<PAGE>
                                       
                      QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)       FIRST      SECOND     THIRD     FOURTH
----------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>       <C>
FISCAL QUARTER 1997
Revenue                                                $76,469    $78,398    $83,302   $86,269
Gross margin                                            39,373     37,825     41,728    43,369
Net income                                               4,478      5,589      6,620     7,305
Primary and fully diluted earnings per share               .21        .26        .31       .34
                                                                                              
FISCAL QUARTER 1996                                                                           
Revenue                                                $79,609    $82,958    $84,561   $91,771
Gross margin                                            38,722     41,566     43,671    47,202
Net income                                               6,422      7,448      8,215     9,265
Primary and fully diluted earnings per share               .32        .36        .39       .43

</TABLE>

                          FIVE YEAR FINANCIAL SUMMARY

<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,                               1997       1996        1995        1994        1993
------------------------------------------------------------------------------------------------------------
<S>                                                 <C>        <C>         <C>         <C>         <C>      
Revenue                                             $324,438   $338,899    $284,036    $237,672    $218,846 
Net income (loss)                                     23,992     31,350      27,070      (6,324)    (11,097)
Primary earnings (loss) per share                       1.12       1.50        1.44        (.38)       (.71)
7-1/4% convertible                                                                                           
  subordinated debentures                             25,821     33,526      68,625      68,625      68,625 
Total assets                                         301,653    281,957     232,046     187,015     186,596 


</TABLE>

Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this 
tax benefit, primary earnings per share would have been $.91.
                                       15

<PAGE>


                                       
                    MANAGEMENT'S  DISCUSSION AND ANALYSIS

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

RESULTS OF OPERATIONS

The following table depicts data derived from the Consolidated Statements of 
Income expressed as a percentage of revenue for each of the three years in 
the period ended March 31, 1997.

(PERCENT OF REVENUE)                      1997      1996      1995
----------------------------------------------------------------------
Product revenue                           66.2%     66.7%     67.9%
Service and other revenue                 33.8      33.3      32.1
                                      --------------------------------
  Total revenue                          100.0     100.0     100.0
                                      --------------------------------
Product gross margin                      58.2      59.9      58.9
Service and other revenue gross margin    33.9      31.6      30.7
                                      --------------------------------
  Total gross margin                      50.0      50.5      49.9
                                      --------------------------------
                                      --------------------------------
Sales and marketing                       23.8      22.2      24.8
Research and development                  12.7      10.8      12.0
General and administrative                 3.5       3.5       4.0
                                      --------------------------------
  Total operating expenses                40.0      36.5      40.8
                                      --------------------------------
                                      --------------------------------
    Income from operations                10.0      14.0       9.1
Interest income                            1.9       1.8       0.9
Interest expense                          (0.7)     (1.4)     (1.8)
Other                                     (0.2)     (0.2)      0.0
                                      --------------------------------
    Income before income taxes            11.0      14.2       8.2
Income tax provision (benefit)             3.8       4.9      (1.3)
Extraordinary gain                         0.2       0.0       0.0
                                      --------------------------------
Net income                                 7.4%      9.3%      9.5%
                                      --------------------------------
                                      --------------------------------

COMPARISON OF 1997 AND 1996

REVENUE  Total revenue in fiscal 1997 decreased $14.5 million, or 4.3%, from 
fiscal 1996. Product revenue and service and other revenue decreased $11.2 
million and $3.3 million, respectively, for the year. The 5.0% decrease in 
product revenue was principally due to a decline in domestic product sales. 
Total product sales in the U.S. federal channel, which includes U.S. 
government sales and sales to U.S. government contractors, decreased 25.3% in 
fiscal 1997. This decrease in U.S. government product revenue was primarily 
due to the substantial completion in fiscal 1996 of the deployment of a 
Department of Defense worldwide network. Increased international product 
sales substantially offset the domestic decline, growing 25.3% over the prior 
year to 45.0% of product revenue. This increase in international product 
sales was primarily attributable to the Company's expansion of its 
international sales and marketing infrastructure coupled with the economic 
growth experienced in these regions. Both factors significantly impacted the 
Company s Asia-Pacific/Latin American channel, which grew product sales 54.5% 
year-over-year.
                                       16

<PAGE>

                                       
                       MANAGEMENT'S  DISCUSSION AND ANALYSIS

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

Overall, revenue in the U.S. federal channel decreased 17.9% over last year 
and decreased as a percentage of total revenue from 36.4% in fiscal 1996 to 
31.2% in fiscal 1997. Total international revenue increased 23.6% over last 
year, and in fiscal 1997, it represented 35.0% of the Company's total revenue 
as compared to 27.1% in fiscal 1996.

Management expects revenue to increase in fiscal 1998 based largely upon the 
introduction of new products and entry into new, larger markets. 

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

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

Management expects total gross margin in fiscal 1998 to remain fairly 
constant. 

OPERATING EXPENSES  Operating expenses increased $6.2 million in fiscal 1997 
and increased as a percentage of total revenue to 40.0% in fiscal 1997 from 
36.5% in fiscal 1996. Management expects operating expenses in fiscal 1998 to 
continue to increase to support planned growth, while remaining fairly 
constant as a percentage of total revenue.

Sales and marketing expense increased $2.0 million in fiscal 1997 due to the 
addition of personnel to support continued expansion of the sales and 
marketing infrastructure, increased travel expenses and increased advertising 
and promotional expenses, offset partially by decreased sales commissions. As 
a percentage of total revenue, sales and marketing expense increased to 23.8% 
in fiscal 1997 from 22.2% in fiscal 1996, primarily due to the lower sales 
volume. Management expects sales and marketing expense to increase in fiscal 
1998 to support continued expansion of the sales and marketing 
infrastructure, which includes increased expenses for planned international 
growth and new product introductions. 

Research and development expense increased $4.6 million in fiscal 1997 due to 
an increase in direct project funding, primarily salary-related expenses and 
purchases of direct materials and hardware and software tools to support 
product development. As a result of this increased spending, research and 
development expense also increased as a percentage of total revenue to 12.7% 
in fiscal 1997 from 10.8% in fiscal 1996. In fiscal 1997, $2.8 million of 
software costs were capitalized as compared to $1.9 million in fiscal 1996 as 
more 
                                       17

<PAGE>

projects reached technological feasibility in line with planned new product 
introductions in fiscal 1997 and 1998. Management plans to continue funding 
research and development efforts at levels necessary to advance product 
programs and expects research and development spending to increase in fiscal 
1998, while remaining fairly constant as a percentage of planned revenue.

General and administrative expense decreased $.4 million year-over-year and 
remained flat as a percentage of total revenue at 3.5%. Management expects 
general and administrative expense to remain fairly constant in fiscal 1998 
as a percentage of planned revenue. 

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

For the fiscal year ended March 31, 1997, the Company recorded income tax 
expense of $12.5 million as compared to $16.9 million for fiscal 1996, at an 
effective rate of 35% for both years. See Note 10 to the Consolidated 
Financial Statements.

The results for fiscal 1997 included an extraordinary gain of $.7 million, or 
three cents per share on a fully diluted basis, arising from the repurchase 
of $7.7 million of convertible subordinated debentures. See Note 8 to the 
Consolidated Financial Statements.

