<PAGE>   1

EX-13             ANNUAL REPORT


STOCK PRICE HISTORY                                     (unaudited)

The following table sets forth the high and low sales prices of the Company's
Common Stock, which trades under the symbol "OPEN", as Reported on the NASDAQ
Stock Market from January 1, 1997 to December 31, 1998. As of December 31, 1998,
the Company had approximately 507 stockholders of record. The Company has paid
no dividends on its Common Stock and anticipates that it will continue to
reinvest earnings to finance future growth.

<TABLE>
<CAPTION>
For year ended December 31, 1998                                                        High              Low
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>
First Quarter                                                                           1 3/8              1
Second Quarter                                                                         1 21/32          1 1/32
Third Quarter                                                                          1 7/16              3/4
Fourth Quarter                                                                         1 29/32           11/16
</TABLE>


<TABLE>
<CAPTION>
For year ended December 31, 1997                                                        High              Low
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>
First Quarter                                                                          3 11/16          1 5/16
Second Quarter                                                                         2 15/16          1 7/16
Third Quarter                                                                           2 1/2           1 9/16
Fourth Quarter                                                                          3 1/2           1 1/32
</TABLE>



<PAGE>   2

EX-13 (Cont'd)    ANNUAL REPORT


SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
---------------------------------------------------------------------------------------------------------
                                                                Years ended December 31,
(in thousands, except per share data)          1998         1997         1996         1995        1994
---------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>         <C>     
Net sales                                    $ 14,326     $ 26,944     $ 45,296     $ 75,323    $ 93,912
Cost of sales                                   8,596       15,340       25,670       36,664      48,148
---------------------------------------------------------------------------------------------------------
Gross profit                                    5,730       11,604       19,626       38,659      45,764
Operating expenses:
   Research and development                     4,610        5,987        9,353        8,802      11,162
   Selling and marketing                        8,018       10,703       15,486       17,903      23,955
   General and administrative                   5,376        3,870        4,590        4,683       7,065
   Restructure costs                               --         (241)       3,312           --       6,330
---------------------------------------------------------------------------------------------------------
       Total operating expenses                18,004       20,319       32,741       31,388      48,512
---------------------------------------------------------------------------------------------------------
(Loss) income from operations                 (12,274)      (8,715)     (13,115)       7,271      (2,748)
Interest income (expense), net                    589        1,052        1,261        1,437         455
Other income                                       --           --           --           --       1,205
---------------------------------------------------------------------------------------------------------
(Loss) income before income taxes             (11,685)      (7,663)     (11,854)       8,708      (1,088)
Provision (benefit) for income taxes              175          184          160          488         251
---------------------------------------------------------------------------------------------------------
Net (loss) income                            ($11,860)    ($ 7,847)    ($12,014)    $  8,220    ($ 1,339)
---------------------------------------------------------------------------------------------------------
Net (loss) income per share -
  basic and diluted                          ($  0.77)    ($  0.51)    ($  0.77)    $   0.52    ($  0.09)
Weighted average number of common
    shares outstanding- basic and diluted      15,312       15,301       15,630       15,692      14,808
---------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital                              $ 12,436     $ 23,620     $ 30,597     $ 39,006    $ 27,550
Total assets                                   20,278       33,403       45,571       59,029      56,911
Stockholders' equity                           15,151       26,892       35,191       47,323      37,679
</TABLE>




<PAGE>   3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto.

 RESULTS OF OPERATIONS

During 1998 the Company completed its corporate repositioning from the LAN
business environment to the Internet Access marketplace.

LAN revenues declined from 32.4% of total revenue in 1997 to 19.9% of total
revenue in 1998. LAN units shipped was reduced from 73% in 1997 to 31% in 1998
of total units shipped. Internet Access products grew from 50.2 % of
total revenue in 1997 to 52.8% of total revenue in 1998 and reached 71% of the
Company's total revenue in the fourth quarter of 1998. Internet Access product
unit shipments represented 27% of the total units shipped in 1997 and 68% in
1998 reflecting the focus of the Company in the growing Internet Access
marketplace. Overall Internet Access product unit shipments increased by 12.7%
in 1998 from 1997 while LAN unit shipments declined by 80.9%.

 NET SALES

Product sales decreased by 53.2% to $10,416,000 in 1998 from $22,248,000 in
1997. This decline reflects the completion of OpenROUTE's planned corporate
repositioning from LAN products to Internet Access products. Although overall
product revenue declined in 1998, Internet Access product unit sales increased
12.7% from 1997. Internet Access product revenue declined by 44.7% in 1998
primarily due to a 75% drop in average selling prices of certain older Corporate
Internet Access products. Average selling prices for the Company's GT Internet
Access products, although declining 25% for the year, remained relatively stable
after the first quarter of 1998. LAN product revenue declined to $2,858,000 in
1998 or by 67.2% from 1997 levels. Software licensing revenue in 1998 increased
to $1,663,000 from $895,000 in 1997 primarily reflecting the revenue produced
from a single software licensing agreement with a major international
telecommunications company. The Company expects that it will continue to have
software licensing revenue in the future, however at varying and uncertain
levels since software licensing revenue is an ancillary component of the
Company's core revenue stream but strategic in its promotion of OpenROUTE
routing technology in the marketplace. Service and other sales in 1998 decreased
by 40.9% to $2,247,000 from $3,801,000 in 1997. This decrease was primarily due
to the reduction in service contracts and upgrade revenue worldwide resulting
from the Company's transition to Internet Access products which require less
support services.

Product sales decreased by 30.9% to $22,248,000 in 1997 from $32,175,000 in
1996. This anticipated decline reflects OpenROUTE's continuing product
transition from LAN products to Internet Access products. Although overall
product revenue declined in 1997, GlobeTrotter product revenue increased 76.5%
from 1996 as a result of increased unit sales. Corporate Enterprise and LAN
product revenue declined in 1997 by 43.3% from 1996 levels. Software licensing
revenue in 1997 decreased by 88.1% to $895,000 from $7,530,000 in 1996
reflecting the declining revenue produced from the IBM and Digital Equipment
software licensing agreements. The Company expects that it will continue to have
software licensing revenue in the future, however at varying and uncertain
levels since software licensing revenue is an ancillary component of the
Company's core revenue stream but strategic in its promotion of OpenROUTE
routing technology in the marketplace. Service and other sales in 1997 decreased
by 32.0% to $3,801,000 from $5,591,000 in 1996. This decrease was primarily due
to the reduction in service contracts and upgrade revenue 


<PAGE>   4

worldwide resulting from the Company's transition to Internet Access products
which require less support services.

 International sales accounted for approximately 30.9%,35.4%, and 38.3% of net
sales in 1998, 1997, and 1996, respectively.

GROSS PROFIT

Total price gross profit margin decreased in 1998 to 40.0% from 43.1% in 1997.
Gross margin on product revenue decreased to 34.4% in 1998 from 42.8% in 1997
principally due to the drop in the average selling prices of the Company's
Internet Access products and certain inventory write downs. Gross margin on
service and other revenues declined to 21.7% in 1998 from 31.1% in 1997
primarily due to a decline in service revenue. The decline in the service margin
was offset by the highly profitable software licensing margins.

Total gross profit margin decreased slightly in 1997 to 43.1% from 43.3% in
1996. Gross margin on product revenue improved significantly to 42.8% in 1997
from 35.3% in 1996 principally due to the expansion of the GT product line into
a number of higher margin models as well as to reductions in manufacturing
overhead expenses. Gross margin on service and other revenues also increased to
31.1% in 1997 from 23.0% in 1996 primarily due to improved efficiencies in the
customer service area. However, these improvements were not sufficient to offset
the substantial decline in software licensing revenue which is highly
profitable.

RESEARCH AND DEVELOPMENT

The Company considers product development expenditures to be critical to future
revenues. These activities are closely related to product enhancement and new
product development. The Company's strategy also includes joint development
partnerships to bring new technologies and products to market. All of the
Company's research and development costs to date have been expensed as incurred.

