on  
G. Michael Schumacher                          the Company and its products,    
Senior Vice President,                         financials, and other useful     
Product Operations                             information. Our Web site is     
                                               located at http://www.net.com.   
Charles S. Shiverick                                                            
Vice President,                                Transfer Agent                   
Information Services and Reengineering                                          
                                               First National Bank of Boston    
Directors                                      Boston, Massachusetts            
                                                                                
Dixon R. Doll                                  Independent Auditors             
Managing General Partner,                                                       
Doll Capital Management                        Deloitte & Touche LLP            
                                               San Jose, California             
James K. Dutton                                                                 
Director, Caere Corporation and ECCS,Inc.                                       
                                               IDNX and the N.E.T. logo are     
Joseph J. Francesconi                          registered trademarks, and       
President and Chief Executive Officer, N.E.T.  FrameXpress, N.E.T., PanaVue,    
                                               PrimeSwitch, PrimeVoice,         
Walter J. Gill                                 Promina, SourcePoint, and        
Vice President and Chief Technology            SwiftCell are trademarks of      
Officer (retired), N.E.T.                      Network Equipment Technologies,  
                                               Inc.                             
George M. Scalise                                                               
President, Semiconductor Industry Association  All other trademarks are the     
                                               sole properties of their         
Hans A. Wolf                                   respective companies.            
Chairman of the Board, N.E.T.                                                   
Vice Chairman of the Board (retired),          (C)1998 Network Equipment        
Syntex Corporation                             Technologies, Inc. All rights    
                                               reserved.                        
                                                                                
                                               Printed in the U.S.A.            
                                                                                
                                                                                
                                               LIT122-1998-20K                  
                                                                                
<PAGE>



                                   NET [LOGO]




                                             6500 Paseo Padre Parkway
                                             Fremont, CA
                                             94555 U.S.A


                                             tel 510.713.7300
                                             fax 510.574.4000