COMPARISON OF 1996 AND 1995

REVENUE  Total revenue in fiscal 1996 increased $54.9 million, or 19.3%, from 
fiscal 1995. Product revenue and service and other revenue increased $33.2 
million and $21.7 million, respectively, over the same period. The 17.2% 
increase in product revenue was principally due to increased IDNX product 
sales across all sales channels. Over one-half of this increase was 
attributable to the U.S. federal channel. Total product sales in the U.S. 
federal channel increased 38.3% to 27.4% of product revenue. International 
product sales increased 11.4% to 34.1% of product revenue, primarily due to 
growth in Europe. Growth in other product lines included a 13.6% 
year-over-year increase in STM-TM- product sales and incremental revenues 
earned in fiscal 1996 on sales of OEM equipment sold under marketing 
alliances. Service and other revenue increased 23.8% from fiscal 1995. This 
increase was attributable to increased systems integration services in 
support of product sales to the U.S. government and, to a lesser extent, to 
growth in the installed base of the Company's products. Overall, revenue in 
the U.S. federal channel grew 37.4% over fiscal 1995 and increased as a 
percentage of total revenue from 31.6% in fiscal 1995 to 36.4% in fiscal 
1996. Total international revenue increased 15.2% over the period and in 
fiscal 1996 represented 27.1% of the Company's total revenue as compared to 
28.1% in fiscal 1995.

GROSS MARGIN  Total gross margin as a percentage of total revenue increased 
to 50.5% in fiscal 1996 from 49.9% in fiscal 1995. Product gross margin 
increased to 59.9% in fiscal 1996 from 58.9% in fiscal 1995. The increase in 
fiscal 1996 was primarily due to favorable manufacturing variances from 
higher production volumes. Favorable sales channel and IDNX product mix in 
fiscal 1996 was partially offset by lower margins 
                                       18

<PAGE>


MANAGEMENT'S  DISCUSSION
              AND ANALYSIS

on sales of OEM equipment. The gross margin for service and other revenue 
increased to 31.6% in fiscal 1996 from 30.7% in fiscal 1995 as a result of 
improved margins on both service and systems integration services provided 
under a U.S. government contract. The gross margin on these systems 
integration services increased to 14.8% in fiscal 1996 from 11.5% in fiscal 
1995 due to changes in the mix of OEM products and services provided.

OPERATING EXPENSES  Operating expenses increased $8.1 million in fiscal 1996. 
Operating expenses as a percentage of total revenue decreased to 36.5% in 
fiscal 1996 from 40.8% in fiscal 1995.

Sales and marketing expense increased $5.1 million in fiscal 1996 due to the 
addition of personnel to support expansion of the sales infrastructure, and 
commissions and travel expenses commensurate with the increase in sales 
volume and the geographic dispersion thereof. Despite the increase in 
spending, sales and marketing expense decreased as a percentage of total 
revenue to 22.2% in fiscal 1996 from 24.8% in fiscal 1995.

Research and development expense increased $2.5 million in fiscal 1996 due to 
an increase in direct project funding, primarily salary-related expenses and 
purchases of hardware and software tools to support product development. The 
expense as a percentage of total revenue decreased to 10.8% in fiscal 1996 
from 12.0% in fiscal 1995. In fiscal 1996, $1.9 million of software costs 
were capitalized as compared to $2.0 million in fiscal 1995.

General and administrative expense increased $.5 million in fiscal 1996, but 
decreased to 3.5% of total revenue as compared to 4.0% in fiscal 1995.

NON-OPERATING ITEMS  Interest income in fiscal 1996 increased $3.4 million 
from fiscal 1995 due to higher cash balances and higher interest rates. 
Interest expense, primarily related to the 7-1/4% convertible subordinated 
debentures, decreased $.5 million to $4.7 million for fiscal 1996 compared to 
$5.2 million for fiscal 1995 as a result of the partial call of the Company's 
convertible debentures. The decrease consisted of $1.0 million in interest 
savings offset by $.5 million of one-time costs associated with the 
redemption. Other expense increased $.4 million in fiscal 1996 from $.1 
million in fiscal 1995.

For the fiscal year ended March 31, 1996, the Company recorded income tax 
expense of $16.9 million at an effective rate of 35% as compared to a tax 
benefit of $3.8 million for fiscal 1995. As a result of the significant 
increase in profitability during fiscal 1995 and in accordance with Statement 
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" 
(SFAS 109), the Company recorded a tax benefit in the fourth quarter of 
fiscal 1995 of $9.9 million. See Note 10 to the Consolidated Financial 
Statements.

BUSINESS ENVIRONMENT AND RISK FACTORS

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

In recent years, the Company has experienced decreases in first quarter 
revenues versus the preceding fourth quarter, and this trend is expected to 
continue in fiscal 1998. Historically, the majority of the Company's revenue 
in each quarter results from orders received and shipped in that quarter. 
Because of these ordering patterns and potential delivery schedule changes, 
the Company does not believe that backlog is indicative 
                                       19

<PAGE>

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

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

The Company's products incorporate intellectual property and technology owned 
by the Company or licensed from third parties. The Company s ability to 
maintain and enhance the value of its intellectual property and technology 
and third party licenses will affect future product and service offerings. 
Moreover, the Company believes that operating results will depend on 
successful development and introduction of new products and enhancements to 
existing products and service offerings. There can be no assurance that the 
Company will succeed in such efforts or that customers will accept new, 
enhanced and existing products and services in quantities and at prices and 
margins that are consistent with the Company's expectations. The Company's 
success also depends on its ability to attract and retain employees necessary 
to support planned development and growth.

The Company's products include components, assemblies and subassemblies that 
are currently available from single sources and, in some cases, are in short 
supply. Testing and manufacturing of products designed by N.E.T. are 
performed at the Company s Redwood City, California, facility. Pursuant to 
several types of agreements, the Company also resells products designed or 
manufactured by third parties, and the Company relies to a significant degree 
on such third parties for order fulfillment, quality control and support of 
their products. Such products are generally available to end users from 
sources other than the Company, and are generally sold or licensed by the 
Company at gross margins that are lower than products designed and 
manufactured by the Company. There can be no assurance that these third-party 
manufacturers will be able to meet the Company's future requirements for 
these products, that the quality control and support provided by these 
manufacturers will be adequate, or that the Company's gross margins on these 
products will not be lowered further. Product availability limitations, price 
increases or business interruptions could adversely impact revenue, margins 
and earnings. 

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

                                       21

<PAGE>

                                       
                    MANAGEMENT'S  DISCUSSION AND ANALYSIS


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

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

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1997, the Company had cash, cash equivalents and temporary 
cash investments of $138.7 million, as compared to $112.2 million at the end 
of fiscal 1996. Cash provided from operations was $48.1 million in fiscal 
1997, a $7.9 million increase over the prior year. This increase was 
principally due to a smaller increase in accounts receivable and a 
significant decrease in inventories, partially offset by a decrease in 
accrued liabilities and lower net income.

Net cash used for investing activities in fiscal 1997 consisted primarily of 
net purchases of temporary cash investments of $39.7 million as increased 
cash generated in the year was invested. Additionally, purchases of property 
and equipment totalled $13.9 million and additions to software production 
costs were $2.8 million.

Net cash used for financing activities in fiscal 1997 was composed of $6.4 
million used to repurchase a portion of the Company's convertible 
subordinated debentures and $2.7 million used to repurchase the Company's 
Common Stock, partially offset by the issuance of $4.6 million of Common 
Stock related to the employee stock benefit plans.

During the second quarter of fiscal 1997, the Board of Directors authorized 
the Company to repurchase up to 10% of the outstanding shares of its Common 
Stock and to repurchase its outstanding 7-1/4% convertible subordinated 
debentures. These purchases can be made on the open market from time to time 
at the discretion of the Company's management and at price levels the Company 
deems appropriate. The Company can discontinue its purchases at any time it 
determines additional purchases are not warranted. As of March 31, 1997, the 
Company had repurchased 204,600 shares of its Common Stock at a weighted 
average price of $13.27 and repurchased debentures with a face value of 
$7,705,000 at a weighted average cost of 83.3% of the face value.

As of March 31, 1997, the Company had available an unsecured $10.0 million 
line of credit. Borrowings under this committed borrowing facility are 
available through May 1998 and bear interest at the bank's base rate (which 
approximates prime). At March 31, 1997, there were no outstanding borrowings 
under this facility. 

