SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-K

(Mark One)

|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                    For the Fiscal Year Ended March 30, 2001

                                       OR

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

         For the transition period from ______________ to ______________

                         Commission File Number 0-15323

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

             Delaware                                        94-2904044
             --------                                        ----------
   (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                        Identification No.)

                            6530 Paseo Padre Parkway
                            Fremont, California 94555
                                 (510) 713-7300
          (Address of principal executive offices, including zip code,
                        area code, and telephone number)

          Securities registered pursuant to Section 12(b) of the Act:

    Common Stock, $0.01 Par Value             New York Stock Exchange
    -----------------------------             -----------------------
        (Title of each class)        (Name of each exchange on which registered)

          Securities registered pursuant to Section 12(g) of the Act:

                   7 1/4% Convertible Subordinated Debentures
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 15, 2001, based on the closing price of such stock on that
date was $64,654,829, calculated by excluding holders of 10% and more, directors
and current executive officers.

The number of shares outstanding of the Common Stock, $0.01 par value, on June
15, 2001 was 21,972,002.

                      DOCUMENTS INCORPORATED BY REFERENCE:

The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on August 14, 2001 is incorporated by reference in Part
III of this Form 10-K to the extent stated herein.


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                                     PART I

FORWARD-LOOKING STATEMENTS

Statements contained in this Form 10-K, which are not historical facts, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. A forward-looking statement may contain words
such as "plans," "hopes," "believes," "estimates," "will continue to be," "will
be," "continue to," "expect to," "anticipate that," "to be," or "can impact."
Forward-looking statements are based upon management expectations and involve
risks and uncertainties that may cause actual results to differ materially from
those anticipated in the forward-looking statements. Many factors may cause
actual results to vary including, but not limited to, the factors discussed in
this Form 10-K. net.com expressly disclaims any obligation or undertaking to
revise or publicly release any updates or revisions to any forward-looking
statement contained in this Form 10-K. Investors should carefully review the
risk factors described in this document along with other documents net.com files
from time to time with the Securities and Exchange Commission.

Item 1. Business

OVERVIEW

Network Equipment Technologies, Inc., doing business as net.com ("net.com"), is
a leading innovator of service creation, providing broadband technology
platforms that enable carriers and service providers to rapidly create and
deliver revenue-generating applications, content and network services to
business and residential customers while maximizing existing infrastructure
investment. Service creation is the ability for end users and service providers
to dynamically define, deliver, manage and profit from network services.
net.com's service creation products reside at the intersection of networks or at
the economic edge where carriers and content providers converge to offer a new
range of communications experiences to end users.

Over the past several years we have seen our revenue decline as traditional
narrowband wide area networks ("WANs"), for which our historical products have
been designed, have been replaced by next generation packetized networks.
Narrowband WANs rely on circuit-switched technology to provide infrastructure
and capability to link local area networks ("LANs"), campus networks, voice
traffic, video and other applications to each other via service provider
transmission facilities or services. Next generation networks in contrast make
use of the Internet Protocol ("IP") to enable convergence or the bundling of
voice, data, and video over a single public carrier infrastructure. By breaking
information into smaller pieces, packet switching enables information to be
moved more swiftly through the network and enables more traffic to be sent in a
shorter time. Convergence of disparate applications onto a single packet
infrastructure has proven to be a more cost-effective solution and ultimately
enables new value added services. The decline in the market for circuit switched
technology, which includes our historical product lines, prompted us to invest
in new technology and to target a new market opportunity over this past year.

With the introduction of our first service creation platform, the SCREAM200(TM),
in June 2000, we announced our strategy to redirect our development and
marketing efforts towards serving the needs of service providers who can no
longer derive a sustainable source of revenue and profitability from basic
access services. In April 2001 we announced two new service creation platforms,
the SCREAM50(TM) and SCREAM100(TM), that are optimized specifically for the
carrier market. Our service creation products sit at the edge or intersection of
networks, allowing telecommunications service providers to manage and create
services across their networks and, ultimately, allow users to determine the
services they require. Traditional providers of transmission facilities such as
carriers, cable operators, wireless service providers and network service
providers recognize today the need to offer broadband access and to
differentiate their services in order to remain competitive and profitable. We
believe that our SCREAM(TM) product line offers service providers the capability
to drive revenue, lower provisioning costs, increase customer retention and
build competitive differentiation.

Our legacy narrowband equipment is used in mission critical multi-service wide
area networks that allow customers to integrate voice, data, image and video
traffic for Asynchronous Transfer Mode ("ATM"), frame relay, IP and ISDN
services across a single network infrastructure. In addition, the new
SHOUTIP(TM) product line offers an effective way to transmit circuit voice over
an IP packet network and to rapidly create and deliver telephony services over a
packet infrastructure. net.com's WAN products are used by enterprise, service
provider and government customers worldwide.


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Consistent with our strategy of redirecting our development and marketing
efforts, during the third quarter of fiscal 2001, we sold our Federal
Professional Services Business ("FSB") to CACI International Inc("CACI").

Network Equipment Technologies, Inc., doing business as net.com, was
incorporated in California in 1983 and was reincorporated in Delaware in 1986.
Our principal offices are located at 6530 Paseo Padre Parkway, Fremont,
California 94555, U.S.A. and our telephone number at that location is (510)
713-7300. Our home page on the Internet is at www.net.com. We have approximately
542 employees worldwide. Our Common Stock is publicly traded on the New York
Stock Exchange under the symbol NWK.

NETWORKING INDUSTRY BACKGROUND

The networking industry has enjoyed an extended period of seemingly unlimited
access to capital and related investment and growth. This growth is the result
of broad-based adoption of the Internet and increases in demand for data, voice
and video communications services by businesses, governments and consumers. This
demand has fueled the development and deployment of large-scale network
infrastructure and massive increases in available bandwidth or information
carrying capacity. In the last decade, long-distance markets have become
extremely competitive, with AT&T, WorldCom, Sprint and hundreds of resellers
competing for consumer telecom spending. Long-distance service has essentially
evolved into a commodity, where competitive price is a minimum requirement and
competitors endeavor to differentiate based on perceptions, hourly pricing
plans, convenience and promotions. As long-distance evolves into a pure
commodity, the ability to bundle services or differentiate will become even more
important.

With the rapid growth of the Internet and the development of advanced
communications applications such as digital, video and audio programs, wireless
access, and video conferencing from personal computers, video e-mail, video on
demand, distance learning, telemedicine and high speed imaging, consumers and
business are demanding faster, better communications services. Consumers
increasingly find dial-up modem speeds unacceptable. Communications networks
increasingly are required to transmit more rapidly large volumes of Internet,
data and video traffic to meet customers' demands with respect to sharing
information, conducting business and delivering entertainment. In response to
this increase in demand, alternative broadband access technologies have been
developed and commercialized, including Digital Subscriber Line ("DSL"), cable,
fiber to the curb and wireless (fixed and mobile).

As consumers and business have demanded more broadband applications from
providers of Internet, data, video and voice communications services, new
service providers have entered the market. The entry of these new competitive
providers and the proliferation of alternative access technologies into
previously regulated markets are rapidly changing the market for broadband
services. Carriers and service providers rapidly built out their infrastructure
to accommodate surges in IP traffic, yet increased competition has further
commoditized bandwidth resulting in incoming revenue streams rising only
modestly. Deregulation in the telecommunications industry together with
homogeneity and commoditization of transport services has created a
hyper-competitive environment that has prevented some service providers from
earning an adequate return on their investment even as we see a significant
shift in traffic from traditional voice to new data-oriented services. This
situation has recently forced many network operations to temporarily scale back
capital spending budgets and it has forced others, such as Northpoint
Communications, to file for bankruptcy.

As the Broadband subscriber base grows, service providers face customers who
increasingly regard high speed Internet access as a commodity. To compete
successfully, broadband service providers must differentiate themselves by
offering a range of value-added services, including multiline, toll-quality,
voice service, virtual private networks ("VPNs"), frame relay, video streaming
and emerging productivity and entertainment applications such as multiplayer
online gaming and streaming music. As the deployment of broadband access
steadily increases, competition between service providers will continue to
intensify as they face the challenge of how to profit from the thousands of
directly connected high-speed users. Intelligent service creation solutions are
required to allow the service provider to offer a new layer of network
intelligence that supports the widespread deployment of comprehensive and
affordable integrated service packages that can be dynamically selected and self
provisioned. A new broadband access network is emerging to satisfy subscribers'
desires for high-speed telecommunications services.


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BUSINESS STRATEGY

Net.com's mission statement is:

"Enabling competitive differentiation through the rapid creation and delivery of
services"

Our objective is to become an industry leader in the telecommunications
equipment industry by providing service creation solutions that enable
competitive differentiation through the rapid creation and delivery of services.
Service creation is the ability for end users and service providers to
dynamically define, deliver, manage and profit from network services.

Service creation also defines a new business model--for service providers and
end users. For service providers the ability to deliver differentiated IP based
broadband services allows them to manage and bill for content or applications
based on their relative value on as needed and or as used rather than simply at
a flat rate. We anticipate this model will enable service providers to generate
incremental revenue and to develop potentially more profitable premium services.
For service providers, the new model encompasses lower provisioning costs,
streamlined service configuration and fast provisioning of services. For end
users, the next business model encompasses one overriding advantage--service
selection. Five key components comprise this new model:

o     Open, non-proprietary interfaces for the development of applications

o     Distributed architecture for easy programmability and deployment

o     The ability to rate, allocate and measure service selection

o     A marketing front-end moving service to and drawing service selection from
      the customer

o     Automated service provisioning and billing

To achieve this objective, our business strategy includes the following key
elements:

      o     Design and develop industry leading broadband hardware and software
            service creation solutions. We consider our technological and
            product leadership to be critical to our future success. We employed
            next generation network processor and custom ASIC technology in
            order to achieve the deterministic performance. In addition, we
            designed the SCREAM100 platform with a, SplitPlane(TM) architecture
            that provides a logical and physical separation of the control plane
            (intelligence) and data plane (packet processing). This distributed
            architecture enables services to be programmed or initiated directly
            onto the network in real time. Finally, we developed an Open
            Programming Interface ("OPI"(TM)) to provide bi-directional
            interface capability that enables third party solutions to be
            implemented quickly on the SCREAM platform using industry standards
            such as CORBA, JAVA and XML.

      o     Leverage market position and revenue contribution of our narrowband
            technology. net.com pioneered the concept of multi-service
            networking and has been delivering these mission critical
            capabilities for over seventeen years. With more than 25,000
            multi-service systems sold around the globe, net.com serves
            approximately 1,750 customers in more than 75 countries. Following
            this year's market correction, access to capital has become more
            difficult for emerging start-ups. The financial strength of our
            balance sheet and proven reputation of net.com provides us with a
            strategic advantage that we expect to continue to leverage as we
            target new service provider customers.

            In specific markets where the rate of broadband deployment is
            slower, we will continue to provide support for our legacy
            multi-service platforms and customers. The installed base and
            revenue contribution from our legacy Promina product line continues
            to be significant and generates significant cash flow for the
            Company. In particular the United States Federal Government
            ("Federal Government") has been slow to


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            adopt new broadband technology and the use of public infrastructure
            due to concerns over quality of service and security. As new
            standards evolve for quality of service and security for the
            Internet, we expect the Federal Government to adopt newer technology
            and to become a customer of our new service creation and voice over
            IP platforms. We anticipate that our expertise in government
            contracting together with the relationships that we have built up
            over an extended period of time will provide us with leverage should
            the Federal Government eventually make this transition. In addition,
            in some parts of the developing world where deregulation has lagged,
            or where circuit switched technology continues to be the technology
            of choice, our multi-service platforms continue to be a very
            appropriate solution.

      o     Leverage relationships with Key Partners. We are continually seeking
            to establish relationships with third-party application software
            vendors and product OEM's or resellers, and our customers. SCREAM
            offers open programmability at the element, service, management and
            control layers through the OPI and allows a service provider or
            third-party developer to quickly develop new applications sought by
            end-users. The importance of software application partners is that
            they provide critical functions such as billing, mediation,
            provisioning and configuration that are needed to create a total
            service creation solution for our customers. Product OEM or resale
            partners are needed to supplement and enhance our existing direct
            sales force both in the United States and overseas as they may have
            pre-existing relationships with our target customers and be able to
            accelerate our time to volume. We also work closely with our
            customers from initial product design through to manufacturing and
            delivery. By engaging with our customers at every level, we seek to
            partner with them at the early stages of system development so that
            we may provide them with all of their requirements. Maintaining
            strong customer relationships is critical to our company's growth
            and every effort is made to ensure that our customers' needs are
            met.

      o     Provide Value-added Service and System Integration Capabilities.
            Since its inception, net.com has viewed customer service and support
            as a key element of its overall strategy and a critical component of
            its long-term relationship with customers. Customers around the
            world turn to net.com not only for the reliability and performance
            of our products but also for our comprehensive support services that
            optimizes the value of those products. As we work more closely with
            prospective service provider customers and third party application
            software vendors, we will continue to provide various consulting
            services that allow those customers and vendors to integrate new
            functions onto existing operational support systems ("OSS") and our
            SCREAM platform's open programming interface to create new
            value-added network services.

      o     Improve Business Operations and Return to Profitability. We are in
            the process of upgrading and consolidating our core business process
            systems onto a new Oracle ERP platform that is scheduled to go live
            in the July to August 2001 time frame. The scope of this project
            includes our order management, financial, human resources, quality
            and manufacturing systems, and encompasses our global operations.
            The purpose of the project is to allow us to support our customers
            better and to help enable us to return to profitability sooner. When
            complete, it will consolidate several legacy systems into one,
            enable more effective decision support capabilities and allow us to
            scale our business more cost effectively. In addition to higher
            efficiencies and related operating expense improvements contemplated
            from this project, our ability to achieve profitability on a
            continuing basis will depend on the successful design, development,
            testing, introduction, marketing and broad commercial distribution
            of our new broadband equipment products, specifically our SCREAM
            product line and to a lesser extent our SHOUTIP product line.

PRODUCTS

BROADBAND

net.com's new Service Creation Manager(TM) platform, known as SCREAM(TM), is a
universal broadband services switch, offering integrated broadband aggregation,
subscriber management, powerful packet and cell processing, high-touch IP, and
broadband service creation. Aggregation involves taking in large numbers of
tributary lines, such as T1s and forwarding on the data to large routers in the
core of the network. Our SCREAM platform takes in thousands of connections from
access equipment such as DSL access multiplexers ("DSLAMs"), cable modem
aggregation equipment and wireless backhaul equipment. Our platform offers
existing carriers the ability to migrate


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legacy services to an IP infrastructure, thus preserving the carrier's existing
investments. Finally, our service creation platform is loaded with processing
power to apply special handling instructions to subscriber traffic so that our
platform can look closely at packet information to detect specific attributes.
At wire speed our platform can apply class of service differentiation by
examining the label or header information attached to an IP packet. This enables
service providers to differentiate broadband subscribers based on the
applications they use, as well as to detect and report billable events in
real-time. With this capability service providers can tailor premium packages
for individuals or groups which we believe may generate additional sources of
revenue for those providers.

The newest additions to the SCREAM product family, announced on April 25, 2001,
are the SCREAM100 and SCREAM50 systems. They feature an advanced packet engine
in a central office-ready form factor, on an open, non-proprietary platform.
Optimized for the carrier environment, the new SCREAM systems offer high
switching capacity and port density in a small footprint, as well as front
access and low power consumption. To meet the rigorous demands of service
providers, the new systems deliver packet processing at OC-48 line rate.

Despite a small footprint, SCREAM100 delivers 40 Gbps of IP throughput, scalable
to 80 Gbps. It supports up to 256,000 broadband subscribers (or 512,000 in
extended-shelf configuration). Six SCREAM100 systems can be configured
back-to-back in a standard telco rack to manage more than one and a half million
subscribers.

SCREAM's SplitPlane architecture provides a logical and physical separation of
the network control plane (intelligence) and the network data plane (packet
processing) that facilitates service creation. SCREAM's separate control plane
and OPI offer easy integration with existing operational support systems. The
separate data plane delivers processing efficiency and support for multiple
transport technologies.

Unlike other platforms, SCREAM offers open programmability at the service,
management, and control layers. The OPI allows a service provider or third-party
developer to quickly develop new applications sought by end-users.

The SCREAM platform is capable of ensuring bandwidth delivery by using network
processor technology and a set of custom ASICs to provide deterministic
performance. It can shape and/or ensure bandwidth at a subscriber level and at
an individual flow level, such as streaming video or interactive gaming flows.
SCREAM can shape or guarantee flows individually at the same customer
premises--such as a VPN connection in the corporate network and regular Internet
traffic.

NARROWBAND

net.com designs, develops and supplies multi-service WANs that integrate voice,
data, image and video traffic across a single network infrastructure. net.com
multi-service WAN networks offer ATM, frame relay, IP, ISDN switching, advanced
voice compression and extensive network management capabilities. Traditional
narrowband WANs rely on circuit switched technology to provide the
infrastructure and capability to link LANs, campus networks, voice traffic,
video and other applications to each other via service provider transmission
facilities or services. WAN products may be located at both the service provider
and the enterprise premises.

Historically, the majority of net.com's product revenue has been generated by
net.com's IDNX(R) and its replacement, Promina(R) Multi-service Bandwidth
Managers. In fiscal years 2001, 2000, and 1999, net.com's IDNX and Promina
accounted for 81.9%, 95.4%, and 93.9% of product revenue respectively. As of
April 30, 1999 IDNX products were replaced by our Promina products and net.com's
Panavue(TM) network management systems.

PROMINA 800

net.com's Promina 800 Series family of multi-service access platforms adapt and
aggregate voice, data, video and fax traffic for access to ATM and other WAN
services. The Promina 800 Series enables standards-based connection of
carrier-located equipment or customer-premise equipment through one of the
industry's broadest range of user-side interfaces. From a trunk-side
perspective, the multi-service systems offer single-platform delivery of
feature-rich services such as virtual private networks that could be based on
ATM networking, frame relay or Internet Protocol (IP).

The Promina 800 network incorporates intelligence both at its core and in
signaling to attached devices. This feature allows the network to quickly
reroute traffic automatically in the event of a failure. ATM adaptation of
various types of traffic is accomplished via net.com's CellXpress(TM), an
internal ATM module option. The CellXpress module provides Class of Service
support for constant bit rate and variable bit rate ("CBR/VBR") traffic in
addition to inverse multiplexing over ATM ("IMA").


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net.com has an industry-leading set of voice compression products marketed under
its PrimeVoice(TM) name. Toll-quality voice compression improves cost
efficiencies for emerging international voice resellers and enterprises alike.
Combined with the CellXpress ATM access capability, the voice compression
capabilities found in the Promina 800 family creates a differentiator allowing
enterprises and carriers to take advantage of ATM service offerings.