Research and development expenses were $4,610,000 or 32.2%, $5,987,000 or 22.2%,
and $9,353,000 or 20.6% of net sales in 1998, 1997 and 1996, respectively. The
decrease in expenses of $1,377,000 in 1998 from 1997 was primarily due to lower
personnel and personnel-related costs. When comparing 1997 to 1996, the decrease
in research and development expenses of $3,366,000 in 1997 from 1996 was
primarily due to lower personnel and personnel-related costs as well as a more
defined focus on the Internet Access products only.

In 1998 the Company continued to focus its efforts on enhancement of existing
products and the development of new products.

Major efforts in 1997 included the continuing development of the GlobeTrotter
series of products with the introduction of several new models during the year.

SELLING AND MARKETING

Selling and marketing expenses were $8,018,000 or 56.0%, $10,703,000 or 39.7%,
and $15,486,000 or 34.2% of net sales in 1998, 1997 and 1996, respectively. The
decrease in expenses in 1998 from 1997 of $2,685,000 was primarily the result of
lower personnel and personnel-related costs including sales commissions due to
the decline in revenues in 1998 from 1997. The Selling and marketing cost
reduction in 1998 as compared to 1997 is also attributable to the Company's
<PAGE>   5

repositioning to focus mainly on the Internet Access products which resulted in
the achievement of marketing cost efficiencies. In 1997 sales and marketing
expenses decreased by $4,783,000 when compared to 1996. This decrease was due
mainly to lower personnel and personnel-related costs.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $5,376,000, $3,870,000, and $4,590,000
in 1998, 1997 and 1996, respectively. The increase in expenses of $1,506,000 in
1998 from 1997 was primarily due to severance payments and accruals that were
made as a result of cost containment measures that were implemented during the
year. Also, additional legal expenses were incurred during 1998 that resulted
from an on-going lawsuit, initiated by OpenROUTE Networks, against two companies
relating to the transfer of OpenROUTE software licensing rights without
OpenROUTE's required consent. When comparing 1997 to 1996, the decrease in
expenses of $720,000 was largely due to lower personnel and personnel-related
costs.

RESTRUCTURING OF OPERATIONS

The Company's management continually reviews methods to reduce the Company's
expense base in response to decreased revenue streams. As a result, the Company
has implemented a series of restructurings, the most recent of which transpired
in 1996. This restructuring of operations was necessary to reestablish the
strategic direction of the Company and better align its operating expenses with
anticipated revenues.

In the fourth quarter of 1996, the Company recorded a $3,312,000 restructuring
charge in connection with its strategic redirection of the Company's business to
the Internet access marketplace. This charge included approximately $410,000 of
severance costs, approximately $785,000 to reduce the Company's occupancy
requirements, approximately $1,922,000 associated with the disposal of fixed
assets, and $195,000 of other costs. During 1996 the cash impact for
restructuring was insignificant and as of December 31, 1996 there was an accrual
of $1,661,000 relating to future spending.

During 1997, the Company incurred cash expenditures in connection with the 1996
restructuring of approximately $495,000 for severance and payroll related costs,
approximately $672,000 as a result of reducing its occupancy costs and $253,000
in other restructuring related costs. Management has determined that all of the
Company's obligations from the 1996 and prior restructurings have been settled.
Accordingly, the Company reversed its remaining restructuring provision of
$241,000 in the third quarter of 1997.

PROVISION FOR INCOME TAXES

In 1998, the Company recorded an income tax provision of $175,000 primarily due
to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1998 is mainly due
to net operating loss carryforwards whose future realization is uncertain.

In 1997, the Company recorded an income tax provision of $184,000 primarily due
to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1997 is mainly due
to net operating loss carryforwards whose future realization is uncertain.


<PAGE>   6

In 1996, the Company recorded an income tax provision of $160,000, primarily due
to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1996 is also due
primarily to net operating loss carryforwards whose future realization is
uncertain.

YEAR 2000

The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If computer programs
with date sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.

The Company has initiated a program to review the Year 2000 readiness of its
internal systems, the Company's product line, and of third party suppliers and
vendors. The program consists of: (i) inventory of products and suppliers to
determine systems which may encounter date processing problems; (ii) assessment
of the Year 2000 issues presented; (iii) remediation, if necessary, of products
owned or manufactured by the Company; (iv) testing of systems; and (v)
contingency plans. The program's implementation varies depending upon the
problems or issues encountered, and their resolution.

PRODUCTS MANUFACTURED BY THE COMPANY. The Company's main business since its
formation has consisted primarily of the manufacture and sale of: (i) Remote
Access Routers used to access the Internet; (ii) Local Area Network (LAN)
equipment used to link together computers and peripheral devices; and (iii)
Network Interface Cards (NIC), which connect computer workstations to a network.
The Company has installed its own proprietary software in all of its
manufactured Remote Access Routers and LANs, and at times has licensed this
software to third parties. The Company's installed proprietary software and the
products manufactured and sold by the Company, now and in the past, do not track
or report dates, are not date dependent, and are Year 2000 compliant. The
Company's manufactured NIC cards do not contain any date-dependent functions,
and thus also are Year 2000 compliant. Therefore, the Company does not expect
that Year 2000 processing problems will occur in products sold by the Company,
or that Year 2000 product problems would have a material effect on the Company's
business, financial condition, or the results of operations.

INTERNAL BUSINESS SOFTWARE AND SYSTEMS. The Company in 1998 conducted an
inventory of its internal business systems, to determine whether any Year 2000
processing problems existed in critical equipment or systems. As a result, and
as part of a corporate program intended to reduce cycle time and improve
efficiency, the Company purchased new business operations systems which operate
the Company's financial, administrative, business, manufacturing, and customer
service functions. The software vendor has indicated these systems are Year 2000
compliant. The Company has completed the installation of this system in January
1999 and has successfully closed the fiscal month of January and February 1999.
The Company has a one year limited warranty on these systems commencing from the
date of delivery, which would expire before January 1, 2000.

The Company also has installed a new telephone system under a long-term lease
which it understands is Year 2000 compliant. However, if testing demonstrates
unexpected Year 2000 problems in these new systems, there would be no assurance
that the Year 2000 problems would not have a material impact on the Company's
internal operations and would not materially impact the Company's business,
<PAGE>   7

financial conditions or results of operations.

The Company expended $340,000 in Year 2000 system costs in 1998. Some of these
costs have been capitalized under generally accepted accounting practices. The
Company expects to incur additional expenditures of $175,000 in 1999 related to
Year 2000 equipment purchases and leases, including consulting fees, license
agreements and lease payments.

READINESS OF THIRD PARTY SUPPLIERS AND VENDORS. The Company relies on third
party suppliers, service providers, and contractors for critical services,
including utility power and telephone, parts and supplies. In addition, the
Company sells its products to customers, including Internet service providers
and others, which are highly dependent on computers, and which could be
adversely affected by their own or their suppliers' lack of Year 2000 readiness.
The Company has conducted an inventory of its critical suppliers, service
providers, and contractors to determine the extent to which the Company's
operations could be affected by those third parties' failure to remedy their own
Year 2000 issues. This exercise was substantially completed in March 1999. Most
of the Company's critical suppliers, service providers, and contractors are also
in the high technology field, thus year 2000 compliance has received intense
attention throughout the vendors' base. OpenRoute's major contract manufacturer,
U.S. Assemblies, has recently completed implementation of the year 2000
compliant version of MAPICS for their Material Resource Planning.

Following completion of its inventory and assessment of third party readiness,
the Company will determine whether testing, verification, or contingency plan
procedures are necessary. The most reasonably likely worst case scenario if
suppliers or customers were not Year 2000 compliant would be interruption in the
Company's ability to manufacture or deliver its products through loss of power,
supply shortages, or disruption of delivery systems, or a material decrease in
the sale of products if customers lose substantial business or divert
substantial resources to uncorrected Internet Year 2000 problems. The Year 2000
readiness of outside suppliers or customers is outside the Company's control.
There can be no assurance that the failure of third party suppliers or the
Company's customers to effectively remedy Year 2000 defects would not have a
material adverse impact on the Company's business, results of operations, or
financial condition.