In April 1997, the Company announced a 12-year operating lease agreement 
pursuant to which a new corporate headquarters facility will be built in 
Fremont, California. In conjunction with the project management and design 
construction of the new facility, the Company expects to incur expenditures 
in fiscal 1998, which it plans to capitalize. The Company plans to move to 
its new headquarters when the buildings are completed, which is expected to 
be in mid-calendar 1998. The Company's current headquarters' lease expires in 
October 1998.

The Company believes that current cash and cash equivalents, temporary cash 
investments and cash flows from operations will be sufficient to fund 
operations, purchases of capital equipment and research and development 
programs currently planned at least through fiscal 1998.

                                       22

<PAGE>

                                       
                          CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)
MARCH 31,                                            1997      1996
-----------------------------------------------------------------------
ASSETS
Current assets:
  Cash and cash equivalents                       $39,141   $52,319
  Temporary cash investments                       99,581    59,892
  Accounts receivable, net of allowances of  
    $3,910 in 1997 and $4,533 in 1996              82,986    76,966
  Inventories                                      22,662    31,705
  Deferred income taxes                             7,418    11,830
  Prepaid expenses and other assets                 6,679     5,714
                                             --------------------------
    Total current assets                          258,467   238,426
                                             --------------------------
Property and equipment:
  Machinery and equipment                          96,011    92,653
  Furniture and fixtures                            6,508     5,874
  Leasehold improvements                           11,885    10,290
  Construction in progress                            318       438
                                             --------------------------
                                                  114,722   109,255
  Less accumulated depreciation and amortization  (84,713)  (78,215)
                                             --------------------------
    Property and equipment, net                    30,009    31,040
Software production costs, net                      4,616     4,146
Other assets                                        8,561     8,345
                                             --------------------------
                                                 $301,653  $281,957
                                             --------------------------
                                             --------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                $23,758   $21,559
  Accrued liabilities                              39,174    42,442
                                             --------------------------
    Total current liabilities                      62,932    64,001
                                             --------------------------
7-1/4% convertible subordinated debentures         25,821    33,526
Stockholders' equity:
  Preferred Stock, $.01 par value
    Authorized: 5,000,000 shares
    Outstanding: none                                  --        --
  Common Stock, $.01 par value
    Authorized: 50,000,000 shares
    Outstanding: 21,049,000 shares in 1997  
      and 20,839,000 shares in 1996                   210       208
  Additional paid-in capital                      172,038   166,013
  Treasury stock                                   (2,545)     (599)
  Net unrealized loss on 
    available-for-sale securities                     (56)      (12)
  Accumulated translation adjustment                 (490)     (931)
  Retained earnings                                43,743    19,751
                                             --------------------------
     Total stockholders' equity                   212,900   184,430
                                             --------------------------
                                                 $301,653  $281,957
                                             --------------------------
                                             --------------------------


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 
STATEMENTS.

                                       23

<PAGE>

                                       
                     CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,                      1997      1996     1995
---------------------------------------------------------------------
Revenue:
  Product revenue                      $214,862  $226,070  $192,901
  Service and other revenue             109,576   112,829    91,135
                                   ----------------------------------
    Total revenue                       324,438   338,899   284,036
                                   ----------------------------------
Cost of sales:
  Cost of product revenue                89,746    90,588    79,227
  Cost of service and other revenue      72,397    77,150    63,193
                                   ----------------------------------
    Total cost of sales                 162,143   167,738   142,420
                                   ----------------------------------
Gross margin                            162,295   171,161   141,616
Operating expenses:
  Sales and marketing                    77,382    75,432    70,348
  Research and development               41,054    36,437    33,923
  General and administrative             11,494    11,884    11,375
                                   ----------------------------------
    Total operating expenses            129,930   123,753   115,646
                                   ----------------------------------
      Income from operations             32,365    47,408    25,970
Interest income                           6,284     6,044     2,626
Interest expense                         (2,310)   (4,713)   (5,213)
Other                                      (522)     (508)      (73)
                                   ----------------------------------
      Income before income taxes         35,817    48,231    23,310
Income tax provision (benefit)           12,515    16,881    (3,760)
                                   ----------------------------------
      Income before extraordinary gain   23,302    31,350    27,070
Extraordinary gain on repurchase 
     of debentures                          690        --        --
                                   ----------------------------------
Net income                             $ 23,992  $ 31,350  $ 27,070
                                   ----------------------------------
                                   ----------------------------------
Primary earnings per share:
  Income before extraordinary gain     $   1.08  $   1.50  $   1.44
                                   ----------------------------------
                                   ----------------------------------
  Net income                           $   1.12  $   1.50  $   1.44
                                   ----------------------------------
                                   ----------------------------------
Fully diluted earnings per share:
  Income before extraordinary gain     $   1.08  $   1.50  $   1.37
                                   ----------------------------------
                                   ----------------------------------
  Net income                           $   1.11  $   1.50  $   1.37
                                   ----------------------------------
                                   ----------------------------------
Shares used in per share computation:
  Primary                                21,505    20,833    18,768
                                   ----------------------------------
                                   ----------------------------------
  Fully diluted                          21,637    20,908    19,794
                                   ----------------------------------
                                   ----------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 
STATEMENTS.

                                       24

<PAGE>

                                       
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31,                                1997      1996     1995
-----------------------------------------------------------------------------
Cash and cash equivalents at beginning of year   $ 52,319  $ 33,886  $ 23,854
                                                 --------  --------  --------
Net cash flows from operating activities:
  Net income                                       23,992    31,350    27,070
  Adjustments required to reconcile net income
    to cash provided by operations:
      Extraordinary credit-gain on repurchase 
        of debentures                                (690)       --        --
      Depreciation and amortization                17,429    15,481    17,591
      Restricted stock compensation                   379       368        10
      Deferred income taxes                         4,412    (1,930)   (9,900)
      Changes in assets and liabilities:
        Accounts receivable                        (5,816)  (20,839)    2,077
        Inventories                                 9,156       506     2,280
        Prepaid expenses and other assets            (927)   (1,185)     (621)
        Accounts payable                            2,158     3,356    (2,092)
        Accrued liabilities                        (2,005)   13,099     6,941
                                                 --------  --------  --------
    Net cash provided by operations                48,088    40,206    43,356
                                                 --------  --------  --------
Cash flows from investing activities:
  Purchases of temporary cash investments        (159,095)  (85,960)  (60,816)
  Proceeds from maturities of temporary 
    cash investments                              119,362    78,800    25,786
  Purchases of property and equipment             (13,910)  (17,165)   (8,258)
  Additions to software production costs           (2,792)   (1,875)   (1,968)
  Other                                              (316)      955       903
                                                 --------  --------  --------
    Net cash used for investing activities        (56,751)  (25,245)  (44,353)
                                                 --------  --------  --------
Cash flows from financing activities:
  Sale of Common Stock                              4,617    12,684    12,583
  Repurchase of convertible subordinated 
    debentures                                     (6,419)  (10,117)       --
  Purchase of Common Stock                         (2,722)       --        --
  Repayments of borrowings                             --        --       (26)
                                                 --------  --------  --------
    Net cash provided by (used for) 
      financing activities                         (4,524)    2,567    12,557
                                                 --------  --------  --------
Effect of exchange rate changes on cash                 9       905    (1,528)
                                                 --------  --------  --------
    Net increase (decrease) in cash and 
      cash equivalents                            (13,178)   18,433    10,032
                                                 --------  --------  --------
Cash and cash equivalents at end of year         $ 39,141  $ 52,319  $ 33,886
                                                 --------  --------  --------
                                                 --------  --------  --------

Other cash flow information:
  Cash paid during the year for:
    Interest                                     $  2,477  $  4,136  $  5,213
    Income taxes                                 $  4,050  $  5,496  $  2,061
  Non-cash investing and financing activities:
    Conversion of convertible subordinated 
      debentures into Common Stock (including 
      accrued interest and debenture 
      offering costs)                            $      -  $ 25,532  $      -
    Income tax benefit arising from employee 
      stock option plans                         $  1,807  $ 12,972  $  2,718