IP traffic is carried over the multi-service network via an internal
multi-protocol router based on Cisco IOS(R) source code. This means that the IP
capabilities are well matched to some 70 percent of the routers deployed
throughout the world. Frame relay traffic is also supported via an internal
frame relay switching module. This combination of voice, data and video
capabilities means that customers are not locked to a particular technology, a
somewhat unique form of investment protection.

SHOUTIP INTRANET TELEPHONY PLATFORM

During the first quarter of fiscal 2001, net.com acquired the assets of
Convergence Equipment Company. Those assets included a small voice-over-IP
platform and related software. SHOUTIP is a voice-over-IP product that provides
an effective means of transmitting circuit voice over an IP packet network.

The SHOUTIP platform integrates trunking, signaling, gatekeeper/call agent
functions, packet aggregation, network management, and configuration tasks in a
single distributed system. Application modules offer additional capabilities
such as real-time, web-accessible billing; integrated voice response ("IVR") and
administration; and authentication and authorization. Switching technologies
include IP, TDM, and ATM. Special networking features include "look-ahead"
signaling and dynamic "hairpinning" to minimize dropped cells.

Designed for next-generation service providers, the SHOUTIP platform enables the
rapid creation and delivery of telephony services over a packet infrastructure.
The SHOUTIP platform is a response to shifting business models in which service
providers are experiencing diminishing margins for access-based services and
decreasing customer loyalty. To create new revenue streams and maintain market
share, service providers need to deliver new, differentiated services -- above
and beyond flat-rate monthly offerings.

The SHOUTIP platform has next-generation architecture with distributed
processing and open programmability. SHOUTIP distributed nodes perform network
functions and call processing within a single node. Routing intelligence is
distributed across the network, rather than combined into an expensive, complex,
centralized network. In addition to simplifying operations, the distributed
architecture achieves greater network resilience by eliminating a single point
of failure that could render all or a significant portion of a service
provider's network inoperative. Also, because the network's intelligence is
carried in each node, performance remains consistent regardless of network size.

The SHOUTIP platform's open applications programming interfaces are designed for
easy third-party development. The platform's open programmability supports the
rapid rollout of new revenue-generating services such as voice-mail, fax mail,
and call-center services.

NETWORK MANAGEMENT

The net.com Panavue and Screamvue Network Management System provides Simple
Network Management Protocol ("SNMP"), based management capabilities featuring
web-based user interfaces. Its open design based on industry standards provides
scalability. The platform's user interface lowers the cost of network ownership
by reducing training time, improving access and streamlining operations
throughout the network. The platform supports the main family of net.com
products. Additionally, the platform's Advanced Fault Management System ("AFMS")
provides unified fault management plus integrated service and network management
for devices in the network including those from other vendors.

CUSTOMERS AND MARKETS

net.com pioneered the concept of multi-service networking and has been
delivering these capabilities for seventeen years. With more than 25,000
multi-service systems sold around the globe, net.com serves approximately 1,750
customers in more than 75 countries. The focus of our narrowband product-line
has been on large enterprises and carriers for their enterprise business. The
initial focus of our new SCREAM broadband product family is on service providers
while ultimately the service creation features may also be attractive to
enterprise customers. For both


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net.com's broadband and narrowband products, we focus primarily on information
and communication intensive organizations. These customers may be local,
national, multinational or global in their operations.

Within the service provider market, we have targeted the following vertical
markets for our SCREAM service creation platforms:

1) Traditional incumbent service providers and interexchange carriers ("RBOC",
"ILEC", "ITCO" and "IXC"). These are the companies providing local and long
distance communications services of various kinds to both consumers and
business;

2) Competitive local exchange carriers ("CLEC"). A subset of the service
provider market, these are telecommunications companies providing services to
local consumers and business in competition with the traditional incumbent
service providers;

3) Application service providers ("ASP" and "ISP") and data centers. These
companies provide host application services over the network;

4) Integration Communication Providers ("ICP"). One of the new categories of
service providers who are building next generation networks both domestically
and globally.

We have targeted our Promina product line at service providers and at enterprise
and government customers. In the service provider marketplace, global carriers
use net.com networks for subscriber services as do a variety of emerging
carriers, cellular providers and international voice resellers and PTTS (Post
Telephone and Telegraph). net.com's strategy for enterprise customers is to
provide an integrated range of solutions and alternatives with which to address
the complexity required to successfully grow a network by maximizing bandwidth
use. We address the needs of government customers for reliable, mission critical
communications solutions. Current enterprise customers include corporations
representing the financial, banking, insurance, energy, transportation,
manufacturing and retail sectors. Government customers represent a variety of
federal and international agencies and organizations including the United States
Department of Defense ("DOD"), NATO, and ministries throughout the world,
including Austria, China and Thailand.

Sales to the Federal Government represented 53.5%, 50.4%, and 37.6% of net.com's
revenue in fiscal 2001, 2000, and 1999, respectively. We sell to the Federal
Government through net.com's wholly owned subsidiary, N.E.T. Federal, Inc.
("Federal"), which sells products both directly and through collaborative
government contracting and subcontracting arrangements. Government contracts
with Federal are for various terms, but most may be terminated by the
contracting government agency at their convenience or at annual intervals. Sales
to the Federal Government include sales under contracts with certain agencies
within the DOD. These DOD contracts may be used by other government agencies to
purchase net.com products and services. See discussion in Business Risk Factors
in this Form 10-K.

In addition to government customers, the Promina product line currently sees
more demand outside the United States especially in emerging markets such as
China and Eastern Europe where the telecommunications infrastructure is still
being developed. Applications that can be enabled by Promina based solutions
include Digital Data Networks ("DDN") that provide basic data services in these
emerging markets. International sales represented 28.5%, 28.1%, and 32.2%, of
net.com's revenue in fiscal 2001, 2000, 1999, respectively.

Other than orders from the Federal Government, no other single customer
accounted for more than ten percent of net.com revenue in fiscal 2001, 2000, or
1999.

COMPETITION

The market for telecommunications equipment is highly competitive and dynamic,
it is characterized by the easy entrance of new start-up companies, rapid
changes to and the convergence of technologies and a worldwide migration from
existing circuit technology to the new packet based technologies. We compete
directly both internationally and domestically with many different companies,
some of which are large, established suppliers of end-to-end solutions such as
Cisco, Lucent, Alcatel, and Nortel. Many of the large suppliers have greater
financial, marketing and technical resources and offer a wider range of
networking products than we have. These suppliers can often provide a complete
network solution rather than a partial solution that may make their products
more attractive to potential net.com customers. In addition, there are a number
of new start-ups that are targeting the aggregation, IP service, service
creation and the Voice over IP market, including Cosine, Ellacoya, Quarry,
Gotham, Celox, and Clarent.


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SALES

We sell our products and services through both direct and indirect sales
channels into more than 75 countries. We believe that to effectively market and
sell our products a local direct sales organization is beneficial to understand
the business and network environment of local countries. We also believe that a
direct sales force effort, supported by sales engineers who provide customers
with pre-sale and post-sale technical assistance, allows net.com to gain more
in-depth knowledge of customers' network requirements. We have more than 111
direct sales personnel located in 11 countries. This sales effort is supported
through more than 50 channel partners.

We sell products and services in North America primarily through direct channels
although we make use of a small number of distributors in some markets. Our
International sales are made almost entirely through indirect channels that are
augmented by the efforts of a local direct sales force. In addition to the
marketing and sale of products, international resellers provide system
installation and technical support. In most cases, international resellers have
non-exclusive agreements to resell net.com products within particular geographic
areas. Resale agreements do not contain a sales commitment or required sales
quota.

net.com has two strategic reseller partnerships, Ericsson Business Networks AB
of Sweden ("Ericsson") and Datacraft Asia Ltd. ("Datacraft"). Ericsson is a
worldwide partner reselling net.com's narrowband products in Europe, Asia and
Latin America. Datacraft resells net.com's narrowband products throughout Asia
and is responsible for a significant portion of net.com sales in China. Both
Ericsson and Datacraft provide service support for the products they sell. None
of these agreements has a required sales commitment and all come up for renewal
on a periodic basis. While a failure to renew any one of our international
reseller agreements would not have a significant impact on net.com's financial
results, failure to renew a significant number of these agreements on favorable
terms and conditions could have a material impact on our financial results.

N.E.T. Federal supports sales to the United States government's defense and
civilian sectors and to government agencies worldwide. Sales to Federal
customers are almost entirely direct. We are, however, a subcontractor on a
number of government contracts and resell third party products to the Federal
Government, as required.

Our direct selling model makes use of our field sales, engineering, and
executive personnel to establish and maintain customer contacts at multiple
levels within a customer organization. We believe the successful execution of
this multi-tiered selling model is important to our success.

net.com's business is not seasonal in nature and sales are generated throughout
the year.

BACKLOG

net.com manufactures its products based upon its forecast of customer demand and
typically builds finished products in advance of receiving firm orders from its
customers. Orders for net.com's products are generally placed by customers on an
as-needed basis and we have typically been able to ship these products within
30-90 days after the customer submits a firm purchase order. Because of the
possibility of customer changes in delivery schedules or cancellation of orders,
net.com's backlog as of any particular date may not be indicative of sales in
any future period. See discussion in Business Risk Factors in this Form 10-K.

CUSTOMER SERVICE

The markets, customers and complex challenges of the networking industry
described above require not only hardware and software based solutions, but also
significant support, service and other assistance in the development, operation
and expansion of a customer network. Since its inception, net.com has viewed
customer service and support as a key element of its overall strategy and a
critical component of its long-term relationship with customers. Customers
around the world turn to net.com not only for the reliability and performance of
our products, but also for our comprehensive support services that optimizes the
value of those products. Customers rely on net.com to help maintain the highest
possible availability for their mission-critical networks.

net.com's SCREAM Care service offerings provide a wide range of service and
support options to customers and resellers of net.com products. Service
offerings include product installation, a choice of different hardware and
software maintenance programs to meet the varying needs of our customers, parts
repair, remote and on-site technical assistance and customer training. In
addition, net.com provides web-based customer support services through our
Electronic Support Center. Services available over the web include first-line
troubleshooting information for net.com products, technical information, such as
trouble shooting guides and frequently asked


                                     Page 9
<PAGE>

questions, and a web-based interface to net.com's Technical Assistance Center
("TAC") through an online case management system.

TAC is staffed 24 hours a day seven days a week by engineers trained in
networking products. TAC assists customers remotely over the telephone and has
language facility in many languages including Spanish, Chinese, French and
German. TAC engineers have the ability to replicate customer problems and test
proposed solutions prior to implementation. As part of net.com's January 2000
restructuring, net.com consolidated its TAC services worldwide into its Ashburn,
Virginia, U.S.A. facility. net.com continues to invest in its TAC operations,
adding tools, equipment and capabilities to enhance its support services.
Maintenance support from net.com's TAC, whether provided over the web or over
the telephone, is fee based under either an annual fee contract or on a time and
materials basis.

Customer training on net.com products is provided to both end-users and
resellers worldwide. net.com has training facilities at its Fremont, California,
U.S.A. headquarters and in its facilities in: Ashburn, Virginia, U.S.A.;
Crawley, United Kingdom; and Singapore. In addition, net.com trainers travel to
customer and reseller facilities to provide training. net.com training services
can be customized to meet the special requirements of its customers. Customers
are charged per person per class for net.com training. In addition, certain
net.com resellers provide training to net.com end-users on behalf of net.com.

Over the years, net.com has developed expertise in certain professional services
such as staging, system integration and managed network services. These services
assist customers in optimizing their network investments, allowing them to
outsource selected network operations to net.com and provide additional
expertise on a project basis. Professional services from net.com are utilized
throughout the network life cycle from planning and design to implementation.
They are generally charged on a per project basis.

A significant amount of net.com's revenue and profits are generated by its
service and support offerings. In fiscal years 2001, 2000, and 1999 service and
support offerings accounted for 28.8%, 48.5% and 40.4%, respectively, of net.com
revenue. In the third quarter of fiscal 2001, net.com completed the divestiture
of its Federal Professional Services business, which accounted for revenue of
$34.3 million, $49.7 million and $43.2 million in fiscal 2001 fiscal 2000 and
fiscal 1999, respectively. net.com cannot guarantee that customers will continue
in the future to require service support on net.com network to the extent that
they have in the past. In particular, maintenance contracts for older IDNX
networks may not be renewed to the extent customers replace those networks with
networking products from other vendors, or deploy packet based technology.

Consistent with our business strategy as discussed above, during the third
quarter of fiscal 2001, we completed the divestiture of our FSB and sold its
assets to CACI for cash consideration of up to $40.0 million. The assets sold
are comprised mainly of service contracts with the Federal Government, accounts
receivable, spares inventory and fixed assets. The strength of net.com has
historically been to provide enterprise-focused wide area networking (WAN)
solutions. The new direction for net.com is targeted towards service providers
and in January 2001, we launched our service creation message with the
introduction of the SCREAM platform for broadband networking, and followed with
the introduction of the SHOUTIP platform for packet telephony. The divestiture
of the well-regarded government services business to CACI allows net.com to
concentrate on the execution of these product strategies. Net.com will continue
to sell products directly to the Federal Government while CACI will now provide
maintenance and other services to our Federal customers. In addition we have a
strategic alliance with CACI to jointly market each other's products and
services.

MANUFACTURING

net.com has one manufacturing facility located at its Fremont, California
facility. Assembly of printed circuit boards and circuit testing of net.com
designed products are outsourced to a single subcontractor, Solectron. For our
legacy products, final assembly, quality control and final testing are performed
in the Fremont manufacturing facility. We anticipate that as the demand for our
new SCREAM product increases, we will outsource many of these
final-manufacturing steps to Solectron and drop ship equipment directly to
customers. net.com maintains control over parts procurement, design,
documentation and selection of approved suppliers. We have a multi-year contract
with Solectron that requires it to meet defined performance specifications.
Because Solectron is a sole source vendor, any interruption in Solectron's
manufacturing processes or a failure to renew our contract could have a material
adverse effect on our financial results and operations.

Currently, several key components of our Promina and SCREAM products are
available only from a single source, including certain ASICs and power supplies.
In addition, some components are in short supply generally throughout the
industry. Depending upon the component, there may or may not be alternative
sources or substitutes. Some of


                                    Page 10
<PAGE>

these components are purchased through purchase orders without an underlying
long-term supply contract. Any delay or difficulty in obtaining needed
components could seriously impact our ability to ship products.

We maintain sufficient inventory to ship products quickly, normally within 30 to
90 days after receipt of an order. Scheduling of production and inventory supply
is based on internal sales forecasts. Generally, our customer contracts allow
the customers to reschedule delivery dates or cancel orders within certain time
frames before shipment without penalty and outside those time frames with a
penalty. Because of these and other factors, there are risks of excess or
inadequate inventory that could materially impact expenses, revenue and
earnings.

net.com is focused on continually enhancing the quality of products and services
delivered to customers worldwide. This includes improving the quality of
supplied components, subassemblies and internal processes. As part of this
continuing process, net.com is ISO 9002 certified.

RESEARCH AND DEVELOPMENT

We believe that our long-term success depends on our ability to maintain product
and technology leadership. The networking equipment industry is characterized by
rapid technological change, evolving industry standards, frequent new product
introductions, enhancements to products currently in the market and constantly
changing customer requirements. To compete effectively, net.com must be able to
bring new products to market in a timely and cost effective manner and enhance
existing products to extend their useful life. Along with making continued
investments in our internal research and development, we will also consider
strategic acquisitions where appropriate to provide needed technology and
resources.

net.com continually monitors relevant markets, its customers' businesses and
technology developments in order to develop products that proactively address
customer needs. net.com's new SCREAM products were designed with an open
architecture to facilitate the development by third parties of products that
will enhance the capabilities of SCREAM. Further, we design to industry
standards and support industry standards bodies in their endeavors. Despite our
efforts, however, there is no guarantee that we will be able to successfully
develop new products or that our customers or our targeted markets will accept
any products we develop.

During the latter half of fiscal 2001 we eliminated the formal separation of our
business into Broadband and Narrowband business units and merged all product
development activities into a single development organization. As of March 30,
2001, we had an engineering staff of 107 engineers working on our SCREAM,
Promina or SHOUTIP products. The majority of our research and development
activity is focused on the SCREAM product line and on our new voice over IP
solution, SHOUTIP. We continue, however, to provide engineering support to
Promina and to provide feature enhancements required to maintain Promina's
viability. While most product development activity is undertaken in-house,
external development organizations are used to shorten time to market.

In fiscal 2001, 2000, and 1999, net.com's research and development expenditures
were $40.4, $41.6 million and $45.2 million, respectively. net.com expensed
in-process research and development of $879,000 in fiscal year 2000 as a result
of the FlowWise Networks acquisition. No in-process research and development
costs were expensed in fiscal year 2001 or 1999.

INTELLECTUAL PROPERTY

Our ability to invent and develop new technologies and then to protect these
technologies from abuse by others outside our company is an important part of
our success. We use all available means to protect our proprietary technology
including patents, trade secrets, trademarks and copyrights. All our employees
sign confidentiality and invention disclosure agreements and anyone outside our
company receiving information either signs a non-disclosure agreement prior to
receiving information or is a net.com licensee. To foster disclosure of
patentable inventions, we provide financial incentives to employees. We believe
that ownership of patents, copyrights and trade secrets is important to our
ability to compete and to defend ourselves against patent infringement
allegations.

Over the past 18 years, a number of patents have been issued to net.com in the
United States, Europe and Japan. These include some very early basic ATM
inventions that comport with ATM Forum standards. In the last fiscal year, we
began a highly focused effort to identify and patent our proprietary SCREAM and
SHOUTIP technology. We expect to continue filing patent applications as our
development process for SCREAM and SHOUTIP moves forward. In addition, as part
of our acquisition of FlowWise Networks in December 1999, we became the
successor to several filed patent applications relating to the FlowWise product.
We are also working to file patent applications for inventions obtained as part
of the purchase of the assets of Convergence Equipment Company.


                                    Page 11
<PAGE>

Although we have a number of patent applications pending, we cannot guarantee
that any one will result in the issuance of a patent. Even if issued, the patent
may later be found to be invalid or may be infringed without our knowledge. It
is difficult to monitor use of our technology by others. If we do not
effectively protect our intellectual property, it could have a material adverse
effect on our competitive position and sales of our products.

In June 2000, net.com entered into its first patent cross-licensing agreement.
The agreement is with Lucent Technologies whereby net.com and Lucent licensed
patents to the other. Under the terms of the cross-licensing agreement, each
company will receive a license under all patents related to its product markets.
net.com's portfolio includes patents in basic networking and ATM technologies
supported by the ATM Standards Forum and other standard setting bodies. This
cross-license agreement with Lucent has a five-year term.