The above description contains "forward-looking" statements addressing
uncertainties and future events relating to the Company's Year 2000 issues.
These statements are based on assumptions and predictions which are difficult to
verify and may change over time. The Company expects that future events and
information, if known by the Company, may affect assessment of the Year 2000
issues potentially affecting the Company.


NEWLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liability or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
<PAGE>   8

Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.


 LIQUIDITY AND CAPITAL RESOURCES

During 1998, the Company consumed $12,040,000 of cash from operating activities.
This was due primarily to the net operating loss of $11,860,000, an increase in
inventory of $2,836,000, and a decrease in accounts payable and accrued expenses
of $1,384,000. This was offset by depreciation of $1,191,000 and a decrease in
accounts receivable of $2,323,000. Working capital decreased to $12,436,000 in
1998 from $23,620,000 in 1997.

Investing activities during 1998 generated net proceeds of $8,628,000
principally from the sales of marketable securities.

The Company's management believes that if it achieves its twelve month operating
plan, then current levels of cash, cash equivalent, and marketable securities
will satisfy its expected working capital and capital expenditure requirements
through the next twelve months. If the operating plan is not achieved, it is
likely that it will be necessary to secure alternative forms of financing and
there is no assurance that the financing would be available when needed or, on
terms favorable to the Company. Accordingly, the Company's 1998 Report of
Independent Certified Public Accountants includes a going concern explanatory
paragraph. The Company is in the process of obtaining additional working capital
financing to fund expected future growth.


 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

The 1998 Annual Report, including the President's Letter and the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on management's current expectations and
involve a number of risks and uncertainties. The Company's future results remain
difficult to predict and may be affected by a number of factors including:
business conditions within the networking industry; timing of orders from and
shipments to major customers; timing of new products introductions; acceptance
of products in the marketplace; increased competition; changes in manufacturing
costs; changes in the mix of product sales and changes in world economic
conditions. Other risk factors are listed from time to time in the required
documents including the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission (SEC).


<PAGE>   9



                                                        OPENROUTE NETWORKS, INC.

                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
December 31,                                                                        1998          1997
--------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
<S>                                                                                <C>          <C>      
ASSETS
CURRENT:
   Cash and cash equivalents                                                       $  2,024     $  5,317
   Marketable securities (Note 3)                                                     3,128       12,443
   Accounts receivable less reserve for doubtful accounts of $1,424,000
   and $927,000 at December 31, 1998 and 1997, respectively                           3,356        6,224
   Inventories (Note 4)                                                               8,546        5,710
   Deposits and other assets                                                            509          437
--------------------------------------------------------------------------------------------------------
     Total current assets                                                            17,563       30,131
PROPERTY AND EQUIPMENT, NET (Note 5)                                                  2,715        3,272
--------------------------------------------------------------------------------------------------------
     Total assets                                                                  $ 20,278     $ 33,403
--------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                                $  1,449     $  2,292
   Accrued compensation                                                                 353          765
   Accrued expenses                                                                   2,743        2,779
   Accrued warranty                                                                     582          675
--------------------------------------------------------------------------------------------------------
     Total current liabilities                                                        5,127        6,511
--------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6,7 AND 11)
STOCKHOLDERS' EQUITY: (NOTE 7)
   Preferred stock, par value $.01 per share, authorized 7,500,000 shares,
    none issued                                                                          --           --
   Common stock, par value $.01 per share, authorized 30,000,000 shares, issued
     15,740,305 and 15,669,524 shares at
     December 31, 1998 and 1997, respectively                                           157          157
   Capital in excess of par value                                                    49,418       49,347
   Accumulated deficit                                                              (33,526)     (21,666)
   Accumulated other comprehensive income                                               112          110
   Less treasury stock, at cost, 390,769 and 407,435 shares
     at December 31, 1998 and 1997, respectively                                     (1,010)      (1,056)
--------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                      15,151       26,892
--------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                                    $ 20,278     $ 33,403
--------------------------------------------------------------------------------------------------------
</TABLE>

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


<PAGE>   10




                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                        (NOTE 8)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Years ended December 31,                                          1998         1997        1996
-------------------------------------------------------------------------------------------------
                                                              (In thousands, except per share data) 
<S>                                                            <C>          <C>          <C>     
SALES:
   Product                                                     $ 10,416     $ 22,248     $ 32,175
   Service and other                                              2,247        3,801        5,591
   Software licensing                                             1,663          895        7,530
-------------------------------------------------------------------------------------------------

     Net sales                                                   14,326       26,944       45,296
-------------------------------------------------------------------------------------------------

COST OF SALES:
   Product                                                        6,836       12,722       20,825
   Service and other                                              1,760        2,618        4,307
   Software licensing                                                --           --          538
-------------------------------------------------------------------------------------------------

     Cost of sales                                                8,596       15,340       25,670
-------------------------------------------------------------------------------------------------

GROSS PROFIT                                                      5,730       11,604       19,626
-------------------------------------------------------------------------------------------------

OPERATING EXPENSES:
   Research and development                                       4,610        5,987        9,353
   Selling and marketing                                          8,018       10,703       15,486
   General and administrative                                     5,376        3,870        4,590
   Restructure costs (Note 9)                                        --         (241)       3,312
-------------------------------------------------------------------------------------------------

     Total operating expenses                                    18,004       20,319       32,741
-------------------------------------------------------------------------------------------------

LOSS FROM OPERATIONS                                            (12,274)      (8,715)     (13,115)

INTEREST INCOME, net of interest expense of $10,000 in 1996         589        1,052        1,261
-------------------------------------------------------------------------------------------------

LOSS BEFORE PROVISION FOR INCOME TAXES                          (11,685)      (7,663)     (11,854)

PROVISION FOR INCOME TAXES (NOTE 10)                                175          184          160
-------------------------------------------------------------------------------------------------

NET LOSS                                                       $(11,860)    $ (7,847)    $(12,014)
-------------------------------------------------------------------------------------------------

NET LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED         $   (.77)    $   (.51)    $   (.77)
-------------------------------------------------------------------------------------------------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING - BASIC AND DILUTED                                15,312       15,301       15,630
-------------------------------------------------------------------------------------------------
</TABLE>

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



<PAGE>   11



                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                           Capital in                       Other           
                                                      Common Stock          Excess of      Accumulated   Comprehensive     
                                                  Shares       Amount       Par Value        Deficit        Income         
------------------------------------------------------------------------------------------------------------------------
                                                                         (In thousands)
<S>                                               <C>          <C>         <C>            <C>                <C>                
BALANCE, December 31, 1995                        15,589         $ 156       $49,141         $(1,805)        $118       
   Issuance of common stock                           48             -           151               -            -       
   Repurchase of stock as treasury stock               -             -             -               -            -       
   Comprehensive income (loss):
     Foreign currency translation                      -             -             -               -           59       
     Net loss                                          -             -             -         (12,014)           -       
------------------------------------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -             -               -            -       
------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996                        15,637           156        49,292         (13,819)         177       
   Issuance of common stock                           33             1            55               -            -       
   Repurchase of stock as treasury stock               -             -             -               -            -       
   Comprehensive loss:
     Foreign currency translation                      -             -             -               -          (67)      
     Net loss                                          -             -             -          (7,847)           -       
------------------------------------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -             -               -            -       
------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997                        15,670           157        49,347         (21,666)         110       
   Issuance of common stock                           70             -            71               -            -       
   Issuance of treasury stock                          -             -             -               -            -       
   Comprehensive income (loss):
     Foreign currency translation                      -             -             -               -            2       
     Net loss                                          -             -             -         (11,860)           -       
------------------------------------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -             -               -            -       
------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998                        15,740         $ 157       $49,418         $(33,526)       $112       
------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                         
                                                                                Total
                                                     Treasury Stock          Stockholders'
                                                  Shares        Amount          Equity
-------------------------------------------------------------------------------------------
                                                               (In thousands)
<S>                                               <C>           <C>          <C>    
BALANCE, December 31, 1995                            81        $ (287)           $47,323
   Issuance of common stock                            -             -                151
   Repurchase of stock as treasury stock             130          (328)              (328)
   Comprehensive income (loss):
     Foreign currency translation                      -             -                 59
     Net loss                                          -             -            (12,014)
-------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -            (11,955)
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1996                           211          (615)            35,191
   Issuance of common stock                            -             -                 56
   Repurchase of stock as treasury stock             196          (441)              (441)
   Comprehensive loss:
     Foreign currency translation                      -             -                (67)
     Net loss                                          -             -             (7,847)
-------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -             (7,914)
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1997                           407         (1,056)           26,892
   Issuance of common stock                            -             -                 71
   Issuance of treasury stock                        (17)           46                 46
   Comprehensive income (loss):
     Foreign currency translation                      -             -                  2
     Net loss                                          -             -            (11,860)
-------------------------------------------------------------------------------------------
       Total comprehensive loss                        -             -            (11,858)
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1998                           390        $(1,010)          $15,151
-------------------------------------------------------------------------------------------
</TABLE>