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 
STATEMENTS.
                                       25

<PAGE>

                                       
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                      NET UNREALIZED
                                            COMMON                                    GAIN (LOSS) ON
                                             STOCK              ADDITIONAL                 AVAILABLE-   ACCUMULATED    RETAINED
                                             TO BE     COMMON      PAID-IN   TREASURY       FOR-SALE    TRANSLATION    EARNINGS
(DOLLARS IN THOUSANDS)                      ISSUED      STOCK      CAPITAL      STOCK     SECURITIES     ADJUSTMENT    (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<C>                                           <S>        <S>      <S>         <S>              <S>          <S>        <S>      
BALANCES, MARCH 31, 1994                      $268       $171     $ 98,914    $  (599)         $   -        $(1,157)   $(38,669)
                                            ------------------------------------------------------------------------------------
Sale of 1,586,000 shares                                                                                                        
  of Common Stock under                                                                                                         
  employee stock benefit plans                   -         16       12,577          -              -              -           - 
Stock issued in connection                                                                                                      
  with merger                                 (236)         -          236          -              -              -           - 
Income tax benefit arising from                                                                                                 
  employee stock option plans                    -          -        2,718          -              -              -           - 
Net unrealized gain on securities                                                                                               
  upon adoption of SFAS 115                      -          -            -          -             64              -           - 
Net unrealized loss on securities                -          -            -          -            (74)             -           - 
Accumulated translation                                                                                                         
  adjustment                                     -          -            -          -              -            363           - 
Net income                                       -          -            -          -              -              -      27,070 
                                            ------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995                        32        187      114,445       (599)           (10)          (794)    (11,599)
                                            ------------------------------------------------------------------------------------
Sale of 1,314,000 shares                                                                                                        
  of Common Stock under                                                                                                         
  employee stock benefit plans                   -         13       13,040          -              -              -           - 
Conversion of convertible                                                                                                       
  subordinated debentures                                                                                                       
  into 802,078 shares of                                                                                                        
  Common Stock, including                                                                                                       
  accrued interest and                                                                                                          
  offering costs                                 -          8       25,524          -              -              -           - 
Stock issued in connection                                                                                                      
  with merger                                  (32)         -           32          -              -              -           - 
Income tax benefit arising from                                                                                                 
  employee stock option plans                    -          -       12,972          -              -              -           - 
Net unrealized loss on securities                -          -            -          -             (2)             -           - 
Accumulated translation                                                                                                         
  adjustment                                     -          -            -          -              -           (137)          - 
Net income                                       -          -            -          -              -              -      31,350 
                                            ------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996                         -        208      166,013       (599)           (12)          (931)     19,751 
                                            ------------------------------------------------------------------------------------
Sale of 303,000 shares                                                                                                          
  of Common Stock under                                                                                                         
  employee stock benefit plans                   -          3        3,591          -              -              -           - 
Purchase of 205,000 shares                                                                                                      
  of Common Stock                               (2)         -       (2,720)         -              -              -           - 
Reissuance of 113,000 shares of                                                                                                 
  treasury stock under stock plans               -          1          627        774              -              -           - 
Income tax benefit arising from                                                                                                 
  employee stock option plans                    -          -        1,807          -              -              -           - 
Net unrealized loss on securities                -          -            -          -            (44)             -           - 
Accumulated translation                                                                                                         
  adjustment                                     -          -            -          -              -            441           - 
Net income                                       -          -            -          -              -              -      23,992 
                                            ------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997                      $  -       $210     $172,038    $(2,545)          $(56)       $  (490)    $43,743 
                                            ------------------------------------------------------------------------------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 
STATEMENTS.
                                       26

<PAGE>

                                       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----
  1
        NATURE OF BUSINESS  Network Equipment Technologies, Inc. ("N.E.T." 
        or "the Company"), headquartered in Redwood City, California, is a 
        leading designer, developer, manufacturer and supplier of 
        multiservice backbone networks and associated services used by 
        enterprises and carriers worldwide.
        
        PRINCIPLES OF CONSOLIDATION  The Consolidated Financial Statements 
        include the accounts of the Company and its wholly owned 
        subsidiaries. Intercompany accounts and transactions have been 
        eliminated.
        
        REVENUE RECOGNITION  The Company recognizes product revenue and 
        accrues related warranty expense upon shipment. At the time of 
        sale, no material vendor or post contract support obligations 
        remain outstanding. Revenue from service contracts is recognized 
        ratably over the contract period. Revenue from other services, such 
        as systems integration, installation and training, is recognized 
        when the service is performed.
        
        CASH AND CASH EQUIVALENTS  Cash and cash equivalents include highly 
        liquid investments with original maturities of three months or less 
        at the time of acquisition.
        
        TEMPORARY CASH INVESTMENTS  Temporary cash investments are 
        primarily composed of highly liquid investments with original 
        maturities of greater than three months at the time of acquisition.

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

        (DOLLARS IN THOUSANDS)                           1997              1996
-------------------------------------------------------------------------------
        Purchased components                          $ 6,710           $14,381
        Work-in-process                                13,675            15,533
        Finished goods                                  2,277             1,791
                                                      -------------------------
                                                      $22,662           $31,705
                                                      -------------------------
                                                      -------------------------

        PROPERTY AND EQUIPMENT  Property and equipment are stated at cost. 
        Depreciation is computed using the straight-line method over 
        estimated useful lives of generally three to five years. Leasehold 
        improvements are amortized over the shorter of the respective lease 
        terms or estimated useful lives.
        
        SOFTWARE PRODUCTION COSTS  Capitalization of software production 
        costs begins upon the establishment of technological feasibility 
        for the products, and amortization begins when the products are 
        available for release to customers. The Company assesses the 
        recoverability of capitalized software production costs in light of 
        many factors, including anticipated future revenues, estimated 
        economic useful lives and changes in software and hardware 
        technologies. Capitalization of software production costs amounted 
        to $2.8 million, $1.9 million and $2.0 million in fiscal 1997, 1996 
        and 1995, respectively. Software production costs are amortized 
        over the lives of the products, generally three years. Amortization 
        amounted to $2.3 million, $2.4 million and $2.8 million in fiscal 
        1997, 1996 and 1995, respectively. Accumulated amortization was 
        $6.0 million and $3.8 million at March 31, 1997 and 1996, 
        respectively. 
        
        FOREIGN CURRENCY TRANSLATION  The functional currency for the 
        Company's foreign subsidiaries is the local currency. Assets and 
        liabilities of foreign subsidiaries are translated into dollars at 
        the rates of exchange in effect at the end of the period. Revenues 
        and expenses are translated at the average exchange rate during the 
        period. Gains and losses from foreign currency translation are 
        included in a separate account in stockholders' equity in the 
        Consolidated Balance Sheets. Foreign currency transaction gains or 
        losses are included in the Consolidated Statements of Income. The 
        Company enters into foreign exchange contracts to hedge certain 
        intercompany balances and balance sheet exposures against future 
        movements in foreign exchange rates. Gains and losses on the 
        foreign exchange contracts are included in other income and 
        expense, which offset foreign exchange gains or losses from 
        revaluation of foreign currency-denominated intercompany 

                                       27

<PAGE>

                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        balances and balance sheet exposure items. At March 31, 1997, the 
        Company had outstanding foreign exchange contracts of $2.9 million 
        (see Note 12). The contracts require the Company to exchange 
        foreign currencies for U.S. dollars and generally mature in one 
        month.
        