Item 2. Properties

net.com is headquartered in Fremont, California. In April 1997, we entered into
a twelve year lease for three buildings totaling 290,000 square feet of office,
R&D and manufacturing space in an industrial park ("1997 Lease Agreement"). In
May 2000, we consolidated into two buildings, the R&D building and the
manufacturing building. This consolidation resulted from 1) the January 2000
restructuring of net.com's business and 2) the settlement of the ground water
intrusion problem affecting all three buildings. Our landlord released us from
the obligation to pay rent on the third building at that time. In March 2000, an
agreement was reached with the landlord and our insurance carrier that will
allow us to move out of the damaged facilities upon completion of a new
build-to-suit facility that is being constructed near by to the current
facilities. net.com believes that substantially all the costs associated with
the move and the build out of the new facility will be covered by insurance
proceeds from the agreement reached with our insurance carrier. In December
2000, we entered into a lease termination and settlement agreement ("Settlement
Agreement") and a 10 year lease for two buildings totaling 185,790 square feet
of office, R&D and manufacturing space on a new campus ("Lease Agreement"). The
buildings on the new campus will be leased to net.com under substantially the
same economic terms as the terms in our 1997 Lease Agreement. The Settlement
Agreement may be terminated if certain contingencies are not met and our move
into the new facility, which is scheduled to take place sometime in the first
half of the 2002 calendar year, may be impacted.

net.com and its subsidiaries also lease sales and service offices at other
locations in the United States, Canada, United Kingdom, France, Germany, Mexico,
Singapore, Uruguay, Brazil, China Japan, and Hong Kong. As a result of the
January 2000 restructuring, net.com vacated its Crawley, United Kingdom facility
and entered into a surrender agreement with the landlord in March 2001. The
sales and service operations that we maintain there have been relocated to a
smaller facility in the Crawley area. In June 2001, we terminated our lease in
Mexico City and have relocated the remaining employees to a smaller facility. We
are also in the process of closing our Boston and New Jersey offices and are
attempting to sublease those facilities.

Item 3. Legal Proceedings

net.com is not aware of any material pending legal proceedings. From time to
time net.com may be involved in employment or other litigation or in activities
including litigation needed to collect past due receivables. Generally, we do
not consider these litigation matters and or collection activities to be
material.

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

None.

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

See Note 8 in the "Notes to Consolidated Financial Statements". At June 15,
2001, there were approximately 527 stockholders of record of net.com.


                                    Page 12
<PAGE>

MARKET PRICE

net.com'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 2001                          High              Low
              ----------------------------------------------------------

              First quarter                      $12.00            $7.50

              Second quarter                      12.44             9.25

              Third quarter                       10.69             5.38

              Fourth quarter                       6.88             3.75
              ----------------------------------------------------------

              Fiscal 2000                          High              Low
              ----------------------------------------------------------

              First quarter                      $11.00            $7.31

              Second quarter                      11.63             8.19

              Third quarter                       14.81             8.88

              Fourth quarter                      12.50             9.25
              ----------------------------------------------------------

net.com has never declared or paid dividends on its capital stock and does not
intend to pay dividends in the foreseeable future. In addition, the Company's 7
1/4% convertible subordinated debentures trade in the over-the-counter market.

Item 6. Selected Financial Data

Five year financial summary:

(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
Fiscal years ended                                  2001           2000           1999           1998          1997
-------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>            <C>           <C>
Revenue                                         $144,286       $225,686       $263,835       $308,721      $324,438

Income (loss) from continuing operations         (20,790)       (40,070)        (7,054)        14,350        23,302

Diluted earnings (loss) per share                  (0.96)         (1.86)         (0.32)          0.65          1.08

7 1/4% convertible subordinated debentures        24,706         24,706         24,706         25,821        25,821

Total assets                                     235,346        259,994        313,112        334,557       301,653
</TABLE>

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

The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes. The discussion contains
forward-looking statements that involve risk and uncertainties. These statements
relate to future events or our future financial results. Forward-looking
statements can often be identified by words such as "may", "will", "should",
"expect", "anticipate", "believe", "estimate" or words of similar import. Our
actual results may differ significantly from those anticipated by any
forward-looking statement as a result of a number of factors, trends, and risks
- many beyond our control. These factors and risks are discussed further within
"Business Environment" and "Risk Factors" below and elsewhere in this Form 10-K.


                                    Page 13
<PAGE>

SALE OF N.E.T. FEDERAL, INC.'S PROFESSIONAL SERVICE BUSINESS

On December 1, 2000, we sold the assets of our federal services business ("FSB")
to CACI International Inc ("CACI") for a cash consideration of up to $40.0
million. The assets sold are comprised mainly of service contracts with the
United States Federal Government ("Federal Government"), accounts receivable,
spares inventory and fixed assets. The purchase price will be paid out over time
beginning with $24.9 million paid at the closing, $1.0 million six months after
closing and $1.0 million held in escrow and payable one year after closing (if
no successful indemnification claims are made). The net gain on the sale to date
is $14.9 million. The remaining $13.0 million is payable contingent upon
transfer to CACI of work performed under certain net.com federal contracts.
Additionally CACI and net.com have entered into an agreement whereby net.com
will receive royalties based on maintenance contract revenue.

RESULTS OF OPERATIONS

The following table depicts data derived from the Consolidated Statements of
Operations expressed as a percentage of revenue:

Years ended:                                  Mar. 30,     Mar. 31,     Mar. 31,

Percent of Revenue                              2001         2000         1999
--------------------------------------------------------------------------------

Product revenue                                 53.4%        58.1%        63.9%

Service and other revenue                       46.6         41.9         36.1

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

Product gross margin                            42.8         50.9         56.6

Service and other revenue gross margin          33.7         38.4         36.9

--------------------------------------------------------------------------------
     Total gross margin                         38.6         45.7         49.5
--------------------------------------------------------------------------------

Sales and marketing                             31.0         30.6         32.5

Research and development                        28.0         18.4         17.1

General and administrative                       8.8          6.5          5.5

Facility relocation costs                        0.0          0.0          0.1

Other operating expense                          2.3          0.8          0.0

Restructuring costs                             (1.0)         6.7          1.8

--------------------------------------------------------------------------------
     Total operating expenses                   69.2         63.0         57.1
--------------------------------------------------------------------------------

     Loss from operations                      (30.6)       (17.3)        (7.6)

Interest income                                  5.5          3.2          2.5

Interest expense                                (1.3)        (1.0)        (0.7)

Other                                           10.4          3.0          0.3

--------------------------------------------------------------------------------
Loss before income taxes                       (15.9)       (12.1)        (5.6)

Income tax provision (benefit)                  (1.5)         5.7         (2.9)
--------------------------------------------------------------------------------

Extraordinary gain                               0.0          0.0          0.1

--------------------------------------------------------------------------------
Net loss                                       (14.4)%      (17.8)%       (2.6)%
================================================================================


                                    Page 14
<PAGE>

COMPARISON OF 2001, 2000 & 1999

Revenue Total revenue decreased 36.1% to $144.3 million in fiscal 2001 as
compared to $225.7 million in fiscal 2000. Fiscal 2000 was a decrease of 14.5%
compared to the $263.8 million in fiscal 1999. Product revenue decreased 41.3%
to $77.0 million in fiscal 2001 as compared to $131.2 million in fiscal 2000.
Fiscal 2000 product revenue was a decrease of 22.2% compared to the $168.6
million in fiscal 1999. The decrease in product revenue is primarily the result
of lower sales of our circuit switched or "narrowband" product line, Promina(R),
which accounts for the majority of the product sales worldwide. Promina sales
decreased in all sales channels as part of a general decline in the overall
market for circuit switched products. Product revenue for the North America
sales channel decreased 50.7% to $10.6 million in fiscal 2001 compared to $21.6
million in fiscal 2000. Fiscal 2000 product revenue for the North America sales
channel was a decrease of 57.2% compared to the $50.5 million in fiscal 1999.
Product revenue for the Asia Pacific/Latin America sales channel decreased 52.6%
to $9.6 million compared to $20.2 million in fiscal 2000. Fiscal 2000 product
revenue for the Asia Pacific/Latin America sales channel was a decrease of 6.0%
compared to $21.5 million in fiscal 1999. Product revenue for the European sales
channel decreased 37.7% to $16.8 million in fiscal 2001 compared to $27.0
million in fiscal 2000. Fiscal 2000 product revenue for the European sales
channel was a decrease of 39.4% compared to the $44.6 million in fiscal 1999.
Product revenue for the United States Federal sales channel, which includes
sales to the United States government and United States government contractors
decreased 34.7% to $42.8 million in fiscal 2001 compared to $65.7 million in
fiscal 2000. Product revenue for the United States Federal sales channel in
fiscal 2000 increased 17.2% compared to $56.0 million in fiscal 1999. Net.com is
currently developing new products for the broadband equipment market that are
intended to offset the decline in product revenue of our Promina product line.
We expect the new broadband products to begin generating additional product
revenue in the upcoming fiscal year.

Service and other revenue sales decreased 28.8% to $67.3 million in fiscal 2001
as compared to $94.5 million in fiscal 2000. Fiscal 2000 was a decrease of 0.7%
compared to the $95.2 million in fiscal 1999. The decrease in service and other
revenue is primarily the result of the following:

1) our sale of the FSB to CACI in the third quarter of fiscal 2001, which
accounted for $14.8 million of the decrease in fiscal 2001. The FSB service and
other revenue in fiscal 2001 was $34.3 million, $49.7 million in fiscal 2000,
and $43.2 million in fiscal 1999.

2) a decline in the installed base of Promina equipment that requires on-going
service support.

As part of the broadband strategy, we are developing new service creation
solutions that we expect will expand our service offerings in the new fiscal
year and offset part of the service and other revenue decline in fiscal 2001.
Although we expect incremental service and other revenue from the broadband
offerings, we expect the service and other revenue to decline in the new fiscal
year compared to fiscal 2001 as a result of the sale of FSB

Gross Margin Total gross margin, comprised of product and service margin,
decreased as a percentage of total revenue to 38.6% in fiscal 2001 compared to
45.7% in fiscal 2000 and 49.5% in fiscal 1999. The decrease in total gross
margin is primarily the result of the following:

1) lower product gross margin. Product gross margin decreased to 42.8% in fiscal
2001, compared to 50.9% in fiscal 2000 and 56.6% in fiscal 1999. The decrease in
product gross margin is primarily the result of unfavorable manufacturing
variances that resulted from lower product revenues. In addition, a charge of
$1.4 million for inventory reserves in connection with the end of life and
subsequent obsolescence of the STM and the Router Accelerator product lines were
taken in fiscal 2001.

2) lower product revenue as a percent of total revenue for fiscal 2001 as
compared to fiscal 2000 and 1999. Product revenue as a percentage of total
revenue was 53.4% in fiscal 2001 compared to 58.1% in fiscal 2000 and 63.9% in
fiscal 1999. Since gross margins are higher for product revenue than for service
revenue, the decline in the percentage of product revenue had an unfavorable
impact on total gross margins.

Service and other revenue gross margin decreased to 33.7% in fiscal 2001,
compared to 38.4 % in fiscal 2000. Fiscal 2000 gross margin increased compared
with fiscal 1999 gross margin of 36.9%. The decrease in service and other
revenue gross margin in fiscal 2001 is primarily the result of lower service
contract revenues and relatively fixed service support expenses. The gross
margin increase in fiscal 2000 compared to fiscal 1999 resulted from reduced
headcount for service support.


                                    Page 15
<PAGE>

Operating Expenses Operating expenses in fiscal 2001 decreased $42.3 million to
$99.8 million compared to $142.1 million in fiscal 2000 and $150.7 million in
fiscal 1999. Operating expenses as a percentage of total revenue increased to
69.2% in fiscal 2001, compared to 63.0% in fiscal 2000 and 57.1% in fiscal 1999.
The increase in operating expenses as a percentage of total revenue is primarily
a result of lower revenue. In the second and fourth quarter of fiscal 2000, we
completed two separate restructurings that included a reduction in our
workforce. These reductions contributed to lower operating expenses in fiscal
2001. The restructure expense in fiscal 2001 was a credit of $1.4 million
compared to an expense of $15.2 million in fiscal 2000 and an expense of $4.7
million in fiscal 1999. The credit in fiscal 2001 resulted from lower costs than
initially estimated related to the closure of field offices. The increase in
operating expenses as a percentage of total revenue resulted primarily from the
lower revenues in fiscal 2001 compared to both prior periods.

Sales and marketing expenses in fiscal 2001 decreased $24.3 million to $44.7
million compared to $69.0 million in fiscal 2000 and $85.8 million in fiscal
1999. Sales and marketing spending as a percentage of total revenue in fiscal
2001 increased to 31.0% compared to 30.6% in fiscal 2000 and decreased from
32.5% in fiscal 1999. The decrease in fiscal 2001 spending resulted from reduced
headcount, lower travel expenses, and lower sales related costs. We expect sales
and marketing expense to decline slightly in fiscal 2002 as we balance the
priorities of cost control and the importance of marketing activities associated
with the introduction of our new broadband products.

Research and development expenses in fiscal 2001 decreased $1.2 million to $40.4
million, compared to $41.6 million in fiscal 2000 and $45.2 million in fiscal
1999. Research and development spending as a percentage of total revenue
increased to 28.0% in fiscal 2001 compared to 18.4% in fiscal 2000 and 17.1% in
fiscal 1999. The decrease in spending in fiscal 2001 compared to 2000 is
primarily from reduced facility related costs. In fiscal 2001, we focused
research and development resources on the development and release of our
broadband technology offerings. We expect personnel related costs tied to the
FlowWise Networks, Inc. acquisition to decline and as a result, total research
and development spending to decline slightly in the new fiscal year.

General and administrative expense in fiscal 2001 decreased $2.0 million to
$12.7 million, compared to $14.7 million in fiscal 2000 and $14.5 million in
fiscal 1999. General and administrative spending as a percentage of total
revenue increased to 8.8% in fiscal 2001 compared to 6.5% in fiscal 2000 and
5.5% in fiscal 1999. The decrease in general and administrative spending is a
result of lower headcount and reduced consulting expenses. We expect general and
administrative spending to decline slightly from continued focus on cost
control.

The amortization of goodwill and other intangible assets was $3.4 million in
fiscal 2001 compared to $801,000 in fiscal 2000 and zero in fiscal 1999. The
amortization is a result of two acquisitions, FlowWise Networks Inc. in the
third quarter of fiscal 2000 and Convergence Equipment Company in the first
quarter of fiscal 2001. Goodwill and other intangibles will be amortized on a
straight-line basis over five years. A charge of $879,000 was recorded in fiscal
2000 for purchased in-process technology that arose from the acquisition of
FlowWise.

Non-Operating Items Interest income, primarily related to cash investments,
increased $679,000 to $8.0 million in fiscal 2001 compared to $7.3 million in
fiscal 2000 and $6.6 million in fiscal 1999. The increase in interest income is
primarily the result of higher yields from our investment portfolio in fiscal
2001 compared to fiscal 2000. The increase in fiscal 2000 compared to fiscal
1999 is primarily the result of a shift in the investment portfolio from
tax-exempt securities to taxable securities.

Interest expense from: 1) the 7 1/4% convertible subordinated debentures, and 2)
the debt obligations assumed by net.com as part of acquisition of FlowWise
decreased in fiscal 2001 $387,000 to $1.9 million, compared to $2.3 million in
fiscal 2000 and $2.0 million in fiscal 1999. The decrease in interest expense is
primarily related to the reduction in principal for the debt obligations. We do
not expect an increase in interest expense in fiscal 2001.

Other income in fiscal 2001 increased $8.4 million to $15.0 million, compared to
$6.7 million in fiscal 2000 and $738,000 in fiscal 1999. Other income in fiscal
2001 included a gain of $14.9 million from the sale of the Federal Services
Business. Other income in fiscal years 2000 and 1999 includes gains of $7.2
million and $1.0 million, respectively, primarily from the sale of all of the
equity securities held in a publicly traded company.

Fiscal 2001 included a tax benefit of $2.2 million as compared to tax provision
of $12.8 million in fiscal 2000 and a tax benefit of $7.6 million in fiscal
1999. In fiscal 2001, we reevaluated the adequacy of our tax liability reserves
taking into account the statute of limitations on previously filed tax returns
as well as our expected fiscal year 2001 net losses. The result of this
reevaluation was to reduce the amount of necessary reserves and to record a tax
benefit of $2.2 million.


                                    Page 16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2001, we had cash and cash equivalents of $20.5 million,
restricted cash of $540,000 and short term investments of $112.8 million for a
total of $133.8 million as compared to $124.9 million at the end of fiscal 2000
and $154.6 million at the end of fiscal 1999. The increase resulted primarily
from the sale of the Federal Services Business and insurance proceeds, both of
which will be discussed below.

Net cash used by operations was $9.6 million in fiscal 2001, compared to $2.2
million used in the prior year. This compares to net cash provided by operations
of $19.0 million in fiscal 1999. The decrease in 2001 resulted primarily from a
net loss of $20.8 million, an adjustment for the sale of the Federal Service
Business of $14.9 million, an increase in inventory of $2.4 million and a
decrease in accrued liabilities of $7.5 million. Partially offsetting the
reductions was the adjustment for depreciation and amortization of $21.5 million
and the $15.0 million in cash received from insurance proceeds associated with
the settlement of construction defects at our Fremont campus. Pursuant to our
settlement agreement, we will be eligible to receive additional insurance
proceeds as a function of costs incurred for moving and replacement of tenant
improvements.

Net cash provided from investment activities was $13.3 million in fiscal 2001,
compared to $2.9 million in fiscal 2000. This compares to net cash used for
investing activities of $63.2 million in fiscal 1999. Net cash provided by
investment activities consisted primarily of the proceeds from maturing
temporary cash investments of $84.6 million, $24.9 million cash received from
the sale of the Federal Services Business and a decrease in restricted cash of
$12.6 million mostly due to our closing our line of credit. Net cash used for
investing activities was $99.1 million in purchases of temporary cash
investments and the net use of $12.1 million cash for the purchases of property
and equipment.

Net cash provided by financing activities was $1.5 million in fiscal 2001,
compared to $286,000 in fiscal 2000. This compares to net cash used for
financing activities of $1.3 million in fiscal 1999. In fiscal 2001, cash
provided by financing activities was $2.9 million from the sale of common stock,
which was partially offset by the use of $1.4 million in cash for the repurchase
of common stock.

The Board of Directors re-authorized a share repurchase program in October of
1999. In fiscal 2001, 170,800 common shares at an average price of $8.27 per
common share were repurchased. We intend to continue the share repurchase
program in fiscal 2002 and from time to time will reenter the market to
repurchase shares.

We believe that our existing 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 the next 12 months.

BUSINESS ENVIRONMENT AND RISK FACTORS

net.com's business is subject to the risks below. Although we have tried to
identify the material risks to our business, this is not an all-inclusive list.
There may be additional risks not listed because either they have not yet been
identified or they are not material now, although they could become material in
the future. Any one of the risks identified below could materially impact our
business, results of operations or financial condition.

WE HAVE INCURRED NET LOSSES IN FISCAL YEAR 2000 AND 2001 AND EXPECT TO INCUR
FUTURE LOSSES.