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


<PAGE>   12

                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Years ended December 31,                                                1998                 1997                 1996
---------------------------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
<S>                                                                 <C>                  <C>                  <C>      
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
   Net loss                                                         $(11,860)            $ (7,847)            $(12,014)
   Adjustments to reconcile net loss to net cash used by
     operating activities:
     Bad debt provision                                                  545                  439                    -
     Inventory provision                                                   -                    -                2,374
     Depreciation and amortization                                     1,191                1,550                3,401
     Restructuring cost                                                    -                    -                1,922
     Loss (gain) on disposition of fixed assets                           53                  198                 (117)
     Changes in operating assets and liabilities:
       Accounts receivable                                             2,323                  962                4,513
       Inventories                                                    (2,836)               3,027               (6,686)
       Deposits and other assets                                         (72)                 768                  372
       Accounts payable
         and accrued expenses                                         (1,384)              (3,869)              (1,326)
---------------------------------------------------------------------------------------------------------------------------
         Net cash used by operating activities                       (12,040)              (4,772)              (7,561)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from the sale of fixed assets                               23                  182                  117
     Capital expenditures                                               (710)                (728)              (1,600)
     Marketable securities sales and maturities                       16,980               19,428               15,456
     Purchase of marketable securities                                (7,665)             (24,953)             (15,511)
---------------------------------------------------------------------------------------------------------------------------
         Net cash provided (used) by investing activities              8,628               (6,071)              (1,538)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of common stock                             71                   56                  151
   Proceeds from issuance of treasury stock                               46                    -                    -
   Purchase of treasury stock                                              -                 (441)                (328)
---------------------------------------------------------------------------------------------------------------------------
         Net cash provided (used) by financing activities                117                 (385)                (177)
---------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                    2                  (67)                  59
---------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                             (3,293)             (11,295)              (9,217)
CASH AND CASH EQUIVALENTS, at beginning of year                        5,317               16,612               25,829
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year                           $  2,024             $  5,317             $ 16,612
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW  INFORMATION:
   Cash paid for:
     Income taxes                                                   $     69             $    230             $    321
     Interest                                                       $      -             $      -             $     10
   Non-cash financing activities:
     Note receivable on sale of fixed assets                        $     15             $    120             $      -
</TABLE>

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


<PAGE>   13
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1.    OPERATIONS AND         OpenROUTE  Networks, Inc. (formerly Proteon, Inc.)
       MANAGEMENTS PLANS      and its subsidiaries (the "Company") develop, 
                              market, and support a wide range of networking
                              products. The Company is engaged principally in
                              one business segment in the computer networking
                              industry having two lines of business; (i)
                              Internet access and (ii) local area network
                              access. The Company is positioned to focus on the
                              Internet access market. The Company's principal
                              geographic markets include the Americas, Europe
                              and the Far East.

                              The Company's consolidated financial statements
                              have been prepared on the basis that it will
                              continue as a going concern. The Company has
                              incurred net losses of approximately $11,860,000,
                              $7,847,000 and $12,014,000 for the years ended
                              December 31, 1998, 1997 and 1996, respectively.
                              The Company's current business strategy is focused
                              on the emerging Internet access market. As such,
                              success of future operations is subject to a
                              number of risks. Principal among these risks are
                              the successful marketing of its products, rapidly
                              changing technology, reliance on significant
                              customers, intense competition from substitute
                              products and significantly larger companies, and
                              the ability to obtain financing to fund future
                              operations. The above factors raise substantial
                              doubt about the Company's ability to continue as a
                              going concern.

                              Management's plans include a continued effort to
                              gain market share and increase its Internet access
                              product revenues. The Company has also continued
                              to monitor cost containment and has a plan to
                              implement further operating expense reductions as
                              it deems necessary. Additionally, the Company
                              is pursuing working capital financing to fund
                              future operating activities. The Company's ability
                              to continue as a going concern depends on the
                              success of management's plans, including obtaining
                              additional funding or establishing strategic
                              relationships and achieving projected operating
                              results. The accompanying consolidated financial
                              statements do not include any adjustments that
                              might result from the outcome of this uncertainty.



<PAGE>   14
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF                      
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

       Principles of                The consolidated  financial  statements
       Consolidation                include the accounts of OpenROUTE Networks,
                                    Inc. and its subsidiaries. Proteon, Inc.
                                    changed its name to OpenROUTE Networks, Inc.
                                    on June 10, 1998. OpenROUTE Networks, Inc.
                                    was previously the name of a wholly-owned
                                    subsidiary of Proteon, Inc. All intercompany
                                    transactions and balances have been
                                    eliminated in consolidation.

       Use of Estimates             The preparation of the 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. In particular, the Company
                                    records reserves for estimated product
                                    returns, collectibility of accounts
                                    receivable, estimated inventory obsolescence
                                    and estimated warranty obligations. All
                                    estimates are based upon experience and
                                    actual results could differ from the
                                    estimates and assumptions used by
                                    management.

       Revenue                      The Company recognizes revenue from product 
       Recognition                  sales upon shipment of the product. Revenue 
                                    from service agreements is recognized
                                    ratably over the term of the agreement.
                                    Revenue from software licensing is
                                    recognized upon performance of milestones
                                    when collectibility is reasonably assured.

       Translation of               The Company has designated the local 
       Foreign                      currency as the functional currency for all
       Currencies                   foreign locations. Accordingly, assets and 
                                    liabilities of all foreign subsidiaries
                                    are translated at year-end rates of
                                    exchange, and income statement accounts are
                                    translated at the average rates of exchange
                                    during the year. The resulting translation
                                    adjustments are excluded from net earnings,
                                    and accumulated as a separate component of
                                    stockholders' equity.

                                    Foreign currency transaction gains and
                                    losses are included in results of operations
                                    in the periods in which they occur, and are
                                    immaterial for all periods presented.