        STOCK-BASED COMPENSATION  The Company accounts for employee 
        stock-based compensation using the intrinsic value method in 
        accordance with Accounting Principles Board Opinion No. 25, 
        "Accounting for Stock Issued to Employees" (APB 25) and, 
        accordingly, does not generally recognize compensation cost in 
        connection with its stock option and purchase plans. A summary of 
        the pro forma effects to reported net income and earnings per share 
        as if the Company had elected to recognize compensation cost based 
        on the fair value of the options granted as prescribed by Statement 
        of Financial Accounting Standards No. 123, "Accounting for 
        Stock-Based Compensation" (SFAS 123) has been disclosed in Note 9 
        to the Consolidated Financial Statements.
        
        EARNINGS PER SHARE  Net income per share has been computed based 
        upon the weighted average number of common and common equivalent 
        shares outstanding. For primary earnings per share, common 
        equivalent shares consist of the incremental shares issuable upon 
        the assumed exercise of dilutive stock options. For fully diluted 
        earnings per share, common equivalent shares also include, if 
        dilutive, the effect of incremental shares issuable upon the 
        conversion of the 7-1/4% convertible subordinated debentures, and 
        net income is adjusted for the interest expense (net of income 
        taxes) related to the debentures.
        
        SIGNIFICANT RISKS AND UNCERTAINTIES  The preparation of financial 
        statements in conformity with generally accepted accounting 
        principles requires management to make estimates and assumptions 
        that affect the reported amounts of assets and liabilities and 
        disclosure of contingent assets and liabilities at the date of the 
        financial statements and the reported amounts of revenues and 
        expenses during the reporting period. Such management estimates 
        include the allowance for doubtful accounts receivable, the 
        valuation of inventory, the valuation allowance on deferred tax 
        assets and certain reserves and accruals. Actual results could 
        differ materially from those estimates.
        
        The Company sells its products primarily to large organizations in 
        diversified industries worldwide. Credit risk is further mitigated 
        by the Company's credit evaluation process and the reasonably short 
        collection terms. The Company typically does not require collateral 
        or other security to support accounts receivable. While the Company 
        does maintain allowances for potential credit losses, actual bad 
        debt losses have not been material or outside of management's 
        expectations.
        
        The Company participates in a very dynamic high technology 
        telecommunications industry and believes that changes in any of the 
        following areas could have a material adverse affect on the 
        Company's future financial position or results of operations: 
        advances and trends in new technologies; competitive pressures in 
        the form of new products or price reductions on current products; 
        changes in product mix; successful introduction of new products and 
        services; changes in the overall demand for products and services 
        offered by the Company; changes in certain strategic partnerships 
        or customer relationships; litigation or claims against the Company 
        based on securities, intellectual property, patent, product, 
        regulatory or other issues or factors; risks associated with 
        changes in domestic and international economic and/or political 
        conditions or regulations; availability of necessary components; 
        and the Company's ability to attract and retain employees necessary 
        to support its growth.
        
        RECENTLY ISSUED ACCOUNTING STANDARD  In February 1997, the 
        Financial Accounting Standards Board issued Statement of Financial 
        Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This 
        standard replaces current earnings per share (EPS) reporting 
        requirements and requires a dual presentation of basic and diluted 
        EPS. As basic EPS excludes dilution by dividing net income by only 
        the weighted average of common shares outstanding for the period, 
        it will result in a higher value than the historically reported 

                                       28

<PAGE>


        primary EPS. Diluted EPS under SFAS 128 is not expected to be 
        significantly different than fully diluted EPS reported 
        historically. This standard will be effective for the Company 
        beginning in the third quarter of fiscal 1998 and will require 
        restatement of prior periods.
        
        RECLASSIFICATION  Certain fiscal 1996 and 1995 amounts have been 
        reclassified to conform with fiscal 1997 presentation.

note    TEMPORARY CASH INVESTMENTS
----
  2

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

<TABLE>
<CAPTION>
                                                              1997
                                         --------------------------------------------
                                                         GROSS       GROSS  ESTIMATED
                                         AMORTIZED  UNREALIZED  UNREALIZED     MARKET
(DOLLARS IN THOUSANDS)                        COST       GAINS      LOSSES      VALUE
-------------------------------------------------------------------------------------
<S>                                        <C>             <C>       <C>      <C>
U.S. government and municipalities         $50,671         $80       $ (86)   $50,665
Corporate notes and bonds                   21,876           -         (35)    21,841
Other debt securities                       13,996           5         (35)    13,966
Foreign debt issues                          5,832           -         (14)     5,818
Commercial paper and banker's acceptances    5,291           -           -      5,291
Certificates of deposit                      2,000           -           -      2,000
                                         --------------------------------------------
                                           $99,666         $85       $(170)   $99,581
                                         --------------------------------------------
                                         --------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                              1996
                                         --------------------------------------------
                                                         GROSS       GROSS  ESTIMATED
                                         AMORTIZED  UNREALIZED  UNREALIZED     MARKET
(DOLLARS IN THOUSANDS)                        COST       GAINS      LOSSES      VALUE
-------------------------------------------------------------------------------------
<S>                                        <C>             <C>       <C>      <C>
U.S. government and municipalities         $ 3,000         $ 3       $   -    $ 3,003
Corporate notes and bonds                   36,495          17         (35)    36,477
Foreign debt issues                         11,430           6          (8)    11,428
Commercial paper and banker's acceptances    2,986           -          (1)     2,985
Certificates of deposit                      6,000           -          (1)     5,999
                                         --------------------------------------------
                                           $59,911         $26       $ (45)   $59,892
                                         --------------------------------------------
                                         --------------------------------------------
</TABLE>

        At March 31, 1997, the estimated market value of available-for-sale 
        securities with maturities between one and two years was $44.5 
        million, with the remainder maturing within one year. Any gains or 
        losses on sales of securities are computed on a specific 
        identification basis. There were no material realized gains or 
        losses from the sale of securities in fiscal years 1997, 1996 and 
        1995.

note    SIGNIFICANT CUSTOMERS
----
  3

        Sales to the U.S. government and its agencies amounted to 29%, 34% 
        and 28% of revenue for fiscal years 1997, 1996 and 1995, 
        respectively. These amounts include sales, which amounted to 27%, 
        30% and 19% of revenue for fiscal years 1997, 1996 and 1995, 
        respectively, under contracts with the Department of Defense under 
        which various government agencies can order products, installation 
        and service from the Company. The Company had no other customers 
        that accounted for more than 10% of revenue during these same 
        periods.

                                       29

<PAGE>


                                       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

note     SEGMENT INFORMATION
----
  4

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)       UNITED STATES    EUROPE   ELIMINATIONS   CONSOLIDATED
----------------------------------------------------------------------------------
<S>                               <C>        <C>           <C>            <C>
YEAR ENDED MARCH 31, 1997
Sales to unaffiliated customers   $265,109   $59,329       $      -       $324,438
Sales to foreign affiliates         28,294     4,764        (33,058)             -
                                  ------------------------------------------------
Total revenue                     $293,403   $64,093       $(33,058)      $324,438
                                  ------------------------------------------------
                                  ------------------------------------------------
Operating income                  $ 27,616   $ 4,921       $   (172)      $ 32,365
                                  ------------------------------------------------
                                  ------------------------------------------------
Identifiable assets at year end   $299,686   $26,180       $(24,213)      $301,653
                                  ------------------------------------------------
                                  ------------------------------------------------


YEAR ENDED MARCH 31, 1996
Sales to unaffiliated customers   $286,842   $52,057       $      -       $338,899
Sales to foreign affiliates         21,409     4,316        (25,725)             -
                                  ------------------------------------------------
Total revenue                     $308,251   $56,373       $(25,725)      $338,899
                                  ------------------------------------------------
                                  ------------------------------------------------
Operating income                  $ 43,607   $ 2,560       $  1,241       $ 47,408
                                  ------------------------------------------------
                                  ------------------------------------------------
Identifiable assets at year end   $283,453   $27,801       $(29,297)      $281,957
                                  ------------------------------------------------
                                  ------------------------------------------------