For the past two fiscal years we have incurred net losses. Our ability to
achieve profitability on a continuing basis will depend on the successful
design, development, testing, introduction, marketing, and broad commercial
distribution of our new broadband equipment products, specifically our
SCREAM(TM) product line and to a lesser degree our SHOUTIP product line. We
expect to continue to incur significant product development, sales and marketing
and administrative expenses as we continue to maintain support of our existing
products and customers while launching new products. Although we have taken a
number of measures to reduce expenditures, most of our operating expenses are
fixed in the short term making it difficult to reduce expenses rapidly. At the
current revenue levels our operating expenses are too high to enable us to be
profitable. In order to achieve profitability, we need to generate significant
sales growth from our SCREAM product line or decrease expenses, in order to
offset declines in our existing Promina product line.


                                    Page 17
<PAGE>

OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

Our operating results vary significantly from quarter to quarter. These
fluctuations are the result of a number of factors including:

      o     the volume and timing of orders from and shipments to our customers;

      o     the length and variability of the sales cycle of our products;

      o     the timing of and our ability to obtain new customer contracts;

      o     the timing of new products and services;

      o     the timing and level of prototype expenses;

      o     the availability of products and services;

      o     the overall capital expenditures of our customers;

      o     the market acceptance of new and enhanced versions of our products
            and services or variations in the mix of products and services we
            sell;

      o     the availability and cost of key components;

      o     the timing of revenue recognition/deferrals;

      o     the timing and size of Federal budget approvals; and

      o     general economic conditions as well as those specific to the
            telecommunications, Internet and related industries.

Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. Any
shortfall in revenue may impact our business, results of operations and
financial condition. You should not rely on our results or growth for one
quarter as any indication of our future performance.

OUR STOCK PRICE MAY BE VOLATILE.

Our common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results and the
published expectations of analysts, and as a result of announcements by our
competitors and us. In addition, the stock market has experienced extreme price
and volume fluctuations that have affected the market price of many companies,
in particular technology companies, and that have often been unrelated to the
operating performance of these companies. These factors, as well as general
economic, industry specific, and political conditions, may materially adversely
affect the market price of our common stock in the future. Additionally,
volatility or a lack of positive performance in our stock price may adversely
affect our ability to retain key employees, all of who have been granted stock
options.

THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS THAT WILL ACHIEVE MARKET ACCEPTANCE.

Our operating results will depend to a significant extent on the successful
design, development, testing, introduction, marketing, and broad commercial
distribution of our new broadband equipment products, specifically our SCREAM
product line and to a lesser extent on our SHOUTIP product line. The success of
these and other new products is dependent on several factors, including proper
new product definition, competitive product cost, timely completion and
introduction of new products, differentiation of new products from those of our
competitors and market acceptance of these products. The markets for our
products are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and evolving methods of building
and operating networks. Our SCREAM and SHOUTIP product lines target start-up
telecommunications companies and long established domestic carriers such as
AT&T, Worldcom, SBC Communications, and Sprint. There can be no assurance that
we will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, or achieve market acceptance of our
products or that products and technologies developed by others will not render
our products or technologies obsolete or non-competitive. That in turn could
have a material adverse effect on our business, results of operation, and
financial condition.


                                    Page 18
<PAGE>

WE ARE DEPENDENT ON REVENUE FROM THE PROMINA PRODUCT LINE UNTIL WE GAIN REVENUE
TRACTION ON THE SCREAM PRODUCT LINE.

Currently, we derive the majority of our product revenue from our Promina(R)
product line, a circuit-based technology. We believe that the market for
circuit-based technology has declined and will continue to decline in the future
as new networks will likely employ packet based technology. The migration from
circuit to packet-based technology has happened more dramatically in the United
States commercial markets than in the United States Federal Government market
and the rest of the world. The decline of our business in the United States
commercial markets since fiscal 1999 has had a material adverse affect on our
business and results of operations. Should this migration extend into our
international and Federal Government markets in a similar fashion before we gain
traction on our new SCREAM product line, it could have a material adverse effect
on our business, results of operations, and financial condition.

A SIGNIFICANT PORTION OF OUR REVENUE IS GENERATED FROM SALES TO THE FEDERAL
GOVERNMENT.

A significant portion of our total revenue from product sales comes from
contracts with the United States Federal Government ("Federal Government"), most
of which do not include long-term purchase commitments. Historically, the
Federal Government has been slower to adopt new technology, such as packet based
technology, which has had the effect of extending the product life of our older
products. If the Federal Government accelerated adoption of new technology by
replacing the Promina(R) product line in their networks our product revenue
would decline sharply. Should we not be successful in renewing a significant
number of Federal Government contracts, and if sales to the Federal Government
were to decline sharply, it could have a material adverse impact on our
business, results of operations and financial condition.

OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE SCREAM AND SHOUTIP WILL DEPEND HEAVILY
ON THE WIDESPREAD ACCEPTANCE OF SERVICE CREATION AS A MEANS OF ACHIEVING MAXIMUM
NETWORK PRODUCTIVITY AND ON APPROPRIATE REGULATORY INCENTIVES.

Over the last five years, carriers generated revenue by adding more customers or
by offering additional services to existing customers. Offering additional
services to an existing subscriber base is generally a preferred approach to
generating additional revenue, but these services typically require network
upgrades and the purchase of expensive equipment. Over time, however, carriers'
aggressive price discounts, expensive direct marketing campaigns, and massive
capital outlays for infrastructure expansion have offset whatever incremental
revenue increases were generated by the new services and have eroded the
profitability of these companies. Since the second quarter of fiscal 2000, we
have spent the majority of our R & D and Marketing resources to position
ourselves and our SCREAM family of products as the next generation of
telecommunications equipment that will enable carriers to maximize the delivery
of new services while leveraging their existing networks and ensuring quality of
service. The future success of SCREAM and SHOUTIP will depend in large measure
on carriers' acceptance of service creation as the vehicle that will deliver
revenue increases sought after by the carriers. Failure to achieve this
acceptance could affect our ability to sell the SCREAM and SHOUTIP products and
grow overall revenue, which could have a material adverse effect on our
business, results of operations, and financial condition.

In addition, without deregulation, in the United States and overseas, the
economic incentive for the incumbent carrier to actively engage in changing
their service delivery model to the service creation delivery model is low.
While the 1999 decision by the United States Federal Telecommunications
Commission's to decline to force incumbent local exchange carriers to unbundle
their ATM infrastructure, thus allowing incumbents to deny competitive carriers
access to their ATM networks, has made the service creation model viable for
carrier revenue growth, it remains to be seen whether or not the regulatory
structure in other countries will set the stage for the service creation model
to take hold. Failure to achieve the regulatory structure favorable to the
service creation model overseas could affect our ability to sell the SCREAM and
SHOUTIP products overseas and to grow overall revenue, which could have a
material adverse effect on our business, results of operations, and financial
condition.


                                    Page 19
<PAGE>

OUR SHOUTIP PRODUCT LINE MAY NEVER GENERATE SIGNIFICANT REVENUE.

Our SHOUTIP product is a voice over IP product that we acquired from the
purchase of the assets of Convergence Technologies in May 2000. While we
continue to believe that the technology is good, and that there is a market for
the SHOUTIP product, it has not yet generated significant sales. Due to the
competitive nature of this market segment there can be no assurances that this
product will generate significant sales in the short term, if ever.

TO SUCCESSFULLY MARKET SCREAM, WE WILL NEED TO SIGN UP SIGNIFICANT NEW STRATEGIC
PARTNERS WHO CAN HELP SELL OUR PRODUCTS INTO THE SERVICE PROVIDER MARKET.

In order to successfully market our SCREAM product, we will need to sign up new
strategic partners, such as software application partners and product OEM's or
resellers. The importance of the software application partners is that they
provide critical functions, such as billing, mediation, provisioning and
configuration that are needed to create a total service creation solution for
our customers. Product OEM or resale partners will be needed to supplement and
enhance our existing direct sales force both in the United States and overseas.
While we have begun the process of identifying and signing both software
application and OEM or resale partners, more partners may be necessary in all
these areas for us to be successful. In particular, we may need to find
strategic partners to assist us with integration of security functions, such as
digital certificates, third party firewall, intrusion detection and public key
management to meet evolving security needs, as well as to counter rival efforts
to assert differentiation in the security area. Additionally, we may need to
pursue partnerships with vendors who have optical core and core routing
technologies in order to counter the end-to-end solution providers, such as
Nortel, Cisco and Lucent as well as to bolster the company's co-marketing
efforts. Failure to sign up these new strategic partners could impact on our
ability to sell the SCREAM product and grow overall revenue, which could
adversely impact our business, results of operations and financial condition.

A CONTINUATION OF THE DOWN TURN IN THE NATIONAL ECONOMY COULD MATERIALLY IMPACT
OUR REVENUE AND AS A RESULT, EARNINGS AND OUR STOCK PRICE.

Growth in the United States economy slowed significantly in the third quarter.
Companies in many different market sectors have been impacted by the slow down.
Telecommunications and other technology related markets in particular have seen
growth slow significantly. This slow growth has led to decreased revenue or
earnings, which in turn has led to declines in the stock price for the
technology sector as a whole. We have seen our stock price decrease along with
our competitors and others in technology. Should the United States economy
continue its slow down, our revenues, earnings and ultimately our stock price
could be materially affected.

THE RECENT DECLINES IN PURCHASES BY TELECOMMUNICATIONS SERVICE PROVIDERS AND THE
OVERALL DECLINE OF PRODUCT SALES IN THIS MARKET COULD IMPACT SALES OVER THE NEXT
SEVERAL QUARTERS.

Over the last twelve months, the financial health of many of the newly emerging
telecommunications service providers, including many of the companies classified
as Competitive Local Exchange Carriers or "CLECs" began to deteriorate. In
addition, there is evidence that other more established service providers are
cutting back on equipment purchases as part of an overall slow down in economic
growth. We believe that many telecommunications equipment companies, including
net.com, were impacted by this decline. In addition, the timing and volume of
purchases by emerging service providers can be unpredictable due to other
factors, including their need to build a customer base and capacity while
working within their budgetary constraints. Our ability to recognize revenue
from emerging service providers will depend on the relative financial strength
of the particular customer. We may be required to write off or decrease the
value of our accounts receivable from a customer whose financial condition
materially deteriorates. Decreases in purchasing volume of emerging service
providers or changes in the financial condition of emerging service provider
customers could have a material impact on our results of operations and
financial condition in future periods. In addition, the selling cycle of our
SCREAM product family could be extended as our service provider customers reduce
their capital budgets.


                                    Page 20
<PAGE>

WE EXPECT GROSS MARGINS TO DECLINE OVER FUTURE PERIODS.

Due to increases in competition, material and labor costs, subcontractor costs
and changes in the mix of products we sell, we expect that our gross margins
could decrease in future quarters. Some of the new products we introduced
recently have lower gross margins than our Promina product line. However, we
expect that new product offerings slated for introduction in the second half of
fiscal 2002 will have gross margins similar to or higher than our Promina
product line. In addition, if product sales continue to decrease as a percentage
of total revenue, overall margins may decrease because service revenue has a
lower margin than product sales. In addition, to the extent we expand our sales
through product resellers and strategic partnerships, we expect to earn lower
gross margins. Recently our subcontractor manufacturer increased our material
costs by 10% due to increased demand and an overall shortage of capacity in the
semiconductor and other component industries. The current economic slowdown may
help alleviate some of the pricing pressure on component parts, although there
is no assurance that these benefits will be passed on to us from our suppliers
or contract manufacturer. Any one of these factors by themselves or all of them
in combination may decrease our product margins and our overall gross margins.

FACTORS BEYOND OUR CONTROL COULD AFFECT OUR ABILITY TO SELL INTO INTERNATIONAL
MARKETS

As a general rule, international sales tend to have risks that are difficult to
foresee and plan for including political and economic stability, regulatory
changes, currency exchange rates, changes in tax rates and structures, and
collection of accounts receivable. Unforeseen events in various areas of the
globe may have an adverse impact on us. Further, our international markets are
served primarily by non-exclusive resellers who themselves may be severely
impacted by economic or market changes within a particular country or region.
Unforeseen or unpredictable changes in international markets could have a
material adverse effect on our business, results of operations and financial
condition.

WE CANNOT GUARANTEE THAT OUR DIVESTITURE OF OUR FEDERAL SERVICES BUSINESS WILL
PROVE SUCCESSFUL.

On December 1, 2000, we closed the sale of our Federal Services Business ("FSB")
to CACI International Inc ("CACI"), who will continue to provide maintenance and
other services to our federal customers. We continue to sell net.com products
directly to the Federal Government and, additionally, have a strategic alliance
with the acquirer, CACI, to jointly market each other's products and services.
For the divestiture to be successful, CACI must continue to provide the level of
service to which our customers have become accustomed. Should CACI experience
difficulties in providing those services, it could impact purchasing decisions
for our product and cause federal customers to seek products from other vendors.

In addition, in order to realize the full economic benefits of the sale, net.com
must facilitate the assignment and extension of certain contracts with the
Federal Government that trigger up to an additional $13.0 million of
consideration under the divestiture agreement. If the divestiture of our FSB
proves unsuccessful, it could have an adverse impact on our business, financial
condition or results of operation.

INCREASED COMPETITION IS LIKELY IN THE FUTURE.

The market for telecommunication equipment is a highly competitive and dynamic
market characterized by the easy entrance of new start-up companies, rapid
changes to and the convergence of technologies and a worldwide migration from
existing circuit technology to the new packet based technologies. We compete
directly both internationally and domestically with many different companies,
some of which are large, established suppliers of end-to-end solutions such as
Cisco, Lucent, Alcatel and Nortel. In addition, there are a number of new
start-ups that are targeting this market, including CoSine, Ellacoya, Quarry,
Gotham, Celox and others. Many of the large suppliers have greater financial,
marketing and technical resources and offer a wider range of networking products
than we offer. They are often able to devote greater resources to the
development, marketing and sale of their products and to use their equity or
significant cash reserves to acquire other companies with technology and/or
products that compete directly with ours. They often can compete favorably on
price because their large product selection allows them to bundle multiple
solutions together without significantly impacting their overall product
margins. Small start-up ventures are better able than net.com to focus their
resources on a particular product development unencumbered by the requirements
to support an existing product line. Through these acquisitions,


                                    Page 21
<PAGE>

competitors can obtain strategic advantages that may adversely affect our
business, financial condition or results of operations.

In addition, the networking equipment market has seen the constant introduction
of new technologies that has reduced the value of older technology solutions.
This has created pricing pressure on older products while increasing the
performance expectations of newer networking equipment. Moreover, broadband
technology standards are constantly evolving and alternative technologies or
technologies with greater capability are constantly introduced and sought by our
customers. It is possible that the introduction of other technologies will
either supplant our current technologies and those technologies we have in
development or that it will require us to significantly lower our prices in
order to remain competitive. To remain competitive, we need to develop new
products that meet the ever-changing technology needs of the networking market
but that can be sold at a competitive price. We also must enhance our current
products to provide needed features that increase their overall value
proposition for the customer while keeping the price competitive. Due to the
competitive nature of the market and the relative age of our current product
offerings, we may not be able to maintain prices for our products at levels that
will sustain profitability over the short or long term. That may have a material
adverse effect on our business, results of operations and financial condition.

OUR INABILITY TO SIGN COMPETITIVE RESALE PARTNERS INTERNATIONALLY COULD
SIGNIFICANTLY AFFECT FUTURE PRODUCT AND SERVICE REVENUE.

Because the transition from circuit to packet technology is slower outside the
United States, we expect international sales will continue to account for a
significant portion of our Promina(R) product sales (other than that sold in the
Federal channel) in future periods. Our International sales are made almost
entirely through indirect channels that include distributors and resellers
worldwide. They do not have minimum purchase requirements that they must meet.
While we require them to use their best efforts to resell our products, because
our product line is small, our distributors and resellers must often resell
product lines from other networking companies, including our competitors, such
as Cisco, in order to sustain a profit. Because of the size of Cisco and its
dominant position in the network equipment market, it is difficult for us to
find a distributor or reseller who does not resell Cisco products. Due to the
difficulty of signing up distributors and resellers without pre-existing
competitive relationships, our distributors and resellers are not always
successful in promoting our products thereby impacting the sustainability of our
international product sales. If we cannot develop relationships with
distributors and resellers that can effectively market and sell our products and
services, we may not be able to meet our forecasted sales and revenue in future
quarters.

OUR PRODUCTS HAVE LONG SALES CYCLES MAKING IT DIFFICULT TO PREDICT WHEN A
CUSTOMER WILL PLACE AN ORDER AND WHEN TO FORECAST REVENUE FROM THE RELATED SALE.

Our products are very complex pieces of networking equipment and represent a
significant capital expenditure to our customers. The purchase of our products
can have a significant impact on how a customer designs its network and provides
services either within its own organization or to an external customer.
Consequently, our customers often engage in extensive testing and evaluation of
products before purchase. There are also numerous financial and budget
considerations and approvals that the customer often must obtain before it will
issue a purchase order. As a result, the length of our sales cycle can be quite
long, up to a year in some cases. In addition, our customers, including
resellers, have the contractual right to delay scheduled order delivery dates
with minimal penalties and to cancel orders within specified time frames without
penalty. The ability to delay or cancel orders makes it difficult to predict
whether or not an order may actually ship. Moreover, while customers may tell us
that they are planning to purchase our products, to ensure a purchase order is
placed, we often must incur substantial sales and marketing expense. If the
order is not placed in the quarter forecasted because approvals took longer than
anticipated by the customer, our sales may not meet forecast and revenues may be
insufficient in that quarter to meet expenses.

OUR LACK OF BACKLOGGED PRODUCT ORDERS MAKE IT DIFFICULT FOR US TO ACCURATELY
FORECAST SALES AND CREATES A RISK OF CARRYING TOO MUCH OR TOO LITTLE INVENTORY

Historically, the majority of our revenue in each quarter has resulted from
orders received and shipped in that quarter. However, for the last two years, we
have not started a quarter with a sufficient amount of backlogged orders to meet
the sales forecast for that quarter. While we do not believe that backlog is
necessarily indicative of future revenue levels, our customers' ordering
patterns and the absence of backlogged orders create a significant risk


                                    Page 22
<PAGE>

that we could carry too much or too little inventory if orders do not match
forecasts. Rather than base forecasts on orders received, we have been forced to
schedule production and commit to certain expenses based more upon forecasts of
future sales, which are difficult to predict in the telecommunications industry.
Furthermore, if large orders do not close when forecasted or if near-term demand
weakens for the products we have available to ship, our operating results for
that or subsequent quarters would be materially adversely affected.

WE HAVE OFFERED AND MAY CONTINUE TO OFFER CUSTOMER FINANCING ARRANGEMENTS.