       Comprehensive                In 1998, the Company adopted Statement of
       Income (Loss)                Financial Accounting Standards ("SFAS") No.
                                    130 "Reporting Comprehensive Income". SFAS
                                    No. 130 establishes rules for the reporting
                                    of comprehensive income (loss) and its
                                    components. Comprehensive income (loss)
                                    consists of net income (loss) and foreign
                                    currency translation adjustments and is
                                    presented in the accompanying consolidated
                                    statements of stockholders' equity. The
                                    adoption of SFAS No. 130 had no impact on
                                    total stockholders' equity. Prior year
                                    financial statements have been reclassified
                                    to conform to the SFAS No. 130 requirements.
<PAGE>   15
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

       Hedging                      In June 1998, the Financial Accounting 
       Activities                   Standards Board issued SFAS No. 133,
                                    "Accounting for Derivatives Instruments and
                                    Hedging Activities" ("SFAS No. 133"). SFAS
                                    No. 133 requires companies to recognize all
                                    derivatives contracts as either assets or
                                    liabilities in the balance sheet and to
                                    measure them at fair value. If certain
                                    conditions are met, a derivative may be
                                    specifically designated as a hedge, the
                                    objective of which is to match the timing of
                                    gain or loss recognition on the hedging
                                    derivative with the recognition of (i) the
                                    changes in the fair value of the hedged
                                    assets or liability or (ii) the earnings
                                    effect of the hedged forecasted transaction.
                                    For a derivative not designated as a hedging
                                    instrument, the gain or loss is recognized
                                    in income in the period of change. SFAS No.
                                    133 is effective for all fiscal quarters of
                                    fiscal years beginning after June 15, 1999.

                                    Historically, the Company has not entered
                                    into derivative contracts either to hedge
                                    existing risks or for speculative purposes.
                                    Accordingly, the Company does not expect
                                    adoption of the new standard to affect its
                                    financial statements.

       Cash Equivalents             The Company considers all highly liquid 
       and Marketable               instruments purchased with a maturity of 
       Securities                   three months or less to be cash 
                                    equivalents. Marketable securities consist
                                    of highly liquid investments with maturities
                                    of more than three months when purchased.
                                    Investments are stated at cost, plus accrued
                                    interest, which approximates fair market
                                    value. In addition, the Company classified
                                    all investments as available-for-sale
                                    securities. Realized gains and losses are
                                    determined on the specific identification
                                    method. The marketable securities portfolio
                                    at December 31, 1998 matures at various
                                    dates through September 8, 1999.

       Inventories                  Inventories are stated at the lower of
                                    cost or market, with cost determined under
                                    the first-in, first-out method.

<PAGE>   16
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

       Property and                 Property and equipment are stated at cost.  
       Equipment                    Depreciation and amortization of property
                                    and equipment are computed principally using
                                    the straight-line method over the estimated
                                    useful lives of the assets as follows:

<TABLE>
                                    Category                                    Years
                                    --------------------------------------------------
<S>                                                          <C>
                                    Machinery and equipment                       3-5
                                    Furniture and fixtures                          7
                                    Leasehold improvements   shorter of lease term or
                                                                estimated useful life
</TABLE>


                                    Maintenance and repairs are charged to
                                    expense as incurred. Upon retirement or
                                    sale, the cost of the disposed assets and
                                    the related accumulated depreciation are
                                    removed from the accounts and any resulting
                                    gain or loss is recorded in the consolidated
                                    statements of operations.

       Income                       Deferred tax assets and liabilities reflect 
       Taxes                        the net tax effects of temporary differences
                                    between the carrying amounts of assets and
                                    liabilities for financial reporting purposes
                                    and the amounts used for income tax
                                    purposes. A valuation allowance is provided
                                    for the net deferred tax assets if it is
                                    more likely than not that some or all of the
                                    deferred tax assets will not be realized.

       Accrued                      The Company records a liability for future 
       Warranty                     warranty costs based upon the relationship
                                    of prior years' sales to actual warranty
                                    costs which approximates expected future
                                    warranty costs.

<PAGE>   17
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

       Research and              Costs incurred in the research and  
       Development               development of software products are
                                 expensed as incurred until the technological
                                 feasibility of the product has been 
                                 established. After technological feasibility
                                 is established, any additional costs would
                                 be capitalized. The Company believes the
                                 current process for developing software is
                                 essentially completed concurrently with the
                                 establishment of technological feasibility.
                                 Accordingly, no software development costs
                                 have been capitalized to date. 
                                 

       Concentrations of         Financial instruments, which potentially
       Credit Risk               subject the Company to concentration of 
                                 credit risk, are principally cash and cash 
                                 equivalents, marketable securities, and
                                 accounts receivable. The Company places its
                                 investments in highly rated financial
                                 institutions and, by policy, limits the
                                 amount of credit exposure to any one 
                                 financial institution.               
                                                                      
                                 Concentration of credit risk with respect to
                                 accounts receivable is limited to certain 
                                 customers with whom the Company makes     
                                 substantial sales. Four customers accounted
                                 for approximately 35% of the Company's     
                                 outstanding accounts receivable at December
                                 31, 1998 and two customers accounted for   
                                 approximately 28% of the Company's         
                                 outstanding accounts receivable at December
                                 31, 1997. To reduce credit risk, the Company
                                 performs ongoing credit evaluation, account 
                                 monitoring procedures and maintains reserves
                                 for potential losses. These losses have been
                                 within management's expectations.   

<PAGE>   18
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

       Net Loss   The Company  follows SFAS No. 128  "Earnings  per Share".  
       Per Share  Under SFAS No. 128,  Basic Earnings  Per Share (EPS)  excludes
                  the effect of any  dilutive  options,  warrants or 
                  convertible securities and is computed by dividing the
                  net income (loss) available to common stockholders by the
                  weighted average number of common shares outstanding for
                  the period. Diluted EPS reflects the potential dilution
                  that could occur if securities or other contracts to
                  issue common stock were exercised. Diluted EPS is
                  computed by dividing the net income (loss) available to
                  common stockholders by the sum of the weighted average
                  number of common shares and common share equivalents
                  computed using the average market price for the period
                  under the treasury stock method.

                  The following table presents the numerator and the
                  denominator of the basic and diluted EPS computations
                  shown on the consolidated statements of operations:

<TABLE>
<CAPTION>
                  --------------------------------------------------------------------------------------
                  Years ended December 31,                        1998            1997            1996
                  --------------------------------------------------------------------------------------
                                                               (In thousands, except per share data)
<S>                                                         <C>              <C>           <C>         
                  Basic and diluted EPS computation:
                     Numerator:
                       Net loss                             $  (11,860)      $  (7,847)    $   (12,014)
                     Denominator:
                       Weighted average common
                         shares outstanding                     15,312          15,301          15,630
                  --------------------------------------------------------------------------------------
                  Basic and diluted EPS                     $     (.77)      $    (.51)    $      (.77)
                  --------------------------------------------------------------------------------------
</TABLE>

                  Outstanding stock options of 2,269,463, 1,758,605 and
                  1,272,009 as of December 31, 1998, 1997 and 1996,
                  respectively, were not included in the diluted EPS
                  computation because their effect would be antidilutive.



<PAGE>   19
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 2.    SUMMARY OF
       SIGNIFICANT
       ACCOUNTING
       POLICIES
       (Continued)

Segment Information        In 1998, the Company adopted SFAS No. 131,
                           "Disclosure about Segments of an Enterprise and
                           Related Information". SFAS No. 131 established
                           standards for disclosures regarding products and
                           services, geographic areas and major customers.
                           Information for 1997 and 1996 has been restated to
                           conform with the 1998 presentation (see Note 8).