YEAR ENDED MARCH 31, 1995
Sales to unaffiliated customers   $236,535   $47,501       $      -       $284,036
Sales to foreign affiliates         24,409     3,624        (28,033)             -
                                  ------------------------------------------------
Total revenue                     $260,944   $51,125       $(28,033)      $284,036
                                  ------------------------------------------------
                                  ------------------------------------------------
Operating income                  $ 23,601   $ 2,938       $   (569)      $ 25,970
                                  ------------------------------------------------
                                  ------------------------------------------------
Identifiable assets at year end   $235,910   $32,146       $(36,010)      $232,046
                                  ------------------------------------------------
                                  ------------------------------------------------
</TABLE>

        Sales to foreign affiliates represent products that are transferred 
        on a basis intended to approximate arms-length prices as negotiated 
        by unrelated entities. Domestic sales to unaffiliated customers, 
        primarily to customers in the Asia-Pacific/Latin American region, 
        include $54.3 million, $39.9 million and $32.3 million of export 
        sales in fiscal years 1997, 1996 and 1995, respectively. 

note     ACCRUED LIABILITIES
----
  5

Accrued liabilities at March 31 were as follows:

(DOLLARS IN THOUSANDS)                                    1997             1996
-------------------------------------------------------------------------------
Accrued compensation                                   $16,211           $18,585
Unearned income                                          6,464             6,082
Other                                                   16,499            17,775
                                                       -------------------------
                                                       $39,174           $42,442
                                                       -------------------------
                                                       -------------------------

note     FINANCING ARRANGEMENTS
----
  6

        The Company maintains an unsecured $10.0 million line of credit. 
        Borrowings under this committed facility are available through May 
        1998 and bear interest at the bank's base rate (which approximates 
        prime). The terms of the agreement require that the Company 
        maintain certain financial covenants including a minimum of $25.0 
        million in cash and short-term highly liquid investments, net of 
        any bank borrowings, no quarterly 

                                       30

<PAGE>


        operating or net losses greater than 10% of tangible net worth and 
        no operating or net losses in any two consecutive quarters of the 
        fiscal year. The Company was in compliance with these covenants at 
        March 31, 1997. There were no outstanding borrowings under the line 
        of credit agreement at March 31, 1997.
        
note    LEASE COMMITMENTS
----
  7

        The Company leases its facilities under operating leases. The 
        minimum future lease commitments under these leases as of March 31, 
        1997 were as follows:

(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------
1998                                                                   $ 7,287
1999                                                                     8,917
2000                                                                     7,021
2001                                                                     7,099
2002                                                                     6,207
After 2002                                                              43,614
                                                                       -------
                                                                       $80,145
                                                                       -------
                                                                       -------

        Rental expense under operating leases was $7.7 million, $7.2 
        million and $6.4 million for fiscal years 1997, 1996 and 1995, 
        respectively. In April 1997, the Company entered into a 12-year 
        operating lease agreement for a new headquarters facility. The 
        existing headquarters' lease expires in the fall of 1998, and the 
        Company plans to move to the new facility in Fremont, California, 
        when the buildings are completed in mid-calendar 1998. Lease 
        commitments under both agreements have been included in the above 
        amounts.

note    CONVERTIBLE SUBORDINATED DEBENTURES 
----
  8

        In May 1989, the Company issued $75.0 million of 7-1/4% convertible 
        subordinated debentures due May 15, 2014, in an underwritten public 
        offering, with net proceeds of $72.8 million. Each debenture is 
        convertible at the option of the holder into Common Stock at $31.50 
        per share and is redeemable at the option of the Company at prices 
        that decline from 101.45% of face value on May 15, 1997, to 100% of 
        face value on May 15, 1999. 

        In September 1990, the Company repurchased debentures in the face 
        amount of $6.4 million. In the third quarter of fiscal 1996, the 
        Company completed a partial call of its outstanding debentures, 
        reducing debenture principal by an additional $35.1 million, of 
        which $9.8 million was redeemed and an additional $25.3 million was 
        converted into shares of Common Stock at a conversion price of 
        $31.50 per share.

        In fiscal 1997, the Company repurchased debentures in the face 
        amount of $7.7 million at a cost of $6.4 million, plus accrued 
        interest. Accordingly, the Company recorded a $.7 million gain, net 
        of taxes ($.03 per share on a fully diluted basis), as an 
        extraordinary credit in the Consolidated Statement of Income.

note    CAPITAL STOCK
----
  9

        STOCKHOLDERS' RIGHTS PLAN  The Company's Board of Directors has 
        approved a plan to protect stockholders' rights in the event of a 
        proposed takeover of the Company. Under the plan, as amended in 
        June 1990, a preferred share purchase right ("Right") is attached 
        to each share of Common Stock. The Rights are exercisable only 
        after a person or group acquires beneficial ownership of 15% or 
        more of the Company's Common Stock 

                                       31

<PAGE>

                                       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        or commences a tender or exchange offer that would result in 20% or 
        more of Common Stock ownership. Each Right initially entitles 
        stockholders to buy one one-hundredth of a share of a new series of 
        participating Preferred Stock at an exercise price of $120. If the 
        Company is acquired in a merger or other transaction with a person 
        or group, or sells 50% or more of its assets or earning power to 
        such a person or group, each Right not owned by such acquiring 
        person will entitle its holder to obtain on exercise of the Right a 
        number of the acquiring company's common shares having a market 
        value at the time of twice the Right's then-current exercise price. 
        If a person or group acquires 15% or more of the Company's 
        outstanding Common Stock, each Right will entitle its holder to 
        obtain on exercise of the Right a number of shares of Common Stock 
        (or equivalent) having a market value of twice the Right's 
        then-current exercise price. After a person or group has acquired 
        15% of the outstanding shares of Common Stock but before their 
        acquisition of 50% or more of the Common Stock, the Board of 
        Directors may exchange one share of Common Stock or equivalent 
        fractions of Preferred Stock for each Right. The Company can redeem 
        the Rights at $.01 per Right at any time until the tenth day 
        following the acquisition by a person or group of 15% of the 
        Company's Common Stock. The Rights are also redeemable thereafter 
        in certain circumstances. The Rights expire on August 24, 1999, 
        unless earlier redeemed or exchanged.

        PREFERRED STOCK  The Company has authorized 5,000,000 shares of 
        $.01 par value Preferred Stock. This stock, if issued, will carry 
        liquidation preferences and other rights, as determined by the 
        Board of Directors. As of March 31, 1997, no preferred shares were 
        outstanding.

        RESERVED STOCK  As of March 31, 1997, the Company had reserved 
        shares of its Common Stock for the following purposes:

                                                                       RESERVED
-------------------------------------------------------------------------------
Stock option plans:
  Outstanding (at $5.25 to $36.63 per share)                          3,577,247
  Available for grant                                                   778,296
Convertible subordinated debentures                                     819,714
Employee Stock Purchase Plan                                            216,815

        EMPLOYEE STOCK PURCHASE PLAN  Under the Employee Stock Purchase 
        Plan, the Company's employees, subject to certain restrictions, may 
        purchase shares of Common Stock at a price equal to at least 85% of 
        the lower of the fair market value of the Common Stock at the 
        beginning of the offering period or the end of each quarter. During 
        fiscal 1997, 1996 and 1995, 224,000, 142,000 and 229,000 shares 
        were issued under this Plan, at weighted average prices of $13.43, 
        $21.67 and $9.41 per share, respectively.
        
        RESTRICTED STOCK AWARD PLAN  Under the Restricted Stock Award Plan, 
        the Company may issue up to 750,000 shares of Common Stock to key 
        employees at $.01 per share. Shares awarded under the Plan carry 
        certain restrictions on transferability, which lapse over the 
        vesting period (generally two to four years). As of March 31, 1997, 
        239,500 shares at $.01 per share have been awarded and issued under 
        the Plan. As of March 31, 1997, the Company had the right to 
        repurchase 48,750 shares from certain employees at the original 
        purchase price. Such right expires ratably over the respective 
        vesting periods. Related compensation expense totalled $379 
        thousand, $368 thousand and $10 thousand for the years ended March 
        31, 1997, 1996 and 1995, respectively.
        