Historically, our customers have been comprised of larger corporate enterprises
or well-established service providers. Over the past three fiscal years, we have
targeted several emerging global carriers, international voice resellers and
smaller rural incumbent local exchange carriers ("ILECS") and CLECS. These
companies generally do not have substantial operating histories or significant
capital resources and often do not qualify for credit from traditional lending
sources. Consequently, vendor-financing programs have become a competitive
factor in obtaining business. We have worked with customers and third-party
financial institutions to finance projects through negotiated financing
arrangements or leases. This program includes a loss sharing provision under
which there is limited recourse to us in the event of default. In addition, we
entered into a loss sharing agreement with one of our resellers wherein we share
in a percentage of any loss arising from a customer's failure to pay the
reseller for our equipment. Both of these programs are for companies based in
the United States only. As of March 30, 2001 we had $5.5 million of outstanding
lease financing that was subject to limited recourse provisions. We have
experienced losses due to customers failing to meet their obligations and
demands by lessors under recourse provisions. Any significant increase in the
use of vendor financing by our customers or any further degradation of the
market in which our customers compete could increase our exposure to credit risk
and have a material adverse effect on our operating results and financial
condition.

IF WE ARE UNABLE TO HIRE QUALIFIED NEW EMPLOYEES OR TO RETAIN EXISTING
EMPLOYEES, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS.

Our success is dependent on being able to attract and retain highly skilled
engineers, managers and other key employees. In the past two years we have seen
a large turnover in our direct sales force in North America. This turnover has
negatively impacted our ability to sell products in the United States. Until
very recently, the tight job market made competition for employees very intense
for all employers. The large job growth in the San Francisco Bay Area and the
competition for employees from both established and start-up companies has made
it difficult for many departments in net.com including Marketing and Engineering
to attract and recruit new employees in a timely manner. The recent lay-offs at
Internet and telecommunications companies have improved somewhat our employee
retention and recruitment concerns. While we have put additional focus and
resources into our recruitment activities and have taken steps including the
introduction of compensation packages and other incentives that we hope will
mitigate these competitive advantages, we cannot say that in the current economy
our increased efforts will substantially improve the recruitment and retention
issues faced by our company at this time. Our inability to attract, recruit and
retain key personnel, particularly engineers and sales and marketing employees,
could impact our ability to meet important company objectives such as product
delivery deadlines and sales targets. That in turn could significantly impact
our business, results of operations and financial condition.

WE RELY ON A NUMBER OF SOLE SOURCE SUPPLIERS FOR OUR COMPONENT PARTS.

We purchase key components from single source suppliers, in particular, our back
planes, ASICS and power supplies. If our sole source suppliers or we fail to
obtain components in sufficient quantities when required, delivery of our
products could be delayed resulting in decreased revenues. In addition, if one
of these suppliers were no longer able to supply a required component, it could
result in our having to significantly reengineer the affected product. Further,
due to increased demand and cyclical shortages of capacity in the semiconductor
industry, lead times for ordering parts have increased from time to time. If we
encounter shortages or delays in receiving ordered components or if we are not
able to accurately forecast our ordering requirements, this could adversely
impact our ability to ship ordered products and could ultimately negatively
impact our results of operations and financial condition.


                                    Page 23
<PAGE>

THE AVAILABILITY OF UNINTERRUPTED ELECTRIC POWER COULD IMPACT OUR ABILITY AND
OUR SUPPLIERS' ABILITY TO MAINTAIN OUR OPERATIONS IN CALIFORNIA.

Recently, the public electric utility that provides power to our facilities and
many of our suppliers' facilities has been subject to shortages of electric
power. These shortages have led to dramatic increases in operating costs and
have subjected us to unpredictable rolling blackouts where power has been
completely interrupted for extended periods of time. Should this power shortage
persist, and the frequency of outages increase, it may become more difficult for
our subcontract manufacturer and other suppliers to meet delivery commitments.
In addition, continued interruptions of power may impact our ability to deliver
new products to the market place on a timely basis. Should the electric utility
not be able to secure sufficient power supplies in the future, it could have a
material adverse impact on our financial condition and results of operations.

WE SINGLE SOURCE OUR MANUFACTURING PROCESS SO THAT A FAILURE OR DELAY BY THAT
VENDOR COULD IMPACT OUR ABILITY TO TIMELY SHIP OUR PRODUCTS.

We currently subcontract some testing and all product manufacturing to one
company, Solectron. Final test and assembly is generally performed at our
Fremont, California facility. While subcontracting creates substantial cost
efficiencies in the manufacturing process, it also exposes us to delays in
product shipments should Solectron be unable to perform under our contract. In
addition, should Solectron in some future period decide not to renew our
contract with them, it would be difficult for us to quickly transfer our
manufacturing requirements to another vendor likely causing substantial delays
in customer product shipments and impacting revenue and our results of
operations.

OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATE TO PROTECT OUR BUSINESS.

Our future success depends upon our proprietary technology. Although we attempt
to protect our proprietary technology through patents, copyrights, and trade
secrets, we cannot predict whether such protection will be adequate, or whether
our competitors can develop similar technology independently without violating
our proprietary rights. As competition in the communications equipment industry
increases and the functionality of the products in this industry further
overlap, we believe that companies in the communications equipment industry may
become increasingly subject to infringement claims. We have received and may
continue to receive notice from third parties, including some of our
competitors, claiming that we are infringing their patents or their other
proprietary rights. We cannot predict whether we will prevail in any litigation
over third-party claims, or that we will be able to license any valid and
infringed patents on commercially reasonable terms. Any of these claims, whether
with or without merit, could result in costly litigation, divert our
management's time, attention and resources, delay our product shipments or
require us to enter into royalty or licensing agreements. In addition, a third
party may not be willing to enter into a royalty or licensing agreement on
acceptable terms, if at all. If a claim of product infringement against us is
successful and we fail to obtain a license or develop or license non-infringing
technology, it could have a material adverse affect on our business, results of
operations and financial condition.

WE NEED TO CONTINUE TO LICENSE PRODUCTS FROM THIRD PARTIES.

For our Promina, SHOUTIP and SCREAM products, we license some of our technology
from third party suppliers. If the relevant licensing agreement expires or is
terminated without our being able to renew that license, that failure to renew
the license could impact our ability to market the affected product and that, in
turn, could materially impact our results of operations and financial condition.

WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATIONS AND
TARIFFS.

Changes in domestic and international telecommunications requirements could
affect the sales of our products. In the United States, our products must comply
with various Federal Communications Commission requirements and regulations. In
countries outside of the United States, our products must meet various
requirements of local telecommunications authorities. Changes in tariffs or
failure by us to obtain timely approval of products could have a material
adverse effect on our business, operating results, and financial condition.

In addition, there are currently few laws or regulations that govern access or
commerce on the Internet. If individual countries, or groups of countries,
acting in concert began to impose regulations or standards on Internet access or


                                    Page 24
<PAGE>

commerce including voice over IP, this could materially impact our ability to
sell our new SCREAM and SHOUTIP products or other new products if the
regulations or standards resulted in decreased demand or increased costs for our
products. This, in turn, could have a material adverse effect on our business,
results of operations and financial condition.

WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY.

As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures have related to non-dollar denominated sales
in the United Kingdom, France, and Germany and non-dollar denominated operating
expenses in Europe, Latin America, and Asia where we sell primarily in United
States dollars. The increasing use of the Euro as a common currency for members
of the European Union could impact our foreign exchange exposure. We will
continue to monitor our exposure and may hedge against these or any other
emerging market currencies as necessary. We are currently not hedging our
exposure to the Euro or any other foreign currency but will continue to evaluate
the impact of foreign currency fluctuations on our future foreign exchange
exposure as well as our internal systems.

THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKE AND FLOODS.

Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
these facilities are located near the San Francisco Bay where the water table is
quite close to the surface and where we have experienced water intrusion
problems. In particular, defects in the construction of our facilities combined
with the proximity to water will force us to move out of these facilities in the
first half of the 2002 calendar year. A significant natural disaster, such as an
earthquake or flood, could have a material adverse impact on our business,
operating results, and financial condition.

THE COMPLETION OF THE ACTIVITIES NECESSARY TO EFFECT THE MOVE TO OUR NEW COMPUS
MAY CAUSE INTERRUPTION TO OUR BUSINESS

A new building campus is currently under construction and will become the new
corporate headquarters for net.com sometime in the first half of the 2002
calendar year. Moving substantially all of our R&D development activities
including the development labs, and all of our in-house manufacturing capability
represents significant risk as it exposes the company to potential disruptions
and delays in business, engineering, and manufacturing operations. While the
costs of construction, and the move will be substantially paid for out of
insurance proceeds, problems with the move could interrupt communications
preventing the company from processing orders, or it could impact engineering
development schedules, or prevent manufacturing operations from shipping
product. In addition, certain contingencies associated with our negotiated move
out of our current facilities, not all of which have been satisfied, may result
in our move not proceeding as planned. Any problems, interruptions or delays
associated with the move could have a material adverse impact on business,
operating results, and financial condition.

THE UPGRADE OF OUR INFORMATION TECHNOLOGY INFRASTRUCTURE MAY EXPOSE THE COMPANY
TO DISRUPTION OF OPERATIONS.

We are in the process of upgrading and consolidating our core business process
systems onto a new Oracle ERP platform that is scheduled to go live in the July
to August 2001 time frame. We expect to incur significant costs relating to this
upgrade. The scope of this project includes our order management, financial,
human resource, quality, and manufacturing systems, and encompasses our global
operations. The purpose of the project is to consolidate several legacy systems
into one, to enable more effective decision support capabilities and to allow us
to scale our business more cost effectively. Any significant problems
experienced with the turn-on of the new systems could prevent us from timely
processing orders and shipping products. These problems could impact the
quarter's revenue and customer relations and could have a material adverse
impact on business, operating results, and financial condition.


                                    Page 25
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The following table represents the hypothetical changes in fair market values in
the financial instruments held by us at March 30, 2001 that are sensitive to
changes in interest rates. These instruments are not leveraged and are held for
purposes other than trading. The modeling technique used measures the change in
fair values arising from selected potential changes in interest rates. Market
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points (BPS), 100 BPS and 150 BPS over a six-month
horizon. Beginning fair values represent the market principal plus accrued
interest, dividends and certain interest rate sensitive securities considered
cash and equivalents for financial reporting purposes at March 30, 2001. Ending
fair values comprise the market principal and accrued interest, dividends and
reinvestment income at a six-month horizon. This table estimates the fair value
of the portfolio at a six-month time horizon:

<TABLE>
<CAPTION>
                                 Valuation of securities           No change         Valuation of securities
                                 given an interest rate           in interest        given an interest rate
                               decrease of x basis points            rates         increase of x basis points
------------------------------------------------------------------------------------------------------------------

(Dollars in thousands)     (150) BPS    (100) BPS     (50) BPS                   50 BPS       100 BPS      150 BPS
------------------------------------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>          <C>          <C>          <C>          <C>
Cash Equivalents            $ 32,034     $ 32,074     $ 32,114     $ 32,154     $ 32,194     $ 32,234     $ 32,275

Treasuries/Agencies           23,111       23,074       23,037       23,000       22,965       22,929       22,893

Corporates                    33,074       33,039       33,006       32,972       32,938       32,905       32,872

Asset Backed                  26,090       25,998       25,906       25,816       25,726       25,637       25,545

Auction Rate Securities       19,463       19,488       19,512       19,536       19,561       19,585       19,610
------------------------------------------------------------------------------------------------------------------
Total                       $133,772     $133,673     $133,575     $133,478     $133,384     $133,290     $133,195
==================================================================================================================
</TABLE>

According to the Federal Reserve Bank of New York, a 50 BPS move in the Federal
Funds Rate has occurred in 8 of the last 10 years; a 100 BPS move in the Federal
Funds Rate has occurred in 5 of the last 10 years; and a 150 BPS move in the
Federal Funds Rate has occurred in 2 of the last 10 years.

We are exposed to foreign currency fluctuation when translating foreign
operations in the Consolidated Financial Statements. If the foreign currencies
fluctuated up to 10%, there would not be a material impact to our business,
financial condition or results of operations.


                                    Page 26
<PAGE>

Item 8. Financial Statements and Supplementary Data

Financial Highlights:
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                  Mar. 30,        Mar 31,
Highlights for fiscal years ended                                   2001           2000
-----------------------------------------------------------------------------------------
<S>                                                              <C>            <C>
Revenue                                                          $ 144,286      $ 225,686

Operating loss                                                     (44,120)       (39,013)

Net loss                                                           (20,790)       (40,070)

Basic and diluted loss per share                                     (0.96)         (1.86)

Working capital                                                    150,088        138,893

Total assets                                                       235,346        259,994

7 1/4% convertible subordinated debentures                          24,706         24,706

Stockholders' equity                                               168,233        185,974

Number of employees                                                    542            843
-----------------------------------------------------------------------------------------
</TABLE>

Quarterly financial data (unaudited):
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                         First        Second         Third         Fourth
-----------------------------------------------------------------------------------------
<S>                                   <C>           <C>           <C>           <C>
Fiscal quarter 2001

Revenue                               $ 43,403      $ 42,557      $ 31,286      $  27,040

Gross margin                            17,422        17,999        10,597          9,664

Net income (loss)                       (6,698)       (6,202)        5,435        (13,325)

Basic earnings (loss) per share          (0.31)        (0.29)         0.25          (0.61)

Diluted earnings (loss) per share        (0.31)        (0.29)         0.25          (0.61)
-----------------------------------------------------------------------------------------

Fiscal quarter 2000

Revenue                               $ 62,555      $ 64,788      $ 51,242      $  47,101

Gross margin                            29,717        30,823        22,773         19,806

Net income (loss)                        3,475        (2,913)      (20,002)       (20,630)

Basic earnings (loss) per share           0.16         (0.14)        (0.93)         (0.96)

Diluted earnings (loss) per share         0.16         (0.14)        (0.93)         (0.96)
-----------------------------------------------------------------------------------------
</TABLE>

Results for the third quarter of fiscal 2001 include a gain on the sale of
net.com's Federal Services Business of $14.9 million or $0.68 per share.
Additionally in the third quarter of fiscal 2001, the results include a $2.2
million tax benefit or $0.10 per share as a result of the evaluation of the
positive and negative evidence bearing upon our tax liabilities. Results for the
fourth quarter of fiscal 2001 include a credit of $1.3 million or $0.05 per
share related to the evaluation of the adequacy of net.com's restructure
accruals.

Beginning fiscal year 2001, net.com's fiscal year consists of 52 weeks, four 13
week quarters. In prior years net.com's fiscal year ended March 31. With this
change, the first fiscal quarter is now slightly longer than previous years and
the fourth fiscal quarter is slightly shorter.

Results for the second quarter of fiscal 2000 include a charge of $3.4 million,
or $0.12 per share related to net.com's restructuring. Results for the third
quarter of fiscal 2000 include a charge for a valuation allowance


                                    Page 27
<PAGE>

against deferred tax assets of $12.6 million and a one time charge for
in-process research and development of $879,000, totaling $0.63 per share.
Results for the fourth quarter include a charge of $11.8 million, or $0.55 per
share related to net.com's restructuring.

Gross margin for fiscal quarters in fiscal 2000 have been reclassified to
reflect a change in allocations of certain general and administrative expenses.
The changes resulted in a $83,000, $84,000, $64,000 and $61,000 increase in
gross margin for the first, second, third and fourth fiscal quarters of fiscal
2000 respectively. These changes were done to better reflect quarter over
quarter and year over year comparisons. These reclassifications had no effect on
Stockholders' Equity, Net income/loss or Net comprehensive losses.


                                    Page 28
<PAGE>

INDEPENDENT AUDITOR'S 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 its subsidiaries as of March 30, 2001 and March
31, 2000, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity and cash flows for each of the three
years in the period ended March 30, 2001. Our audits also included the
consolidated financial statement schedule listed in item 14.(a)2. These
financial statements and the financial statement schedule are the responsibility
of Network Equipment Technologies' management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 its subsidiaries at March 30, 2001 and March 31, 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.


/s/DELOITTE & TOUCHE LLP

San Jose, California

June 25, 2001


                                    Page 29
<PAGE>

CONSOLIDATED BALANCE SHEETS

(In thousands except par value amounts)

<TABLE>
<CAPTION>
                                                                                         Mar. 30,          Mar. 31,
                                                                                           2001             2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>               <C>
Assets
    Current assets:
        Cash and cash equivalents                                                       $  20,471         $  14,880
        Restricted cash                                                                       540            13,144
        Temporary cash investments                                                        112,766            96,902
        Accounts receivable, net of allowances of $2,127 in 2001 and $3,667 in 2000        29,825            39,317
        Inventories                                                                        20,122            17,691
        Prepaid expenses and other assets                                                   8,554             6,087
-------------------------------------------------------------------------------------------------------------------
            Total current assets                                                          192,278           188,021
-------------------------------------------------------------------------------------------------------------------

     Property and equipment:
        Machinery and equipment                                                            71,889            99,007
        Furniture and fixtures                                                              7,771             8,081
        Leasehold improvements                                                              2,097            18,542
        Construction in progress                                                            5,334               141
-------------------------------------------------------------------------------------------------------------------
                                                                                           87,091           125,771
        Less accumulated depreciation and amortization                                    (61,526)          (84,150)
-------------------------------------------------------------------------------------------------------------------
           Property and equipment, net                                                     25,565            41,621

    Software production costs, net                                                          2,102             4,821
    Goodwill and other intangible assets, net                                              13,036            15,220
    Other assets                                                                            2,365            10,311
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 235,346         $ 259,994
===================================================================================================================

Liabilities and Stockholders' Equity
    Current liabilities:
        Accounts payable                                                                $   8,478         $   9,009
        Accrued liabilities                                                                33,568            39,980
        Capital leases                                                                        144               139
-------------------------------------------------------------------------------------------------------------------
           Total current liabilities                                                       42,190            49,128
-------------------------------------------------------------------------------------------------------------------

    Long-term liabilities:
        Capital leases                                                                         42               186
        71/4% redeemable convertible subordinated debentures                               24,706            24,706
        Other long term liabilities                                                           175                --
-------------------------------------------------------------------------------------------------------------------
            Total long term liabilities                                                    24,923            24,892
-------------------------------------------------------------------------------------------------------------------

    Stockholders' equity:
        Preferred stock, $.01 par value
            Authorized: 5,000 shares
            Outstanding: none                                                                  --                --
        Common stock, $.01 par value
            Authorized: 50,000 shares
            Outstanding: 21,840 shares in 2001 and 21,602 shares in 2000                      218               216
        Additional paid in capital                                                        182,335           181,683
        Treasury stock                                                                     (4,768)           (5,640)
        Cumulative comprehensive income (loss)                                                174            (1,349)
        Retained earnings (deficit)                                                        (9,726)           11,064
-------------------------------------------------------------------------------------------------------------------
           Total stockholders' equity                                                     168,233           185,974
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 235,346         $ 259,994
===================================================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements


                                    Page 30
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                      Mar. 30,       Mar. 31,        Mar. 31,
Fiscal years ended                                                      2001           2000           1999
------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>
Revenue:
    Product revenue                                                  $  76,994      $ 131,182      $ 168,641
    Service and other revenue                                           67,292         94,504         95,194
------------------------------------------------------------------------------------------------------------
        Total revenue                                                  144,286        225,686        263,835
------------------------------------------------------------------------------------------------------------
Cost of sales:
    Cost of product revenue                                             44,003         64,389         73,177
    Cost of service and other revenue                                   44,601         58,178         60,040
------------------------------------------------------------------------------------------------------------
        Total cost of sales                                             88,604        122,567        133,217
------------------------------------------------------------------------------------------------------------
Gross margin                                                            55,682        103,119        130,618
Operating expenses:
    Sales and marketing                                                 44,732         68,982         85,832
    Research and development                                            40,420         41,552         45,223
    General and administrative                                          12,677         14,691         14,512
    Facility relocation costs                                               --             --            395
    Restructure costs (benefits)                                        (1,411)        15,227          4,695
    In process research and development costs                               --            879             --
    Amortization of goodwill and other intangible assets                 3,384            801             --
------------------------------------------------------------------------------------------------------------
        Total operating costs                                           99,802        142,132        150,657
------------------------------------------------------------------------------------------------------------
           Loss from operations                                        (44,120)       (39,013)       (20,039)

Interest income                                                          7,985          7,306          6,580
Interest expense                                                        (1,894)        (2,281)        (1,975)
Gain on sale of equity securities                                           --          7,156            997
Gain on sale of Federal Services Business                               14,920             --             --
Other                                                                      119           (467)          (259)
------------------------------------------------------------------------------------------------------------
           Loss before income taxes                                    (22,990)       (27,299)       (14,696)
Income tax provision (benefit)                                          (2,200)        12,771         (7,642)
------------------------------------------------------------------------------------------------------------
           Loss before extraordinary gain                              (20,790)       (40,070)        (7,054)
Extraordinary gains on repurchase of debentures                             --             --             95
------------------------------------------------------------------------------------------------------------
           Net loss                                                  $ (20,790)     $ (40,070)     $  (6,959)
============================================================================================================
Basic loss per share:
    Loss before extraordinary gain                                   $   (0.96)     $   (1.86)     $   (0.33)
    Net loss                                                         $   (0.96)     $   (1.86)     $   (0.32)

Diluted loss per share:
    Loss before extraordinary gain                                   $   (0.96)     $   (1.86)     $   (0.33)
    Net loss                                                         $   (0.96)     $   (1.86)     $   (0.32)

Shares used in per share computation:
    Basic                                                               21,666         21,489         21,508
    Diluted                                                             21,666         21,489         21,508

Consolidated Statements of Comprehensive Loss

Net loss                                                             $ (20,790)     $ (40,070)     $  (6,959)

Other comprehensive income (loss), net of tax:
    Cumulative translation adjustments                                      95              6           (372)
    Net unrealized gains (losses) on securities, net of taxes of
        $0 in 2001, $0 in 2000 and $1,564 in 1999                        1,428         (7,276)         2,970
------------------------------------------------------------------------------------------------------------
           Comprehensive loss                                        $ (19,267)     $ (47,340)     $  (4,361)
============================================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements


                                    Page 31
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Mar. 30,       Mar. 31,       Mar. 31,
Fiscal years ended                                                        2001           2000           1999
--------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
Cash and cash equivalents at beginning of year                         $  14,880      $  13,720      $  59,512

Cash flows from operating activities:
    Net loss                                                             (20,790)       (40,070)        (6,959)
    Adjustments required to reconcile net loss to net
        cash provided by (used for) operations:
           Depreciation and amortization                                  21,482         23,416         21,685
           Restructure liability                                              --          7,513          4,158
           Gain on sale of Federal Services Business                     (14,920)            --             --
           Proceeds from insurance settlement                             15,000             --             --
           In process research and development costs                          --            879             --
           Extraordinary gains on repurchase of debentures                    --             --            (95)
           Stock compensation                                                 33             15            286
           Deferred income taxes                                              --         14,563         (8,226)
           Loss on disposition of property and equipment                     180            405             --
           Changes in assets and liabilities:
               Accounts receivable                                             9          6,857         25,313
               Inventories                                                (2,437)         1,711            506
               Prepaid expenses and other assets                            (949)           951            403
               Accounts payable                                              367         (7,546)       (10,114)
               Accrued liabilities                                        (7,537)       (10,879)        (7,947)
--------------------------------------------------------------------------------------------------------------
        Net cash provided by (used for) operations                        (9,562)        (2,185)        19,010
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Purchases of temporary cash investments                              (99,071)      (113,472)      (131,608)
    Proceeds from maturities of temporary cash investments                84,635        152,129        104,477
    Purchases of property and equipment                                  (12,082)        (4,809)       (32,214)
    Additions to software production costs                                    --         (1,759)        (3,359)
    Acquisition of company (net of cash acquired)                         (1,500)       (15,339)            --
    Proceeds from sale of Federal Services Business                       24,900             --             --
    (Increase) decrease in restricted cash                                12,604        (13,144)            --
    Other                                                                  3,836           (727)          (461)
--------------------------------------------------------------------------------------------------------------
        Net cash provided by (used for) investing activities              13,322          2,879        (63,165)
--------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
    Sale of common stock                                                   2,909          4,061          5,294
    Repurchase of convertible subordinated debentures                         --             --           (955)
    Repurchase of common stock                                            (1,413)        (3,775)        (5,617)
--------------------------------------------------------------------------------------------------------------
        Net cash provided by (used for) financing activities               1,496            286         (1,278)
--------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                      335            180           (359)
        Net increase (decrease) in cash and cash equivalents               5,591          1,160        (45,792)
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                               $  20,471      $  14,880      $  13,720
==============================================================================================================

Other cash flow information:
Cash paid (refunded) during the year:
        Interest                                                       $   1,841      $   2,248      $   1,895
        Income taxes                                                   $      22      $  (5,974)     $   1,449
    Non-cash investing and financing activities:
        Unrealized gain (loss) on available-for-sale securities        $   1,428      $  (7,276)     $   2,970
        Income tax benefit arising from employee stock
           option plans                                                $      --      $      --      $     808
        Deferred stock compensation                                    $      48             --             --
</TABLE>

See accompanying notes to the consolidated financial statements


                                    Page 32
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                      Additional                     Cumulative      Retained           Total
                                           Common        Paid-in       Treasury   Comprehensive      Earnings   Stockholders'
(Dollars in thousands)                      Stock        Capital          Stock   Income (loss)      (Deficit)         Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>            <C>            <C>             <C>
Balances, March 31, 1998                $     215      $ 176,452      $  (1,430)     $   3,323      $  58,093       $ 236,653
-----------------------------------------------------------------------------------------------------------------------------

Sale of 269,000 shares
   Common Stock under
   Employee stock benefit plans                 2          2,877             --             --             --           2,879

Purchase of 500,000 shares
   of Common Stock                             (5)            --         (5,612)            --             --          (5,617)

Reissuance of 286,000 shares of
   treasury stock under stock plans             3            459          2,189             --             --           2,651

Income tax benefit arising from
   employee stock option plans                 --            808             --             --             --             808

Net unrealized gain on securities              --             --             --          2,970             --           2,970

Cumulative translation adjustment              --             --             --           (372)            --            (372)

Net loss                                       --             --             --             --         (6,959)         (6,959)
-----------------------------------------------------------------------------------------------------------------------------

Balances, March 31, 1999                      215        180,596         (4,853)         5,921         51,134         233,013
-----------------------------------------------------------------------------------------------------------------------------

Sale of 193,000 shares of
   Common Stock under
   Employee stock benefit plans                 2          1,842             --             --             --           1,844

Purchase of 438,000 shares of
   Common Stock                                (4)            --         (3,771)            --             --          (3,775)

Reissuance of 338,000 shares of
   treasury stock under stock plans             3           (755)         2,984             --             --           2,232

Net unrealized loss on securities              --             --             --         (7,276)            --          (7,276)

Cumulative translation adjustment              --             --             --              6             --               6

Net loss                                       --             --             --             --        (40,070)        (40,070)
-----------------------------------------------------------------------------------------------------------------------------

Balances, March 31, 2000                      216        181,683         (5,640)        (1,349)        11,064         185,974
-----------------------------------------------------------------------------------------------------------------------------

Sale of 151,000 shares of
   Common Stock under
   Employee stock benefit plans                 1          1,245             --             --             --           1,246

Purchase of 171,000 shares of
   Common Stock                                (2)            --         (1,411)            --             --          (1,413)

Reissuance of 257,000 shares of
   treasury stock under stock plans             3           (626)         2,283             --             --           1,660

Deferred stock compensation                    --             33             --             --             --              33

Net unrealized gain on securities                             --                         1,428                          1,428

Cumulative translation adjustment              --             --             --             95             --              95

Net loss                                       --             --             --             --        (20,790)        (20,790)
-----------------------------------------------------------------------------------------------------------------------------

Balances, March 30, 2001                $     218      $ 182,335      $  (4,768)     $     174      $  (9,726)      $ 168,233
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to the consolidated financial statements


                                    Page 33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business Network Equipment Technologies, Inc. doing business as
net.com (collectively, the Company, we, our or net.com), is a leading innovator
of service creation, providing broadband technology platforms that enable
carriers and service providers to rapidly create and deliver revenue-generating
applications, content, and network services to business and residential
customers while maximizing existing infrastructure investment. Service creation
is the ability for end users and service providers to dynamically define,
deliver, manage and profit from network services. net.com's service creation
products reside at the intersection of networks, or at the economic edge where
carriers and content providers converge to offer a new range of communications
experiences to end users.

Principles of Consolidation The Consolidated Financial Statements include the
accounts of net.com and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.

Basis of Presentation Beginning in fiscal year 2001, net.com began using a 52
week fiscal year ending on the last Friday in March. In all previous years we
used a fiscal year ending March 31. The new fiscal year period being used is
intended to better reflect quarter over quarter performance.

Revenue Recognition net.com recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectibility is reasonably assured. Service and other revenue includes
revenue from service contracts, which is recognized ratably over the contract
period, and revenue from other services, such as systems integration,
installation and training, which is recognized when the service is performed.
Product warranty costs are accrued when revenue is recognized.

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. net.com 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 being excluded from
earnings and reported as a separate component of stockholders' equity.

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 30, 2001 and March 31, 2000 consisted of the following:

(In thousands)                                          2001                2000
--------------------------------------------------------------------------------
Purchased components                                 $ 4,198             $ 2,866

Work-in-process                                       14,860              13,868

Finished goods                                         1,064                 957
--------------------------------------------------------------------------------

                                                     $20,122             $17,691
================================================================================


                                    Page 34
<PAGE>

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 ten 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.
net.com 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 $1.8 million, and $3.4 million in
fiscal 2000, and 1999, respectively, with none capitalized in fiscal 2001.
Software production costs are amortized over the lives of the products,
generally three years. Amortization amounted to $2.7 million, $3.1 million, and
$2.7 million in fiscal 2001, 2000, and 1999, respectively. During fiscal 2000,
net.com reduced fully amortized software production costs by $792,000.
Accumulated amortization was $ 10.7 million, $7.9 million and $5.7 million at
March 30, 2001, March 31, 2000 and March 31, 1999, respectively.

Goodwill and Intangibles Goodwill and intangibles represent the excess of cost
over the fair value of tangible net assets acquired and are amortized over five
years using the straight-line method. Accumulated amortization was $4.2 million
at March 30, 2001 and $801,000 at March 31, 2000.

Foreign Currency Translation The functional currency for net.com'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 into dollars 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 or included in the Consolidated Statements of
Operations and have not been significant. net.com from time to time may enter
into foreign exchange contracts to hedge certain intercompany balances and
balance sheet exposures against future movements in foreign exchange rates.
Gains and losses on 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 30, 2001, net.com had no outstanding foreign exchange contracts.

Stock Based Compensation net.com 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.

Comprehensive Income (Loss) In fiscal 1999, net.com adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner sources.
Statements of comprehensive income (loss) for the years ended March 30, 2001,
March 31, 2000 and March 31, 1999 have been included within the Consolidated
Statement of Operations. Cumulative comprehensive income (loss) at March 30,
2001, March 31, 2000 and March 31, 1999 is comprised of cumulative foreign
translation adjustments of ($707,000), ($802,000) and ($808,000), respectively,
and cumulative net unrealized gains (losses) on available-for-sale securities of
$881,000, ($547,000) and $6.7 million, respectively.

Comprehensive loss for fiscal 2000 has been revised in the accompanying
consolidated financial statements to $(47.3) million from the previously
reported amount of $(39.9) million to correct the previous calculation. Such
revision had no effect on net loss, net loss per share or stockholders' equity
for fiscal 2000.

Financial Statement Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such management estimates include, but are not
limited to, the allowances for potentially uncollectible accounts receivable,
the


                                    Page 35
<PAGE>

valuation of inventory, the valuation allowance on deferred tax assets, lease
recourse obligation and certain reserves and accruals.

Credit Risks net.com's credit evaluation process and the reasonably short
collection terms help to mitigate credit risk. net.com typically does not
require collateral or other security to support accounts receivable. We perform
ongoing credit evaluations of our customers' financial condition and limit the
amount of credit extended when deemed necessary. We maintain reserves for
potential losses and recourse obligations (see Note 5: Notes to Consolidated
Financial Statements, below).

Recently Issued Accounting Standards In June 1998, the Financial Accounting
Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in the current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. This statement
is effective for net.com beginning April 1, 2001, with earlier application
permitted. net.com believes that this statement will not have a significant
impact on net.com's consolidated financial position, results of operations or
cash flows.

Reclassifications Certain prior year amounts have been reclassified to conform
to the current year presentation. Such reclassifications had no impact on net
income or stockholders' equity for any year presented.

NOTE 2: TEMPORARY CASH INVESTMENTS

Temporary cash investments at March 30, 2001 and March 31, 2000 consisted of the
following:

<TABLE>
<CAPTION>
                                                                                2001
                                                       --------------------------------------------------------
                                                                           Gross          Gross       Estimated
                                                       Amortized      Unrealized     Unrealized          Market
(Dollars in thousands)                                      Cost           Gains         Losses           Value
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>            <C>             <C>
United States government and municipalities            $  32,680       $     144      $     --        $  32,824
Corporate notes and bonds                                 45,611             260            (1)          45,870
Other debt securities                                     29,814             420            --           30,234
Foreign debt issues                                        3,780              58            --            3,838
---------------------------------------------------------------------------------------------------------------
                                                       $ 111,885       $     882      $     (1)       $ 112,766
===============================================================================================================

<CAPTION>
                                                                                2000
                                                       --------------------------------------------------------
                                                                           Gross          Gross       Estimated
                                                       Amortized      Unrealized     Unrealized          Market
(Dollars in thousands)                                      Cost           Gains         Losses           Value
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>            <C>             <C>
United States government and municipalities            $  32,148       $      --      $   (143)       $  32,005
Corporate notes and bonds                                 38,453              --          (192)          38,261
Other debt securities                                     19,714               3          (164)          19,553
Foreign debt issues                                        7,088              --            (5)           7,083
---------------------------------------------------------------------------------------------------------------
                                                       $  97,403       $       3      $   (504)       $  96,902
===============================================================================================================
</TABLE>

At March 30, 2001, the estimated market value of available-for-sale securities
with maturities less than one year was $85.8 million, with maturities between
one year and five years was $36.3 million, with maturities between five years
and ten years was $2.6 million and with maturities greater than ten years was
$1.0 million. Any gains or losses on sales of securities are computed on a
specific identification basis. In fiscal 2000 and 1999, there were realized
gains on the sale of equity securities of $7.2 million and $1.0 million,
respectively


                                    Page 36
<PAGE>

NOTE 3:  ACCRUED LIABILITIES

Accrued liabilities at March 30, 2001 and March 31, 2000 were as follows:

(In thousands)                                           2001               2000
--------------------------------------------------------------------------------

Accrued compensation                                 $ 10,628           $  8,517
Deferred taxes                                          4,994              7,365
Unearned income                                         4,882              4,794
Restructure costs                                       1,318              7,513
Lease program reserve                                   4,130              1,362
Other                                                   7,616             10,429
--------------------------------------------------------------------------------
                                                     $ 33,568           $ 39,980
================================================================================

NOTE 4: RESTRUCTURE COSTS

During fiscal 1999, net.com recorded a restructuring charge of $4.7 million.
This charge was established to provide for a business reorganization, which
included severance, outplacement and office closure costs. During fiscal 2000,
net.com recorded two additional charges in the amount of $3.4 million and $12.2
million to provide for increased levels for severance, outplacement and office
closure costs associated with its plan of business reorganization.

Through March 30, 2001, net.com made payments in connection with its plan of
business reorganization for severance, outplacement and office closure costs in
the amount of $17.5 million. During fiscal 2001, net.com evaluated the adequacy
of the remaining liability for restructure charges. This evaluation resulted in
a credit to operating expenses of $1.4 million.

The remaining liability for restructure charges is $1.3 million. Net.com
believes that all costs associated with its plan of business reorganization will
be paid not later than fiscal 2003.

NOTE 5: FINANCING ARRANGEMENTS

The financing agreement between net.com and BancBoston Leasing to provide lease
financing to net.com's customers was terminated in fiscal 2001, partly as a
result of BancBoston Leasing being purchased by Fleet Bank Capital Leasing. The
agreement contained a limited recourse arrangement with a minimum of $5.0
million or 20% of the outstanding lease balances, whichever is greater. In
fiscal 2000 and 1999, net.com recognized $3.2 million and $5.0 million,
respectively, as revenue related to sales to customers who obtained financing
from BancBoston Leasing. The outstanding lease payments to Fleet Bank Capital
Leasing at March 30, 2001 totaled $4.1 million and net.com's recourse is $4.1
million.

Beginning in fiscal 2001, net.com entered into a financing agreement with Marcap
Vendor Financing Corporation "Marcap" to provide lease financing to net.com
customers, with limited recourse of $5.0 million or 20% of the outstanding lease
balance, whichever is greater. The term of the agreement is two years with
automatic one year extensions unless otherwise terminated in writing by either
party. There is no maximum amount that can be financed under the terms of this
agreement. In fiscal 2001, net.com recognized $1.7 million in revenue from one
customer who obtained financing from Marcap. The outstanding lease payments to
Marcap as of March 30, 2001 were $1.4 million and net.com's recourse is $1.4
million.


                                    Page 37
<PAGE>

NOTE 6: COMMITMENTS AND CONTINGENCIES

net.com leases its facilities under operating leases and certain equipment under
capital leases. The minimum future lease commitments under these leases as of
March 30, 2001, were as follows:

(Dollars in thousands)                       Operating Leases     Capital Leases
--------------------------------------------------------------------------------

2002                                                  $ 6,547            $   154

2003                                                    5,210                 44

2004                                                    3,823                 --

2005                                                    3,451                 --

2006                                                    3,010                 --

After 2006                                             17,306                 --
--------------------------------------------------------------------------------

Total                                                 $39,347                198
                                                      -------

Less amount representing interest                                             12
--------------------------------------------------------------------------------

Present value of net minimum lease payments                                  186

Less current portion                                                         144
--------------------------------------------------------------------------------

Long term portion                                                        $    42
================================================================================

Rental expense under operating leases was $5.1 million, $7.2 million and $7.6
million for fiscal years 2001, 2000 and 1999, respectively.