3. MARKETABLE              Marketable securities consists of the following:
   SECURITIES 
<TABLE>
<CAPTION>
                           -------------------------------------------------------------
                           December 31,                         1998              1997
                           -------------------------------------------------------------
                                                                  (In thousands)
<S>                                                          <C>            <C>       
                           Fixed income securities           $ 3,128        $    7,074
                           Repurchase agreements                   -               263
                           Certificates of deposit                 -             1,291
                           Commercial paper                        -             2,557
                           U.S. Government securities              -             1,258
                           -------------------------------------------------------------
                                                             $ 3,128        $   12,443
                           -------------------------------------------------------------
</TABLE>

4. INVENTORIES             Inventories consist of the following:

<TABLE>
<CAPTION>

                           -------------------------------------------------------------
                           December 31,                         1998              1997
                           -------------------------------------------------------------
                                                                  (In thousands)
<S>                                                          <C>            <C>       
                           Raw materials                       $2,270         $1,043
                           Work in process                         15            373
                           Finished goods                       6,261          4,294
                           -------------------------------------------------------------
                                                               $8,546         $5,710
                           -------------------------------------------------------------
</TABLE>

<PAGE>   20
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 5.    PROPERTY AND       Property and equipment consist of the following:
       EQUIPMENT
<TABLE>
<CAPTION>
                          ------------------------------------------------------------------
                          December 31,                              1998              1997
                          ------------------------------------------------------------------
                                                                      (In thousands)
<S>                                                            <C>              <C>       
                          Machinery and equipment              $  11,791        $   11,492
                          Furniture and fixtures                     593               554
                          Leasehold improvements                     884             1,188
                          ------------------------------------------------------------------
                                                                  13,268            13,234
                          Less accumulated depreciation and
                           amortization                           10,553             9,962
                          ------------------------------------------------------------------
                          Property and equipment, net          $   2,715        $    3,272
                          ------------------------------------------------------------------
</TABLE>

 6.    COMMITMENTS AND
       CONTINGENCIES

       Letter of Credit   The Company has an outstanding letter of credit of
                          approximately $288,000 at December 31, 1998, 1997 and
                          1996. This letter of credit which matures on April
                          30, 2002, automatically renews annually on December
                          31. This letter of credit collateralized the
                          Company's obligation to a third party for a certain
                          lease transaction.



<PAGE>   21
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 6.    COMMITMENTS AND
       CONTINGENCIES
       (Continued)

       Operating Leases    The Company leases its office and  manufacturing  
                           facilities under operating leases expiring at various
                           dates through 2002. Under certain leases the Company
                           is obligated to pay taxes, repairs, and other
                           operating costs. The Company has the option to extend
                           the term of the lease of its primary office and
                           manufacturing facility for two five-year periods
                           commencing on May 1, 2002 and May 1, 2007. Rental
                           expense amounted to approximately $1,119,000,
                           $1,128,000, $1,556,000 in 1998, 1997 and 1996,
                           respectively. At December 31, 1998, future rental
                           commitments are approximately as follows:

<TABLE>
<CAPTION>
                         Years ended December 31,           Amount
                         -------------------------------------------
<S>                                                  <C>          
                         1999                        $     584,100
                         2000                              547,700
                         2001                              511,100
                         2002                              162,200
                         -------------------------------------------
                                                     $   1,805,100
                         -------------------------------------------
</TABLE>


7.     CAPITAL STOCK

       Common Stock        The Company has an Employee Stock Purchase Plan (the
                           "Purchase Plan") available to most full time
                           employees. Under this plan, 300,000 shares of common
                           stock were reserved for issuance. Eligible employees
                           may designate not more than 5% of their cash
                           compensation to be deducted each pay period for the
                           purchase of common stock under the Purchase Plan. The
                           purchase price of the shares under the plan is equal
                           to the lower of 85% of the fair market value per
                           share of the stock on the grant date (first day of
                           the exercise period) or 85% of the fair market value
                           on the exercise date (the last day of the exercise
                           period). The fair market value as of a given date is
                           determined by averaging the last sales price of the
                           stock for the ten trading days immediately proceeding
                           the given date.

<PAGE>   22
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CAPITAL STOCK
       (Continued)

       Common Stock
       (Continued)         The Company sold 66,084, 32,667 and 41,628 shares to
                           employees in 1998, 1997 and 1996, respectively, under
                           the Purchase Plan. At December 31, 1998, 186,316
                           shares remained unissued under the Purchase Plan. No
                           compensation cost has been recognized for shares
                           issued under the Purchase Plan in 1998, 1997 and 1996
                           since the amount was determined not to be material.

       Preferred Stock     In 1991, the Shareholders approved the authorization
                           of 7,500,000 shares of preferred stock. The Board of
                           Directors is authorized, subject to any limitations
                           prescribed by law, to issue from time to time such
                           shares of preferred stock in one or more series. Each
                           such series of preferred stock will have such number
                           of shares, designations, preferences, voting power,
                           qualifications, and special or private rights or
                           privileges as shall be determined by the Board of
                           Directors, which may include, among others, dividend
                           rights, voting rights, preemptive and sinking fund
                           provisions, liquidation preferences, conversion
                           rights and preemptive rights. No such shares have
                           been issued to date.

       Stock Options       The Company's stock option plans generally provide
                           for the granting to employees of incentive stock
                           options to purchase shares of common stock at the
                           fair market value as defined by the plan on the date
                           of grant and of non-qualified stock options at no
                           less than 50% of the fair market value as defined by
                           the plan on the date of the grant. To date, the
                           Company has never issued non-qualified stock options
                           at an exercise price less than the fair market value
                           on the date of the grant.

                           Generally, options become exercisable at the rate of
                           25% at the end of each of the first four
                           anniversaries of the grant. Options generally expire
                           ten years from the date of grant, or ninety days from
                           the date of termination of employment. At December
                           31, 1998, 2,545,083 shares of common stock were
                           reserved under the plans and 275,620 shares were
                           available for grant.

<PAGE>   23
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CAPITAL STOCK
       (Continued)

       Stock Options 
       (Continued)

                           In 1998 and 1996, the Compensation Committee of the
                           Board of Directors, pursuant to the authority granted
                           under the Company's 1991 Restated Stock Option Plan,
                           voted to allow employees of the Company holding
                           options with exercise prices greater than $1.90 and
                           $3.625 per share in 1998 and 1996, respectively, to
                           exchange those options for substitute options having
                           an option exercise price of $1.90 and $3.625 per
                           share in 1998 and 1996, respectively.

                           In February 1998 and in 1996, 799,575 and 707,154   
                           options, respectively, were surrendered by employees 
                           and exchanged for new options at the new option 
                           exercise price and vesting schedule. A summary of the
                           status of the Company's stock plans as of December
                           31, 1998, 1997 and 1996, and changes during the years
                           then ended is presented below:

<TABLE>
<CAPTION>
                                           1998                           1997                           1996
----------------------------------------------------------------------------------------------------------------------------
                                                 WEIGHTED-                      Weighted-                     Weighted-
                                                  AVERAGE                        Average                       Average
                                   NUMBER        EXERCISE         Number        Exercise        Number        Exercise
                                 OF OPTIONS        PRICE        of Options        Price       of Options        Price
----------------------------------------------------------------------------------------------------------------------------
<S>                              <C>             <C>            <C>             <C>           <C>             <C>   

Outstanding, at the
  beginning of year                1,758,605        $  2.70       1,272,009        $ 3.34       1,237,649        $ 5.52
    Granted                        2,412,501           1.31       1,007,805          2.02       1,245,726          4.11
    Exercised                         (4,687)          1.70               -             -          (6,712)         4.01
    Cancelled                     (1,896,956)          2.51        (521,209)         3.18      (1,204,654)         6.23
----------------------------------------------------------------------------------------------------------------------------
Outstanding, at the
  end of year                      2,269,463        $  1.38       1,758,605        $ 2.70       1,272,009        $ 3.34
----------------------------------------------------------------------------------------------------------------------------
Options exercisable
  at year end                        687,978        $  1.87         685,270        $ 3.41         522,064        $ 3.41
----------------------------------------------------------------------------------------------------------------------------
Weighted average
  fair value of options
  granted during the year          2,412,501        $  0.51       1,007,805        $ 1.34       1,245,726        $ 2.78
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   24
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CAPITAL STOCK
       (Continued)

       Stock Option
       (Continued) 

                           The following tables summarize information concerning
                           outstanding and exercisable options at December 31,
                           1998.