        STOCK OPTION PLANS  Under the Company's stock option plans, options 
        generally become exercisable ratably over a four-year period and 
        expire after seven to ten years. Options may be granted to 
        officers, key employees, directors and independent contractors to 
        purchase Common Stock at a price not less than 100% of fair market 
        value at the date of grant.

                                       32

<PAGE>


        Activity in the Company's option plans, excluding restricted stock,   
        is summarized below:

                                                        WEIGHTED
                                                         AVERAGE        NUMBER
                                        SHARES    EXERCISE PRICE   EXERCISABLE
------------------------------------------------------------------------------
Options outstanding at March 31, 1994   4,174,735         $ 8.33     2,091,202
                                       ---------------------------------------
  Granted                                 654,862          11.91              
  Exercised                            (1,352,107)          7.75              
  Cancelled                              (465,028)          8.91              
                                       ---------------------------------------
Options outstanding at March 31, 1995   3,012,462           9.25     1,628,899
                                       ---------------------------------------
  Granted                                 996,066          26.19              
  Exercised                            (1,114,819)          8.63              
  Cancelled                              (259,021)         14.57              
                                       ---------------------------------------
Options outstanding at March 31, 1996   2,634,688          15.39     1,080,002
                                       ---------------------------------------
  Granted                               3,514,470          18.15              
  Exercised                              (183,189)          8.88              
  Cancelled                            (2,388,722)         25.30              
                                       ---------------------------------------
Options outstanding at March 31, 1997   3,577,247         $12.00     1,149,338
                                       ---------------------------------------
                                       ---------------------------------------

        The following table summarizes information concerning options 
        outstanding and exercisable as of March 31, 1997:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                             -------------------------------------------------------------------------------
                                                    WEIGHTED                                                
                                                     AVERAGE         WEIGHTED                       WEIGHTED
                                NUMBER             REMAINING          AVERAGE        NUMBER          AVERAGE
RANGE OF EXERCISE PRICES   OUTSTANDING      CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
------------------------------------------------------------------------------------------------------------
<S>                          <C>                        <C>            <C>        <C>                 <C>
$ 5.25 - $ 7.88                719,156                  6.06           $ 7.36       595,111           $ 7.28
$ 8.13 - $12.25                550,273                  5.90           $ 9.87       454,401           $ 9.62
$12.38 - $12.38              1,627,095                  9.17           $12.38           350           $12.38
$12.75 - $36.63                680,723                  9.13           $17.60        99,476           $21.90
                             -------------------------------------------------------------------------------
$ 5.25 - $36.63              3,577,247                  8.03           $12.00     1,149,338           $ 9.46
                             -------------------------------------------------------------------------------
                             -------------------------------------------------------------------------------

</TABLE>


        During the second quarter of fiscal 1997, the Company approved the 
        cancellation and regrant of outstanding options under the Company's 
        stock option plans. Under the program, holders of outstanding 
        options with exercise prices in excess of $12.38 per share were 
        given the choice of retaining these options or of obtaining in 
        substitution new options for the same number of shares. The new 
        options are exercisable at a price of $12.38 per share, the fair 
        market value of the Common Stock on the regrant date. The new 
        options have a vesting schedule identical to the cancelled options, 
        but beginning anew on the date of regrant.
        
        STOCK-BASED COMPENSATION  As discussed in Note 1, the Company 
        continues to account for its stock-based compensation using the 
        intrinsic value method in accordance with APB 25 and, accordingly, 
        does not recognize compensation expense for employee stock plans as 
        they are granted at fair market value. However, generally accepted 
        accounting principles require disclosure of pro forma net income 
        and earnings per share had the Company adopted the fair value 
        method as prescribed by SFAS 123. Under SFAS 123, the fair value of 
        stock-based awards is calculated through the use of option pricing 
        models, even though such models were developed to estimate the fair 
        value of freely tradable, fully transferable options without 
        vesting restrictions, which significantly differ from the Company's 
        stock-based awards. These models also require subjective 
        assumptions, including future stock price volatility and expected 
        time to exercise, which greatly affect the calculated values. As 
        the Company's employee stock-based compensation plans have 
        characteristics significantly different from those of traded 
        options, and because changes in the subjective input assumptions 
        can materially affect the fair value estimate, the Company believes 
        that the existing option valuation models do not necessarily 
        provide a reliable single measure of the fair value of awards from 
        those plans. 
        
        If the computed fair values of the fiscal 1997 and 1996 awards had 
        been amortized to expense, pro forma net income and earnings per 
        share would have been $16.9 million ($.78 per share fully diluted) 
        in fiscal 1997 and $26.7 million ($1.28 per share) in fiscal 1996. 
        The impact of outstanding non-vested stock options granted prior to 
        fiscal 1996 has been excluded from the pro forma calculations; as 
        such, the fiscal 1997 

                                       33

<PAGE>

                                       
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        and 1996 pro forma adjustments are not representative of such 
        future adjustments, which will include expense for more than two 
        years of awards.
        
        The fair value of the options was estimated at the date of grant 
        using the Black-Scholes option pricing model with the following 
        weighted average assumptions for fiscal 1997 and 1996, 
        respectively: risk-free rates of 6.3% and 6.1%; a stock price 
        volatility factor of 52%; an expected option life of six months 
        following vesting; and no dividends during the expected term. The 
        Company's calculations are based on a multiple option valuation 
        approach and recognition of forfeitures as they occur. The weighted 
        average fair value of options granted during fiscal 1997 and 1996 
        was approximately $6.49 and $11.11, respectively. The fair value of 
        the employee purchase rights under the Employee Stock Purchase Plan 
        was estimated using the same model, but with the following weighted 
        average assumptions for both fiscal 1997 and 1996: risk-free rate 
        of 5.5%; stock price volatility factor of 48%; and expected option 
        life of six months. The weighted average fair value of purchase 
        rights granted in fiscal 1997 and 1996 was approximately $6.16 and 
        $8.73, respectively.
        
note    INCOME TAXES
----
  10

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

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

(DOLLARS IN THOUSANDS)                             1997     1996     1995
-------------------------------------------------------------------------
Income before income taxes:
  Domestic                                      $31,360  $46,674  $20,563
  Foreign                                         4,457    1,557    2,747
                                                -------------------------
                                                $35,817  $48,231  $23,310
                                                -------------------------
                                                -------------------------
Provision (benefit) for income taxes:
  Current:
    Federal                                     $ 5,218  $16,595  $ 6,140
    State                                         1,238    2,216        -
    Foreign                                       1,647        -        -
                                                -------------------------
                                                  8,103   18,811    6,140
                                                -------------------------
  Deferred:
    Federal                                       4,070   (1,643)  (8,227)
    State                                           342     (287)  (1,673)
    Foreign                                           -        -        -
                                                -------------------------
                                                  4,412   (1,930)  (9,900)
                                                -------------------------
                                                $12,515  $16,881 $ (3,760)
                                                -------------------------
                                                -------------------------

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

(DOLLARS IN THOUSANDS)                             1997     1996      1995
--------------------------------------------------------------------------
Statutory federal tax provision                 $12,536  $16,881   $ 8,159
State taxes net of federal income tax benefit     1,397    1,929     1,399
Change in valuation allowance                      (115)  (3,504)  (14,341)
Foreign sales corporation benefit                (1,440)       -         -
Other                                               137    1,575     1,023
                                                --------------------------
Provision (benefit) for income taxes            $12,515   $16,881 $ (3,760)
                                                --------------------------
                                                --------------------------

                                       34

<PAGE>


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

(DOLLARS IN THOUSANDS)                                      1997           1996 
------------------------------------------------------------------------------- 
Reserves not currently deductible for tax purposes       $ 7,770        $ 7,866 
Depreciation                                                (280)           942 
Loss carryforwards                                         1,044          1,159 
Credit carryforwards                                       3,500          6,431 
                                                         -----------------------
Gross deferred tax assets                                 12,034         16,398 
Gross deferred tax liabilities --                                               
  Capitalized software production costs                   (3,572)        (3,409)
Valuation allowance                                       (1,044)        (1,159)
                                                         -----------------------
Net deferred tax assets                                  $ 7,418        $11,830 
                                                         -----------------------
                                                         -----------------------

        The valuation allowance decreased $.1 million in fiscal 1997 due to 
        the realization of the benefit of certain tax loss carryforwards. A 
        valuation allowance of $1.0 million remains at March 31, 1997, and 
        is attributable to foreign loss carryforwards.
        