In March 2000, an agreement was reached with the landlord and our insurance
carrier that allowed us to move out of the damaged facilities upon completion of
a new build-to-suit facility that is being constructed next door to the current
facilities. In December 2000, we entered into a 10 year lease for two buildings
totaling 185,790 square feet of office, R&D and manufacturing space on a new
campus. The buildings will be leased to net.com under the same economic terms as
our original lease. The move is scheduled to take place in the first half of the
2002 calendar year.

In the year ended March 30, 2001, we received $15.0 million from our insurance
carrier for the settlement mentioned above. We are entitled to receive up to an
additional $8.8 million upon presenting our insurance carrier with invoices in
excess of the initial amount of $15 million. To date we have expended $3.8
million that qualifies to be reimbursed by our insurance carrier. This consists
of $2.7 million related to moving and reconfiguring our existing buildings and
$1.1 million in leasehold improvements for our new site. In addition, we have
incurred $393,000 of non-reimbursable expenditures and we have also reserved
$12.7 million in leasehold improvements for our current facilities. These
amounts will not qualify for reimbursement by our insurance carrier. At March
30, 2001 we have recorded in accrued liabilities unearned insurance settlement
proceeds of $1.2 million. When we move to our new facilities we will offset the
total insurance proceeds with all expenditures and reserved amounts not relating
to new leasehold improvements and recognize any unearned insurance settlement
proceeds in current operations. We will then begin amortizing the new site
leasehold improvements. We believe all of the costs of tenant improvements and
moving will be covered by the insurance proceeds.

NOTE 7: REDEEMABLE CONVERTIBLE SUBORDINATED DEBENTURES

In May 1989, net.com 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
net.com. 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. Any redemption or conversion of debentures prior to the date of the
sinking fund payment will reduce those payments. Previous redemptions have
satisfied the sinking fund requirement through May 15, 2012.


                                    Page 38
<PAGE>

In fiscal 1991, net.com repurchased debentures in the face amount of $6.4
million. During fiscal 1996, net.com completed a partial call of its outstanding
debentures, reducing debenture principal by $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, net.com
repurchased debentures in the face amount of $7.7 million.

In fiscal 1999, net.com repurchased debentures in the face amount of $1.1
million at a cost of $983,000 plus accrued taxes. Accordingly, net.com recorded
a $ 95,000 gain, net of taxes ($0.01 per diluted share), as an extraordinary
gain in the Consolidated Statements of Operations.

net.com did not repurchase any of its debentures in fiscal year 2000 or fiscal
year 2001.

NOTE 8: CAPITAL STOCK

Stockholders' Rights Plan On July 12, 1999, the Board of Directors of net.com
voted to extend net.com's existing Stockholder Rights Plan for an additional 10
years. In addition, the Board voted to amend the Plan: 1) to adjust the exercise
price to $80.00 per one-one hundredth of a share of Series A Preferred Stock;
and 2) to adopt a Three Year Independent Director Evaluation Provision or "TIDE
provision" whereby a committee of independent directors of net.com will review
and evaluate the Rights Plan at least once every three years to determine if it
continues to be in the best interests of net.com and its stockholders to
maintain the Rights Plan in effect.

Under the plan, as amended, 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 net.com'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 (1/100) of a share of a new series of participating Preferred
Stock at an exercise price of $80.00. If net.com 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 net.com'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. net.com can redeem the Rights at
$.01 per Right at any time until the tenth day following the acquisition by a
person or group of 15% of net.com Common Stock. The Rights are also redeemable
thereafter in certain circumstances. The Rights expire on August 24, 2009,
unless earlier redeemed or exchanged.

Preferred Stock net.com 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 30, 2001, no
preferred shares were outstanding.

Reserved Stock As of March 30, 2001, net.com had reserved shares of its Common
Stock for the following purposes:

                                                                        Reserved
--------------------------------------------------------------------------------

Stock option plans:

      Outstanding (at $4.12 to $35.75 per share)                       5,978,298

      Available for grant                                              3,932,375

Convertible subordinated debentures                                      784,317

Employee Stock Purchase Plan                                             771,817
--------------------------------------------------------------------------------


                                    Page 39
<PAGE>

Employee Stock Purchase Plan Under the Employee Stock Purchase Plan, net.com'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 offering period or the end of each four
month period. During fiscal 2001, 2000 and 1999, 257,301, 338,000 and 285,000
shares were issued under this Plan, at weighted average prices of $6.45, $6.60
and $9.30 per share, respectively.

Stock Option And Restricted Stock net.com 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 (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, 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
2001, 2000 or 1999. Previously issued restricted stock carries certain
restrictions on transferability, which lapse over the vesting period (generally
two to four years). As of March 30, 2001, 239,500 restricted shares at $.01 per
share have been awarded and issued. Related compensation expense totaled $0,
$15,000 and $286,000 for the years ended March 30, 2001, March 31, 2000 and
1999, respectively.

Activity in net.com's option plans is summarized below:

<TABLE>
<CAPTION>
                                                                      Weighted                           Weighted
                                                                       Average           Number           Average
                                                    Shares      Exercise Price      Exercisable    Exercise Price
-----------------------------------------------------------------------------------------------------------------
<S>                                             <C>                     <C>           <C>                  <C>
Options outstanding at March 31, 1998            4,696,469              $12.68        1,861,651            $11.11
-----------------------------------------------------------------------------------------------------------------
      Granted                                    2,970,007               12.72
      Exercised                                   (273,845)               9.50
      Cancelled                                 (2,445,751)              15.88
-----------------------------------------------------------------------------------------------------------------
Options outstanding at March 31, 1999            4,946,880               11.28        2,180,545             11.62
-----------------------------------------------------------------------------------------------------------------
      Granted                                    3,528,151                9.36
      Exercised                                   (193,835)               9.05
      Cancelled                                 (2,000,839)              10.54
-----------------------------------------------------------------------------------------------------------------
Options outstanding at March 31, 2000            6,280,357               10.51        2,697,106             11.49
-----------------------------------------------------------------------------------------------------------------
      Granted                                    2,219,003                8.68
      Exercised                                   (151,114)               8.24
      Cancelled                                 (2,369,948)              10.39
-----------------------------------------------------------------------------------------------------------------
Options outstanding at March 30, 2001            5,978,298              $ 9.94        2,775,761            $10.91
-----------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information concerning options outstanding and
exercisable as of March 30, 2001:

<TABLE>
<CAPTION>
                                        Options Outstanding                                 Options Exercisable
                           -----------------------------------------------------      -----------------------------
                                                   Weighted
                                                 Avg Remaining       Weighted                           Weighted
       Range of              Number            Contractual Life       Average            Number          Average
    Exercise Prices        Outstanding              (Years)       Exercise Price       Exercisable   Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                         <C>                       <C>            <C>                 <C>             <C>
   $ 4.12  -  $ 8.63        1,386,749                 7.77           $ 7.55              478,246         $  7.63
     8.69  -    9.44        1,375,156                 8.53             9.03              441,591            9.08
     9.50  -   10.19        1,476,568                 8.70            10.05              427,706            9.97
    10.25  -   12.38        1,512,346                 6.33            11.22            1,211,273           11.38
    12.75  -   35.75          227,479                 5.70            20.79              216,945           21.11
-------------------------------------------------------------------------------------------------------------------
   $ 4.12  -  $35.75        5,978,298                 7.73           $ 9.94            2,775,761         $ 10.91
===================================================================================================================
</TABLE>


                                    Page 40
<PAGE>

During the third quarter of fiscal 1999, net.com approved a cancellation and
regrant program for outstanding options under net.com's stock option plans.
Under the program, holders of outstanding options granted after July 24, 1996,
with exercise prices in excess of $10.25 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 $10.25
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 to the Consolidated Financial
Statements, net.com 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, SFAS 123, "Accounting for Stock Based Compensation"
requires disclosure of pro forma net income and earnings per share had net.com
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 net.com'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
net.com'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,
net.com believes that the existing option valuation models do not necessarily
provide a reliable measure of the fair value of awards from those plans.

If the computed fair values of the awards had been amortized to expense over the
vesting period of the awards, pro forma net loss and loss per share would have
been ($25.6) million (($1.22) per diluted share), ($44.8) million (($2.08) per
diluted share) and ($12.8) million (($0.27) per diluted share) in fiscal 2001,
2000 and 1999, respectively.

net.com's calculations for option grants were made using the Black-Scholes
option pricing model with the following weighted average assumptions for fiscal
2001, 2000 and 1999, respectively: risk free rates of 5.7%, 6.4% and 5.3%; stock
price volatility factors of 64%, 56% and 56%; expected option lives of two
months, three months, four months following vesting; and no dividends during the
expected term. net.com's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. The weighted average fair
value of options granted during fiscal 2001, 2000 and 1999 was approximately
$3.81, $3.63 and $4.86, 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 2001, 2000
and 1999, respectively: risk free rate of 4.9%, 6.0% and 5.1%; stock price
volatility factor of 63%, 60% and 60%; and expected option life of four months,
four months and four months. The weighted average fair value of purchase rights
granted in fiscal 2001, 2000 and 1999 was approximately $3.06, $2.82 and $3.69,
respectively.

NOTE 9: INCOME TAXES

net.com 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 consist
of the following:

(Dollars in thousands)                         2001          2000          1999
--------------------------------------------------------------------------------
Income (loss) before income taxes:
      Domestic                             $(21,946)     $(18,835)     $(13,217)
      Foreign                                (1,044)       (8,464)       (1,479)
--------------------------------------------------------------------------------
                                           $(22,990)     $(27,299)     $(14,696)
================================================================================


                                    Page 41
<PAGE>

Provision (benefit) for income taxes:

Current:
      Federal                      $ (2,315)         $ (2,045)         $  1,067
      State                              --                 3              (144)
      Foreign                           115               250              (338)
--------------------------------------------------------------------------------
                                     (2,200)           (1,792)              585
--------------------------------------------------------------------------------

Deferred:
      Federal                            --            10,749            (4,286)
      State                              --             3,814            (3,941)
      Foreign                            --                --                --
--------------------------------------------------------------------------------
                                         --            14,563            (8,227)
--------------------------------------------------------------------------------
                                   $ (2,200)         $ 12,771          $ (7,642)
================================================================================

The provision (benefit) for income taxes reconciles to the amount computed by
applying the statutory United States federal rate of 35% to income before income
taxes as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                                2001          2000          1999
--------------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>
Statutory federal tax provision                   $ (8,047)     $ (9,555)     $ (5,144)
State taxes net of federal income tax benefit           --            (3)         (284)
Goodwill                                             1,184           588            --
Research and Development credit                     (1,093)         (968)           --
Change in valuation allowance                        7,895        24,153            --
Foreign sales corporation benefit                       --            --          (316)
Exempt interest income                                  --          (336)       (1,260)
Other                                               (2,139)       (1,108)         (638)
--------------------------------------------------------------------------------------
Provision (benefit) for income taxes              $ (2,200)     $ 12,771      $ (7,642)
======================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
(Dollars in thousands)                                           2001          2000
-----------------------------------------------------------------------------------
<S>                                                          <C>           <C>
Gross deferred tax assets:
      Reserves not currently deductible for tax purposes     $  8,186      $  8,937
      Loss carryforwards                                       16,767         9,696
      Credit carryforwards                                     15,512        14,384
-----------------------------------------------------------------------------------
Gross deferred tax assets                                      40,465        33,017

Gross deferred tax liabilities:
      Depreciation                                             (7,012)       (7,041)
      Capitalized software production costs                    (1,405)       (1,823)
      Unrealized gain on securities                                --
-----------------------------------------------------------------------------------
Gross deferred tax liabilities                                 (8,417)       (8,864)
Valuation allowance                                           (32,048)      (24,153)
-----------------------------------------------------------------------------------
Net deferred tax assets                                      $     --      $     --
===================================================================================
</TABLE>

The valuation allowance increased $7.9 million and $24.2 million in fiscal 2001
and 2000 respectively. These increases resulted from management's evaluation of
the positive and negative evidence bearing upon the realization of its deferred
tax assets. Under the applicable accounting standards, management considered the
history of losses and concluded that it was appropriate to fully reserve the
deferred tax assets.

As of March 30, 2001, net.com has available federal research and development tax
credit carryforwards of $6.3 million expiring in years 2006 through 2022, and
alternative minimum tax credit carryforwards of $3.7 million


                                    Page 42
<PAGE>

available indefinitely. Also available at March 30, 2001 are state research and
development tax credit carryforwards of $5.6 million, also available
indefinitely.

As of March 30, 2001 net.com has available Net Operating Loss ("NOL")
carryforwards of $36.0 million expiring in the years 2020 through 2021.

NOTE 10: LOSS PER SHARE

Basic loss per share excludes dilution and is computed based upon the weighted
average number of common shares outstanding for the periods presented. Diluted
loss per share reflects the potential dilution that could occur if Common Stock
options were exercised. Potentially dilutive common shares in the diluted
computation are excluded in net loss periods as their effect would be
antidilutive. Such outstanding securities totaled 32,000 at March 30, 2001.
Additionally, there were 784,000 shares of Common Stock issuable upon conversion
of debentures. These shares, and the related effect of accrued interest expense
on the debentures, were not included in the calculation of diluted loss per
share for any of the years presented, as their inclusion would have been
antidilutive.

<TABLE>
<CAPTION>
                                                    2001          2000          1999
------------------------------------------------------------------------------------
<S>                                             <C>           <C>           <C>
Numerator:
Loss before extraordinary gain                  $(20,790)     $(40,070)     $ (7,054)
Net loss                                        $(20,790)     $(40,070)     $ (6,959)

Denominator:
Weighted average shares outstanding - basic       21,666        21,489        21,508
Dilutive effect of options                            --            --            --
------------------------------------------------------------------------------------
Total Diluted                                     21,666        21,489        21,508

Basic and diluted loss per share:
         Loss before extraordinary gain         $  (0.96)     $  (1.86)     $  (0.33)
         Net loss                               $  (0.96)     $  (1.86)     $  (0.32)
</TABLE>

NOTE 11: SIGNIFICANT CUSTOMERS

Sales to the United States government and its agencies amounted to 53%, 50% and
38% of revenue for fiscal years 2001, 2000 and 1999, respectively. These amounts
include sales, which amounted to 54%, 39% and 24% of revenue for fiscal years
2001, 2000 and 1999, respectively, under contracts with the Department of
Defense ("DoD"). Under these DoD contracts various government agencies both
inside and outside the DOD can order products, installation and service from
net.com. net.com had no other customers that accounted for more than 10% of
revenue during these same periods.

NOTE 12: SEGMENT INFORMATION

net.com operates in one segment: the design, development, manufacture and sale
of multiservice wide area networks and associated services used by enterprises,
government organizations and carriers worldwide. net.com follows the
requirements of SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information". Following is operating information by geographic territory
for fiscal 2001, 2000 and 1999:

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                          United                          Other
2001                                      States        Europe    International     Eliminations          Totals
----------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>               <C>              <C>            <C>
      Product                          $  52,067     $  16,848         $  9,568         $ (1,489)      $  76,994

      Service and other                   54,219         9,778            3,467             (172)         67,292

----------------------------------------------------------------------------------------------------------------
          Total revenue                $ 106,286     $  26,626         $ 13,035         $ (1,661)      $ 144,286
----------------------------------------------------------------------------------------------------------------

      Long-lived assets                $  53,591     $   1,040         $    250         $(11,813)      $  43,068
================================================================================================================
</TABLE>


                                    Page 43
<PAGE>

<TABLE>
<CAPTION>
                                                        United                        Other
2000                                                    States       Europe    International     Eliminations        Totals
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>               <C>             <C>           <C>
      Product                                        $  72,195    $  27,030         $ 20,182        $ (3,266)     $ 116,141

      Service and other                                 92,251       12,903            4,203              188       109,545

---------------------------------------------------------------------------------------------------------------------------
          Total revenue                              $ 164,446    $  39,933         $ 24,385        $ (3,078)     $ 225,686
---------------------------------------------------------------------------------------------------------------------------

      Long-lived assets                              $  82,097    $   2,644         $    475        $(13,243)     $  71,973
===========================================================================================================================

<CAPTION>
                                                        United                          Other
1999                                                    States       Europe     International    Eliminations        Totals
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>               <C>             <C>           <C>
      Product                                        $  94,833    $  44,612         $ 21,464        $ (3,790)     $ 157,119

      Service and other                                 88,071       14,221            4,586            (162)       106,716

---------------------------------------------------------------------------------------------------------------------------
          Total revenue                              $ 182,904    $  58,833         $ 26,050        $ (3,952)     $ 263,835
---------------------------------------------------------------------------------------------------------------------------

      Long-lived assets                              $  87,644    $   5,242         $    701        $(12,956)     $  80,631
===========================================================================================================================
</TABLE>

The schedules for fiscal years 2000 and 1999 above have been reclassified due to
the change of the administrative functions in our European operations. In prior
years the revenue was based on where the invoices originated, now total revenues
are based on the country the customer resides in.

NOTE 13: EMPLOYEE BENEFIT PLAN

net.com 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 $741,000, $1.3 million and $1.1 million for fiscal 2001,
2000 and 1999, respectively.

NOTE 14: FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE

The estimated fair values of net.com's financial instruments at March 30, 2001
and March 31, 2000 were as follows:

<TABLE>
<CAPTION>
                                                   2001                     2000
-------------------------------------------------------------------------------------------
                                            Carrying   Estimated      Carrying    Estimated
(Dollars in thousands)                        Amount   Fair Value       Amount   Fair Value
-------------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>          <C>
Assets:

    Cash and cash equivalents               $ 21,011     $ 21,011     $ 28,024     $ 28,024

    Temporary cash investments              $112,766     $112,766     $ 96,902     $ 96,902

    Equity securities                       $     --     $     --     $  1,103     $  1,103

-------------------------------------------------------------------------------------------
Liabilities:

    Convertible subordinated debentures     $ 24,706     $ 15,441     $ 24,706     $ 17,294
-------------------------------------------------------------------------------------------
</TABLE>

The following methods and assumptions were used in estimating the fair values of
financial instruments:


                                    Page 44
<PAGE>

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

Temporary cash investments and convertible subordinated debentures--fair values
are based on quoted market prices.

The equity instrument held was in a privately held company and was sold in
fiscal 2001 at approximately face value. Due to there being no stated market
value for the equity, it was being held and recorded at cost.