<TABLE>
<CAPTION>
                                                                    Options Outstanding
                           --------------------------------------------------------------------------
                                                                           Weighted-
                                                                            Average          Weighted-
                                 Range of                                  Remaining          Average
                                 Exercise             Number of           Contractual        Exercise
                                  Prices             Outstanding             Life              Price
                           --------------------------------------------------------------------------
<S>                        <C>                       <C>                   <C>               <C>    
                           $   .81-$ 1.17            1,264,926               9.5              $   .95
                           $  1.23-$ 1.68              238,700               9.2                 1.34
                           $  1.70-$ 2.10              709,526               9.3                 1.91
                           $  2.56-$ 3.63               36,311               7.8                 2.98
                           $  6.00-$ 7.50               20,000               2.4                 7.50
                           --------------------------------------------------------------------------
                                                     2,269,463               9.3              $  1.38
                           --------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                    Options Exercisable
                           --------------------------------------------------------------------------
                                                                           Weighted-
                                                                            Average          Weighted-
                                 Range of                                  Remaining          Average
                                 Exercise             Number of           Contractual        Exercise
                                  Prices             Exercisable             Life              Price
                           --------------------------------------------------------------------------
<S>                                                  <C>                   <C>               <C>    
                           $   .81-$ 1.17              137,890               9.5              $   .93
                           $  1.23-$ 1.68               25,075               8.7                 1.43
                           $  1.70-$ 2.10              494,826               9.4                 1.90
                           $  2.56-$ 3.63               10,187               7.5                 3.12
                           $  6.00-$ 7.50               20,000               2.4                 7.50
                           --------------------------------------------------------------------------
                                                       687,978               9.2              $  1.87
                           --------------------------------------------------------------------------
</TABLE>

<PAGE>   25
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CAPITAL STOCK
       (Continued)

       Stock Options   SFAS No. 123 "Accounting for Stock-Based 
       (Continued)     Compensation" requires that companies either 
                       recognize compensation expense for grants of stock,
                       stock options, and other equity instruments based on
                       fair value, or provide pro forma disclosure of net
                       income (loss) and net income (loss) per share in the
                       notes to the financial statements. The Company    
                       adopted the disclosure provisions of SFAS No. 123 and
                       has applied APB Opinion 25 and related               
                       interpretations in accounting for its plans.         
                       Accordingly, no compensation cost has been recognized
                       for its stock-based plans in 1998, 1997 and 1996.    
                                                                            
                       The Company's net loss and net loss per share for the
                       years ended December 31, 1998, 1997 and 1996 would   
                       have increased to the pro forma amounts indicated    
                       below, if compensation cost for stock-based plans    
                       were recorded based on the fair value at grant dates.

<TABLE>
<CAPTION>
                                                1998                    1997                1996
                                         ---------------------   --------------------   --------------------
                                                      LOSS                    Loss                    Loss
                                           NET        PER          Net        Per         Net         Per
                                           LOSS       SHARE        Loss       Share       Loss        Share
                                        ----------    ------     --------    ------    ----------    ------ 
<S>                                     <C>           <C>        <C>         <C>       <C>           <C>    
                        As reported     $  (11,860)   $ (.77)    $ (7,847)   $ (.51)   $  (12,014)   $ (.77)
                        Pro forma       $  (12,007)   $ (.78)    $ (8,140)   $ (.53)   $  (12,627)   $ (.81)
</TABLE>

                        The fair value of each stock option is estimated on
                        the date of grant using the Black-Scholes
                        option-pricing model with the following
                        weighted-average assumptions: an expected life of six
                        years, expected volatility of 46% in 1998, 75% in
                        1997 and 65% in 1996, and no dividends assumed. The
                        weighted average assumptions for the risk-free
                        interest rates for 1998, 1997 and 1996 were 5.52%,
                        6.11% and 6.32%, respectively.

                        The effects of applying SFAS No. 123 in the above pro
                        forma disclosure are not indicative of future
                        amounts. SFAS No. 123 does not apply to awards prior
                        to 1995, and additional awards in the future years
                        are anticipated.
<PAGE>   26
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     SEGMENT          The Company is engaged principally in one business    
       INFORMATION      segment having two lines of business; (i) Internet 
       AND SIGNIFICANT  access and (ii) local area network access. In 1998, 1997
       CUSTOMERS        and 1996, net sales to one customer accounted for 
                        approximately 12%, 11% and 14% of the Company's total
                        net sales, respectively. A second significant customer
                        accounted for approximately 10%, 8% and 14% of total net
                        sales in 1998, 1997 and 1996, respectively.
<PAGE>   27
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     SEGMENT                  The Company does not have an individual country 
       INFORMATION              that contributes to 10% or more of the total 
       AND SIGNIFICANT          operating data. The geographic distribution of
       CUSTOMERS  (Continued)   the Company's operating data is therefore
                                summarized as follows:

<TABLE>
<CAPTION>
                                                            United         Asia
                                                            States        Pacific      Europe       Total
                    ---------------------------------------------------------------------------------------
                                                                            (In thousands)
<S>                                                         <C>          <C>          <C>          <C>     
                    Year ended December 31, 1998:
                      Net sales                             $  9,894     $  2,065     $  2,367     $ 14,326
                      Loss from operations                   (10,914)        (896)        (464)     (12,274)
                       Loss before income taxes              (10,325)        (896)        (464)     (11,685)
                      Total assets                            19,698          827          203       20,728
                      Capital expenditures                       673           26           11          710
                      Depreciation and
                        amortization                           1,104           66           21        1,191
                    Year ended December 31, 1997:
                      Net sales                             $ 17,403     $  4,182     $  5,359     $ 26,944
                      Income (loss) from operations           (9,472)        (942)       1,699       (8,715)
                       Income (loss) before income taxes      (8,420)        (942)       1,699       (7,663)
                      Total assets                            31,101        1,301        1,001       33,403
                      Capital expenditures                       570          144           14          728
                      Depreciation and
                        amortization                           1,343           49          158        1,550
                    Year ended December 31, 1996:
                      Net sales                             $ 27,941     $  7,195     $ 10,160     $ 45,296
                      Income (loss) from operations          (13,958)         757           86      (13,115)
                       Income (loss before income taxes)     (12,697)         757           86      (11,854)
                      Total assets                            41,420        2,386        1,765       45,571
                      Capital expenditures                     1,387          137           76        1,600
                      Depreciation and
                        amortization                           2,853          141          407        3,401
</TABLE>

<PAGE>   28
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.     RESTRUCTURING OF 
       OPERATIONS 


                           During the fourth quarter of 1996, the Company's
                           management announced a restructuring plan for the
                           strategic redirection of the Company. The
                           restructuring principally addressed the move toward
                           the rapidly growing Internet/Intranet connectivity
                           marketplace.

                           As a result of the restructuring, the Company
                           recorded a $3,312,000 charge in the fourth quarter of
                           1996. This included a reduction in the Company's work
                           force of forty-two employees, or approximately 22%,
                           accounting for approximately $410,000 of severance
                           costs. The Company incurred a charge of approximately
                           $785,000 in connection with the substantial reduction
                           in its occupancy requirements. In addition, the
                           charge included approximately $1,922,000 for disposal
                           of fixed assets and approximately $195,000 of other
                           costs.

                           During 1997, the Company incurred cash expenditures
                           relating to the 1996 restructuring of approximately
                           $495,000 for severance and payroll related costs,
                           approximately $672,000 as a result of reducing its
                           occupancy costs and $253,000 in other restructuring
                           related costs. Management has determined that all of
                           the Company's obligations from the 1996 and prior
                           restructurings have been settled. Accordingly, the
                           Company reversed its remaining restructuring
                           provision of $241,000 against operating expenses in
                           the third quarter of 1997.