        As of March 31, 1997, the Company has available alternative minimum 
        tax credit carryforwards of $2.0 million available indefinitely and 
        state tax credit carryforwards of $1.5 million. Foreign tax loss 
        carryforwards of $2.8 million are available for use in reducing 
        future taxable income in certain foreign jurisdictions.

note    EMPLOYEE BENEFIT PLAN
----
  11

        The Company has established a 401(k) tax-deferred savings plan, 
        whereby eligible employees can contribute a percentage of their 
        eligible compensation (presently from 1% to 17% to a maximum of 
        $9,500 per year). Company contributions are discretionary and were 
        $860 thousand, $1.0 million and $846 thousand for fiscal 1997, 1996 
        and 1995, respectively.

note    FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
----
  12

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

<TABLE>
<CAPTION>
                                              1997                     1996
                                      -----------------------------------------------
                                      CARRYING     ESTIMATED   CARRYING     ESTIMATED
(DOLLARS IN THOUSANDS)                  AMOUNT    FAIR VALUE     AMOUNT    FAIR VALUE
-------------------------------------------------------------------------------------
<S>                                    <C>           <C>        <C>           <C>    
Assets:                                                                              
  Cash and cash equivalents            $39,141       $39,141    $52,319       $52,319
  Temporary cash investments           $99,581       $99,581    $59,892       $59,892
                                                                                     
Liabilities:                                                                         
  Foreign exchange contracts           $ 2,882       $ 2,898    $ 4,969       $ 4,924
  Convertible subordinated debentures  $25,821       $22,464    $33,526       $36,669

</TABLE>


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

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

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

                                       35

<PAGE>

                                       
                        INDEPENDENT AUDITORS' REPORT

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES, 
INC.

We have audited the accompanying consolidated balance sheets of Network 
Equipment Technologies, Inc. and subsidiaries as of March 31, 1997 and 1996, 
and the related consolidated statements of income, stockholders  equity, and 
cash flows for each of the three years in the period ended March 31, 1997. 
These financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these financial 
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all 
material respects, the financial position of Network Equipment Technologies, 
Inc. and subsidiaries at March 31, 1997 and 1996, and the results of their 
operations and their cash flows for each of the three years in the period 
ended March 31, 1997 in conformity with generally accepted accounting 
principles.



/s/ DELOITTE & TOUCHE LLP
-------------------------
    DELOITTE & TOUCHE LLP


San Jose, California
April 16, 1997

                                       36

<PAGE>

                                       
                   COMMON STOCK DIVIDENDS AND PRICE RANGE

DIVIDENDS

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

MARKET PRICE

The Common Stock is traded on the New York Stock Exchange under the symbol 
NWK. The following table sets forth, for the periods indicated, the range of 
high and low sale prices.

FISCAL 1997                                                HIGH            LOW 
-------------------------------------------------------------------------------
First quarter                                            $31.63          $19.38
Second quarter                                            21.75           11.13
Third quarter                                             16.38           13.00
Fourth quarter                                            20.88           13.13

FISCAL 1996                                                HIGH            LOW 
-------------------------------------------------------------------------------
First quarter                                            $25.25          $19.75
Second quarter                                            39.75           22.38
Third quarter                                             42.00           27.75
Fourth quarter                                            36.00           21.00

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


                                              37
<PAGE>


                      CORPORATE  DIRECTORY & INFORMATION
<TABLE>
<CAPTION>
 
<S>                                             <C>
CORPORATE DIRECTORY                             CORPORATE INFORMATION

CORPORATE OFFICERS                              ANNUAL MEETING                                   
                                                The annual meeting of shareholders will be held  
Joseph J. Francesconi                           at 10:00 a.m. on August 12, 1997, at the         
PRESIDENT AND CHIEF EXECUTIVE OFFICER           Company's headquarters in Redwood City,          
                                                California.                                      
Roger A. Barney                                                                                  
VICE PRESIDENT,                                 INVESTOR RELATIONS                               
HUMAN RESOURCES AND CORPORATE SERVICES          N.E.T. welcomes inquiries from its shareholders  
                                                and other interested investors. To receive the   
James B. De Golia                               Company's Annual Report, Form 10-K, quarterly    
VICE PRESIDENT, GENERAL COUNSEL                 financial results, and other corporate           
AND ASSISTANT SECRETARY                         information, please dial our hotline at          
                                                1-888-828-8080, or write to Investor Relations   
Samuel H. Ezekiel                               at N.E.T., 800 Saginaw Drive, Redwood City, CA   
SENIOR VICE PRESIDENT, MARKETING                94063, or visit our World Wide Web site.         
                                                                                 
Craig M. Gentner                                N.E.T. ON THE INTERNET                           
SENIOR VICE PRESIDENT, CHIEF FINANCIAL          N.E.T.'s home page on the World Wide Web         
OFFICER AND CORPORATE SECRETARY                 contains background on the Company and its       
                                                products, financials, and other useful           
David P. Owen                                   information. Our Web site is located at          
VICE PRESIDENT,                                 http://www.net.com                               
STRATEGY AND TECHNOLOGY                                                                                                 
                                                TRANSFER AGENT                                   
Raymond E. Peverell                             First National Bank of Boston                    
SENIOR VICE PRESIDENT, SALES AND SUPPORT        Boston, Massachusetts                            
                                                                            
G. Michael Schumacher                           INDEPENDENT AUDITORS                             
SENIOR VICE PRESIDENT,                          Deloitte & Touche LLP                            
PRODUCT OPERATIONS                              San Jose, California                             
                            
Charles S. Shiverick                                 
VICE PRESIDENT,          
INFORMATION SERVICES AND REENGINEERING                                                
                                       
DIRECTORS                                                
                                   
Dixon R. Doll                       
MANAGING GENERAL PARTNER,                         
DOLL CAPITAL MANAGEMENT                                                
                                 
James K. Dutton       
DIRECTOR, CAERE CORPORATION AND ECCS,INC.                                                
                                                IDNX and the N.E.T. logo are registered         
Joseph J. Francesconi                           trademarks, and CellXpress, FrameXpress,        
PRESIDENT AND CHIEF EXECUTIVE OFFICER, N.E.T.   N.E.T., PanaVue, PrimeVoice, Promina, and STM   
                                                are trademarks of Network Equipment             
Walter J. Gill                                  Technologies, Inc.                              
VICE PRESIDENT AND CHIEF TECHNOLOGY                                                                       
OFFICER (RETIRED), N.E.T.                       -C-1997 Network Equipment Technologies, Inc.   
                                                All rights reserved. Printed on recycled paper. 
Hans A. Wolf                                    Printed in U.S.A.                               
CHAIRMAN OF THE BOARD, N.E.T.                                                           
VICE CHAIRMAN OF THE BOARD (RETIRED),           LIT122-1997-20K                                 
SYNTEX CORPORATION                                              
</TABLE>


                                              38