NOTE 15: ACQUISITIONS

In December 1999, net.com completed the acquisition of FlowWise Networks, Inc.
("FlowWise"). The acquisition was accounted for as a purchase. net.com paid
approximately $15.4 million in cash for all FlowWise common and preferred shares
outstanding plus investment banking, accounting and legal fees of approximately
$800,000. net.com also placed $6.6 million in an escrow account for payments to
FlowWise employees who agree to remain as net.com employees for a period of two
years beginning January 2000. These amounts will be paid out and recorded as
compensation expense over the course of the two years. net.com recorded a one
time charge of $879,000 in the third quarter of fiscal year 2000 for purchased
in-process technology that had not reached technological feasibility and had no
alternative future use. The remaining portion of the purchase price that
exceeded the net assets of FlowWise, a total of $16 million, was recorded as
goodwill and other intangibles that will be amortized on a straight line basis
over five years.

The operating results of FlowWise have been included in the consolidated
statements of operations since the date of acquisition. Had the acquisition
taken place at the beginning of fiscal year 1999, the unaudited pro forma
results of operations would have been as follows for fiscal years ended March
31, 2000 and 1999 (in thousands except for per share data):

--------------------------------------------------------------------------------
                                                      2000                 1999
--------------------------------------------------------------------------------

       Net revenues                             $  226,086           $  263,983

       Net  loss                                $  (51,929)          $  (20,836)

       Basic loss per share                     $    (2.42)          $    (0.97)
--------------------------------------------------------------------------------

The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles, interest associated with
funding the acquisition and amortization of the amount placed in escrow for
payment to FlowWise employees. The $879,000 charge for purchased in-process
technology has been excluded from the pro forma results, as it is a material
non-recurring charge.

In the first quarter of fiscal 2001, we acquired the assets of privately held
Convergence Equipment Company ("Convergence") from Global Communication
Technologies, Inc. for $1.5 million in cash. Convergence designs and
manufactures next generation IP (Internet Protocol) telephony platforms. The
acquisition was accounted for as a purchase. Included in the transaction is
property, plant and equipment valued at $300,000 and the Convergence engineering
team, intellectual property, and a full-featured IP voice switch valued at $1.2
million. The $1.2 million is classified as an intangible asset and will be
amortized over 5 years. The effect of Convergence's operations is considered
immaterial and therefore no pro forma information is provided. The operating
results for Convergence have been included in the consolidated statements of
operations for net.com effective May 4, 2000, the date of the acquisition.

NOTE 16: SALE OF N.E.T. FEDERAL, INC.'S PROFESSIONAL SERVICE BUSINESS

On December 1, 2000, we sold the assets of our federal services business ("FSB")
to CACI International Inc ("CACI") for a cash consideration of up to $40.0
million. The assets sold are comprised mainly of Federal Government service
contracts, accounts receivable, spares inventory and fixed assets. The purchase
price will be paid out over time beginning with $24.9 million paid at the
closing, $1.0 million six months after closing and $1.0 million held in escrow
and payable one year after closing (if no successful indemnification claims are
made). The net gain on the sale to date is $14.9 million. The remaining $13.0
million is payable contingent upon transfer to


                                    Page 45
<PAGE>

CACI of work performed under certain net.com federal contracts. Additionally
CACI and net.com have entered into an agreement whereby net.com will receive
royalties based on maintenance contract revenue.

The operating results of the FSB have been excluded from the consolidated
statements of operations since the date of sale. Had the sale taken place at the
beginning of fiscal year 2000, the unaudited pro forma results of operations
would have been as follows for fiscal years 2001 and 2000 (in thousands except
for per share data):

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

       Net revenues                                   $  111,296     $  175,999

       Net loss                                       $  (48,197)    $  (59,688)

       Basic an diluted loss per share                $    (2.22)    $    (2.78)
--------------------------------------------------------------------------------

The pro forma results of operations give effect to certain adjustments,
including adding back the effect of fixed corporate allocations.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.


                                    Page 46
<PAGE>

                                    PART III

Certain information required by Part III is omitted from this Form 10-K because
net.com will file its definitive proxy statement (the "Proxy Statement")
pursuant to Regulation 14A within 120 days after the end of its fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated by reference into this Part III.

Item 10. Directors and Executive Officers of Registrant

Information regarding net.com's Directors and Executive Officers is contained in
the sections captioned "Election of Directors: Directors" in the Proxy Statement
and is incorporated herein by reference.

Executive Officers of the Company

The Executive Officers of net.com and their ages at June 1, 2001 are as follows:

Name                      Age    Position

Hubert A.J. Whyte         50     President and Chief Executive Officer

John C. Batty             46     Senior Vice President, Chief Operating Officer,
                                 Chief Financial Officer and Corporate Secretary

Andrew G. Sceats          49     Senior Vice President, Worldwide Sales

Hans Kramer               39     Vice President, Product Development

Craig W. Forbes           39     Vice President, Marketing

Hubert A.J. Whyte has served as a Director of net.com since June 1, 1999, when
he joined net.com as its President and Chief Executive Officer. From 1994 until
he joined net.com, Mr. Whyte served as President and CEO of Advanced Computer
Communications (ACC). Prior to joining ACC, Mr. Whyte served as Vice President
and General Manager of the Access Products unit of Newbridge Networks
Corporation. Earlier in his career, Mr. Whyte gained industry experience with
British Telecom, Ericsson, Shell Oil, Business Intelligence Services, Mitel and
Siemens.

John C. Batty joined net.com in December 1999 as Vice President and Chief
Financial Officer. He was appointed Chief Operating Officer in April 2001 and
Corporate Secretary in February 2001. He has a 20-year background in high
technology, including strong experience in telecommunications, specifically in
wide area networks, net.com's core business. Prior to joining net.com, Batty was
Vice President of Finance and Chief Financial Officer of Verilink. Prior to
Verilink, Mr. Batty spent eleven years at VLSI as Controller, Director of
Corporate Financial Planning and finally as Vice President and Treasurer prior
to its acquisition by Phillips Semiconductor. He earned his B.A. in Economics at
the University of New Hampshire and his M.B.A. at the University of Chicago
School of Business. He began his career with Intel.

Andrew G. Sceats joined net.com in October 1999 as Vice President of
International Sales, in the U.K. In February 2001, he moved to net.com's
headquarters in Fremont, California as Senior Vice President, Worldwide Sales.
Over the last 25 years, Mr. Sceats' career has been focused in sales, marketing
and general management in the communications industry. Prior to joining net.com,
Mr. Sceats spent most of the period from 1990 - 2000 in a variety of management
positions for Newbridge Networks Ltd. and played a key role in the development
of its business. Prior to Newbridge, he served for three years as Sales Director
for Dowty Information Systems, Ltd. In Europe, and 10 years prior to that,
served in a variety of successful sales roles with CASE Communications,
particularly as Vice President of International Sales.

Hans Kramer joined net.com in 1988 and became Vice President of Product
Development in 1999. During the latter half of fiscal 2001 Mr. Kramer
transitioned from his position of Vice President and General Manager of the
Broadband Business Unit to focusing on product development for the release of
net.com's SCREAM product line. He joined net.com after working for a series of
start-up companies in the communications industry, including


                                    Page 47
<PAGE>

Macom LinkABit, now a part of the Hughes Network, where he was the project
leader for a VSAT product. Mr. Kramer received his B.A. in Computer Science from
the University of California at San Diego, with dual minors in Economics and
Queuing Systems.

Craig W. Forbes joined N.E.T. Federal, Inc., a wholly owned subsidiary of
net.com, in 1988. He was appointed to the position of Vice President of
Marketing in July 1999, taking an active role in the new management team's
effort to revitalize and redirect the company, with a focus on opportunities in
emerging technologies, without abandoning its core customer base worldwide.
Currently, Mr. Forbes directs net.com's overall marketing efforts while leading
the company's narrowband business in support of its existing customer base. Mr.
Forbes has a Bachelor of Science degree in Electrical Engineering from Bucknell
University. From 1984 until he joined net.com in 1988, he was an officer in the
United States Air Force.

Item 11. Executive Compensation

Information regarding compensation of net.com's Directors and Executive Officers
is contained in the sections captioned "Election of Directors: Board Committees,
Meetings, and Remuneration" and "Executive Compensation and Related Information"
in the Proxy Statement, which sections are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial owners and
management from the section captioned "Stock Ownership of Five Percent
Stockholders, Directors, and Corporate Officers" in the Proxy Statement is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding transactions with net.com's Directors and Executive
Officers from the sections captioned "Election of Directors: Board Committees,
Meetings, and Remuneration" in the Proxy Statement and "Executive Compensation
and Related Information" in the Proxy Statement is incorporated herein by
reference.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)   1. Index to Consolidated Financial Statements

                                                                           Page
                                                                           ----

Independent Auditors' Report                                                29

Consolidated Balance Sheets as of March 30, 2001 and March 31, 2000         30

Consolidated Statements of Operations for the years ended
        March 30, 2001, March 31, 2000 and 1999                             31

Consolidated Statements of Comprehensive Loss for the years
        ended March 30, 2001, March 31, 2000 and 1999                       31

Consolidated Statements of Cash Flows for the years ended
        March 30, 2001, March 31, 2000 and 1999                             32

Consolidated Statements of Stockholders' Equity for the years ended
        March 30, 2001, March 31, 2000 and 1999                             33


                                    Page 48
<PAGE>

Notes to Consolidated Financial Statements                                  34

      2. Index to Consolidated Financial Statement Schedules

                                                                            Page
                                                                            ----

Schedule II - Valuation and Qualifying Accounts                              54

      All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or Notes thereto.

      Separate financial statements of the Registrant are omitted because the
Registrant is primarily an operating company and all subsidiaries included in
the Consolidated Financial Statements filed, in the aggregate, do not have a
minority equity interest and/or long-term indebtedness to any person outside the
consolidated group in an amount which together exceeds 5% of total consolidated
assets at March 30, 2001.

      3. Exhibits

Exhibit No.                       Description                              Note

    3.1      Registrant's Restated Certificate of Incorporation, as         1
             amended.

    3.2      Registrant's Bylaws, as amended.                               1

    4.1      Indenture dated as of May 15, 1989 between Registrant and      2
             Morgan Guaranty Trust Company of New York.

    4.2      Rights Agreement dated as of August 15, 1989 between           3
             Registrant and The First National Bank of Boston, as
             amended.

    4.3      Certificate of Designations of Series A Junior Participating   4
             Preferred Stock filed with the Secretary of State of Delaware
             on August 24, 1989 (Exhibit 4.1 in the Registrant's Form S-8
             Registration Statement).

    10.1     Headquarters Facilities Lease Agreements between Sobrato       5
             Interests III and Network Equipment Technologies, Inc.
             dated April 9, 1997.

    10.2     Officer Employment and Continuation Agreement between          6
             Registrant and Joseph J. Francesconi.

    10.3     Officer Employment and Continuation Agreement between          6
             Registrant and G. Michael Schumacher.

    10.4     Officer Employment and Continuation Agreement between          6
             Registrant and Raymond E. Peverell.


                                    Page 49
<PAGE>

    10.5     Officer Employment and Continuation Agreement between           6
             Registrant and Roger A. Barney.

    10.6     Officer Employment and Continuation Agreement between           6
             Registrant and Hubert A. Whyte.

    10.7     General Release of All Claims, Covenant Not to Sue, and         6
             Confidentiality Agreement between Registrant and Joseph J.
             Francesconi.

    10.8     Employment Agreement between Registrant and Walter J. Gill.     7

    10.9     Change of Control Agreement between Registrant and John C.      8
             Batty.

    10.10    Change of Control Agreement between Registrant and Craig W.     8
             Forbes.

    10.11    Change of Control Agreement between Registrant and Hans         8
             Kramer.

    10.13    Change of Control Agreement between Registrant and Hubert       8
             A.J. Whyte

    10.14    Form of Officer Employment and Continuation Agreement as        7
             signed by all other Executive Officers and Registrant.

    10.15    Form of Director Indemnification Agreement as signed by all     7
             Directors of the Company.

    10.16    Form of Officer Indemnification Agreement as signed by all      7
             Executive Officers of the Company.

    10.17    Corporate Director Compensation Deferral Election Program       7
             and 1996 Deferral Form.

    10.18    Corporate Officer Compensation Deferral Election Program and    7
             1996 Deferral Form.

    10.19    Corporate Officers Long-Term Variable Compensation Program.     7

    10.20    Agreement and Plan of Merger dated as of December 14, 1999      9
             by and among Network Equipment Technologies, Inc., IPNow,
             Inc., and FlowWise Networks, Inc..

   *10.21    Change of Control Agreement between Registrant and A.G.
             Sceats.

    10.22    Headquarters Facilities - Lease Termination and Settlement
             Agreement between Sobrato Interests II, Ardenwood Corporate
             Park Associates and Network Equipment Technologies, Inc.
             dated December 21, 2000.


                                 Page 50
<PAGE>

    10.23    Headquarters Facilities - Lease between Ardenwood Corporate
             Park Associates and Network Equipment Technologies, Inc.
             dated December 21, 2000.

    10.24    Asset Acquisition Agreement dated October 18, 2000, by and    10
             among CACI, Inc.-Federal, CACI International Inc, N.E.T.
             Federal, Inc., and Network Equipment Technologies, Inc.

    13       Portions of 2000 Annual Report to Stockholders.

    21.1     Subsidiaries of Registrant as of June 28, 2001.

    23.1     Independent Auditors' Consent.

    99.1     Registrant's 1983 Stock Option Plan, as amended.              11

    99.2     Registrant's 1988 Restricted Stock Award Plan.                12

    99.3     Registrant's 1990 Employee Stock Purchase Plan, as amended.   13

    99.4     Registrant's 1993 Stock Option Plan, as amended               14
             (Exhibit 99.3).

    99.5     Registrant's 1997 Stock Option Program, as amended            14
             (Exhibit 99.2).

    99.6     Registrant's 1998 Employee Stock Purchase Plan                14
             (Exhibit 99.1).

NOTES

(1)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Form 10-Q (Commission File No. 0-15323) for the
      fiscal quarter ended December 24, 1995, originally filed with the
      Securities and Exchange Commission on February 7, 1996.

(2)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Form 8 Amendment No. 1 to Annual Report on Form
      10-K (Commission File No. 0-15323) for the fiscal year ended March
      31, 1989, filed with the Securities and Exchange Commission on July
      25, 1989.

(3)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on Form 10-K (Commission File No.
      0-15323) for the fiscal year ended March 31, 1990, filed with the
      Securities and Exchange Commission on June 29, 1990.

(4)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Registration Statement on Form S-8 (Nos.
      33-33013 and 33-33063), filed with the Securities and Exchange
      Commission on January 19, 1990.


                                 Page 51
<PAGE>

(5)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Registration Statement on Form 10-K (Commission
      File No. 0-15323) for the fiscal year ended March 31, 1997,
      originally filed with the Securities and Exchange Commission on
      June 23, 1997.

(6)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on Form 10-K (Commission File No.
      0-15323) for the fiscal year ended March 31, 1999, filed with the
      Securities and Exchange Commission on June 29, 1999.

(7)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on Form 10-K (Commission file No.
      0-15323) for the fiscal year ended March 31, 1996, filed with the
      Securities and Exchange Commission on June 21, 1996.

(8)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on Form 10-K (Commission File No.
      0-15323) for the fiscal year ended March 31, 2000, filed with the
      Securities and Exchange Commission on June 29, 2000.

(9)   Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Current Report on Form 8-K (Commission file No.
      0-15323), filed with the Securities and Exchange Commission on
      January 10, 2000.

(10)  Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Form 10-Q (Commission File No. 0-15323) for the
      fiscal quarter ended September 30, 2000, originally filed with the
      Securities and Exchange Commission on November 13, 2000.

(11)  Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on Form 10-K (Commission File No.
      0-15323) for the fiscal year ended March 31, 1993, filed with the
      Securities and Exchange Commission on June 25, 1993.

(12)  Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Annual Report on form 10-K (Commission File No.
      0-15323) for the fiscal year ended March 31, 1991, filed with the
      Securities and Exchange commission on June 28, 1991.

(13)  Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Registration Statement on Form S-8 (No.
      33-68860), filed with the Securities and Exchange Commission on
      September 15, 1993.

(14)  Incorporated by reference from the corresponding Exhibit (or the
      Exhibit identified in parentheses) previously filed as an Exhibit
      in the Registrant's Registration Statement on Form S-8 (No.
      333-49837), filed with the Securities and Exchange Commission on
      April 10, 1998.

(15)  * Indicates management contracts or compensation plans or
      arrangements required to be filed as an exhibit to this report.

(b)   Reports on Form 8-K

net.com did not file any Form 8-K during Q4 of fiscal 2001.


                                 Page 52
<PAGE>

                                SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                            NETWORK EQUIPMENT TECHNOLOGIES, INC.
                                                                    (Registrant)


Date: June 28, 2001                             By:   /s/ Hubert A.J. Whyte
                                                      --------------------------
                                                      Hubert A.J. Whyte
                                                      President, Chief Executive
                                                      Officer and Director

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

   Signature                            Title                      Date

   /s/ John Batty              Senior Vice President,              June 28, 2001
--------------------------     Chief Operating Officer,
   John Batty                  Chief Financial Officer,
                               CorporateSecretary,
                               (Principal Financial Officer and
                               Principal Accounting Officer)


   /s/ Dixon R. Doll           Director                            June 28, 2001
--------------------------
   Dixon R. Doll


   /s/ James K. Dutton         Director                            June 28, 2001
--------------------------
   James K. Dutton


   /s/ Walter J. Gill          Director                            June 28, 2001
--------------------------
   Walter J. Gill


   /s/ Peter Sommerer          Director                            June 28, 2001
--------------------------
   Peter Sommerer


   /s/ George M. Scalise       Director                            June 28, 2001
--------------------------
   George M. Scalise


   /s/ Hubert A.J. Whyte       President, Chief Executive          June 28, 2001
--------------------------     Officer and Director
   Hubert A.J. Whyte           (Principal Executive Officer)


   /s/ Hans A. Wolf            Chairman of the Board               June 28, 2001
--------------------------
   Hans A. Wolf


                                    Page 53
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.

                                   SCHEDULE II

                        Valuation and Qualifying Accounts

                                 (in thousands)

<TABLE>
<CAPTION>
                                          Balance at    Charged to         Charged                       Balance
                                           Beginning     costs and        to other      Deduction/        at end
Description                                of period      expenses     accounts(1)       write off     of period
----------------------------------------------------------------------------------------------------------------
<S>                                          <C>                           <C>           <C>             <C>
For the year ended March 31, 1999:

       Accounts receivable
              allowances                     $ 3,926            --         $ 4,679       $(5,230)        $ 3,375

For the year ended March 31, 2000:

       Accounts receivable
              allowances                     $ 3,375            --         $ 5,690       $(5,398)        $ 3,667

For the year ended March 30, 2001:

       Accounts receivable
              allowances                     $ 3,667            --         $ 1,515       $(3,055)        $ 2,127
</TABLE>

----------

(1)   Amount represents additions to accounts receivable allowances that were
      charged primarily to revenue.


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