<PAGE>   29
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 10. INCOME TAXES          The provision for income taxes consists of the 
                           following:


<TABLE>
<CAPTION>
                           --------------------------------------------------------------------------------------
                           Years ended December 31,                    1998              1997              1996
                           --------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>              <C>   
                           Current:
                              Foreign                                $  175             $ 156            $  215
                              Federal                                     -                 -               (65)
                              State                                       -                28                10
                           --------------------------------------------------------------------------------------
                                                                     $  175             $ 184            $  160
                           --------------------------------------------------------------------------------------
                            A reconciliation between the Company's
                           effective tax rate and the U.S. statutory
                           rate is as follows:
                           --------------------------------------------------------------------------------------
                           Years ended December 31,                    1998            1997            1996
                           --------------------------------------------------------------------------------------
                           U.S. statutory rate                        (34.0)  %       (34.0)  %       (34.0)   %
                           Foreign tax rate differential                1.5             2.4              .1
                           Change in valuation allowance               34.0            34.0            35.2
                           ---------------------------------------------------------------------------------------
                           Effective tax rate                           1.5   %         2.4   %         1.3    %
                           ---------------------------------------------------------------------------------------
</TABLE>



<PAGE>   30
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.    INCOME TAXES      A valuation allowance of $17,841,000 and $13,210,000 
       (Continued)       at December 31, 1998 and 1997, respectively has been 
                         recorded to offset the related net deferred tax      
                         assets due to the uncertainty of realizing the       
                         benefit of these assets. The following is a summary  
                         of the significant components of the Company's       
                         deferred tax assets and liabilities:                 

<TABLE>
<CAPTION>
                          --------------------------------------------------------------------------------------
                          December 31,                                                  1998              1997
                          --------------------------------------------------------------------------------------
                                                                                           (In thousands)
<S>                                                                               <C>                <C>      
                          Deferred tax assets:
                             Bad debt reserve                                     $      580         $     360
                             Inventory reserves                                          678               533
                             Product warranty                                            270               262
                             Federal tax benefit of net operating loss
                               carryforwards                                          11,256             7,889
                             State tax benefit of net operating loss
                               carryforwards                                           2,301             1,827
                             Tax credit carryforwards                                  1,298               912
                             Alternative minimum tax credit                              699               699
                             Depreciation                                                 76               144
                             Other items                                                 683               584
                          --------------------------------------------------------------------------------------
                          Total deferred tax assets                                   17,841            13,210
                          Valuation allowance for deferred tax assets                (17,841)          (13,210)
                          --------------------------------------------------------------------------------------
                          Net deferred tax assets                                 $        -         $       -
                          --------------------------------------------------------------------------------------
</TABLE>

<PAGE>   31
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INCOME TAXES      As of December 31, 1998, the Company had net         
    (Continued)       operating loss carryforwards, subject to review by   
                      the Internal Revenue Service and state taxing        
                      authorities of approximately $33,000,000 and         
                      $48,000,000 for federal and state income tax         
                      purposes, respectively. The federal net operating    
                      losses begin to expire in 2010 and the state net     
                      operating losses began to expire in 1998. Similarly, 
                      research and development credit carryforwards of     
                      approximately $1,298,000 were available on December  
                      31, 1998, expiring at various dates through 2005.    

11. RETIREMENT        Eligible employees are permitted to contribute to the
    SAVINGS PLAN      401(k) Plan through payroll deductions within statutory
                      limitations and subject to any limitations included in the
                      401(k) Plan. The Plan provides for the matching
                      contribution by the Company in an annual amount not to
                      exceed 2% of a participant's compensation. The Company
                      contributed approximately $116,000, $128,000 and $185,000
                      to the plan in 1998, 1997 and 1996, respectively.


12. SELECTED         Selected  quarterly  financial data for the years ended   
    QUARTERLY        December 31, 1998 and 1997 is as follows:                 
    FINANCIAL DATA   
    (Unaudited)

<TABLE>
<CAPTION>
                                                                                              Basic and
                                                                                               Diluted
                      Year ended                     Net          Gross             Net       Net Loss
                      December 31, 1998             Sales        Profit            Loss       Per Share
                      --------------------------------------------------------------------------------------
                                                         (In thousands, except per share data)
<S>                                             <C>             <C>          <C>              <C>    
                      First Quarter             $   4,188       $  1,615     $   (2,513)          $ (.17)
                      Second Quarter                4,825          2,093         (3,876)            (.25)
                      Third Quarter                 2,168            740         (3,573)            (.23)
                      Fourth Quarter                3,145          1,282         (1,898)            (.12)
                      --------------------------------------------------------------------------------------
                                                $  14,326       $  5,730     $  (11,860)          $ (.77)
                      --------------------------------------------------------------------------------------
</TABLE>

<PAGE>   32
                                                        OPENROUTE NETWORKS, INC.
                                                        (FORMERLY PROTEON, INC.)
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
12.    SELECTED QUARTERLY  
       FINANCIAL DATA
       (Unaudited)
       (Continued)                                                                                 Basic and 
                                                                                                    Diluted
                           Year ended                     Net            Gross          Net        Net Loss
                           December 31, 1997             Sales          Profit         Loss        Per Share
                           -----------------------------------------------------------------------------------
                                                                 (In thousands, except per share data)
<S>                                                  <C>             <C>           <C>             <C>    
                           First Quarter             $   9,125       $   4,256     $    (313)          $ (.02)
                           Second Quarter                7,748           3,748        (1,133)            (.07)
                           Third Quarter                 5,006           1,754        (2,894)            (.19)
                           Fourth Quarter                5,065           1,846        (3,507)            (.23)
                           --------------------------------------------------------------------------------------
                                                     $  26,944       $  11,604     $  (7,847)          $ (.51)
                           --------------------------------------------------------------------------------------
</TABLE>

                           The 1997 fourth quarter operating loss reflects
                           approximately $880,000 or $.06 per share of certain
                           adjustments and accruals relating to business
                           operations in the Asia Pacific region, as well as
                           certain employee incentive programs.


13. VALUATION AND 
    QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                          Balance at                               Balance at
                           Allowance for                  Beginning     Provision                   End of
                           Doubtful Accounts              of Period    for Bad Debt   Write-offs    Period
                           ----------------------------   ----------   ------------   ----------   ----------
                           <S>                             <C>           <C>          <C>           <C>
                           Year ended December 31, 1998    $926,608      $496,909     $       0     $1,423,517
                           Year ended December 31, 1997    $671,755      $346,833     $ (91,980)      $926,608
                           Year ended December 31, 1996    $889,276           --      $(217,521)    $  671,755
</TABLE>

<PAGE>   33
                                                  OPENROUTE NETWORKS, INC.
                                                  (FORMERLY PROTEON, INC.)
                                                          AND SUBSIDIARIES

--------------------------------------------------------------------------

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
OpenROUTE Networks, Inc.
Westborough, Massachusetts


We have audited the accompanying consolidated balance sheet of OpenROUTE
Networks, Inc. (Formerly Proteon, Inc.) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OpenROUTE Networks,
Inc. and subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.

The accompanying 1998 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred significant
losses during each of the three years ended December 31, 1998. The Company's
current business strategy is focused on the emerging Internet access market. As
such, success of future operations is subject to a number of risks. Principal
among these risks are the successful marketing of its Internet access products,
rapidly changing technology, reliance on significant customers, intense
competition from substitute products and significantly larger companies, and the
ability to obtain financing to fund future operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern
until the Company successfully obtains additional funding or establishes
strategic relationships and achieves projected operating results. Management's
plans are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



                                        BDO Seidman, LLP

Boston, Massachusetts
February 12, 1999
<PAGE>   34
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of OpenROUTE Networks, Inc.:

We have audited the accompanying consolidated balance sheet of OpenROUTE 
Networks, Inc. as of December 31, 1997, and the related consolidated statements 
of operations, stockholders' equity and cash flows for the years ended December 
31, 1997 and 1996. 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, the financial statements referred to above present fairly, in 
all material respects, the consolidated financial position of OpenROUTE 
Networks, Inc. as of December 31, 1997, and the consolidated results of its 
operations and its cash flows for the years ended December 31, 1997 and 1996 in 
conformity with generally accepted accounting principles.

                                        PricewaterhouseCoopers LLP

Boston, Massachusetts
February 11, 1998, except as to the segment
information for the years ended December 31,
1997 and 1996 presented in Note 8, for which
the date is March 26, 1999.