<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                       OR
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          FOR THE PERIOD FROM ___TO___

                        COMMISSION FILE NUMBER: 000-26485
                             PARADYNE NETWORKS, INC.
             (Exact name of registrant as specified in its charter)

<Table>
         <S>                                                <C>
                    DELAWARE                                    75-2658219
         (STATE OR OTHER JURISDICTION                        (I.R.S. EMPLOYER
               OF INCORPORATION)                            IDENTIFICATION NO.)
</Table>
                             8545 126TH AVENUE NORTH
                              LARGO, FLORIDA 33773
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (727) 530-2000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                     COMMON STOCK, $.001 PAR VALUE PER SHARE
                                (Title of class)

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

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

         The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $87,937,727 at March 15,
2001, based on the closing sale price of $3.18 per share for the common stock on
such date on the Nasdaq National Market.

         The number of shares of the registrant's common stock outstanding
(including 7,623,875 shares issuable as a result of the acquisition of Elastic
Networks Inc. on March 5, 2002) at March 15, 2002 was 41,286,641.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None
================================================================================


<PAGE>

                             PARADYNE NETWORKS, INC.
                           Annual Report on Form 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                Table of Contents
<TABLE>
<CAPTION>
ITEM                                                                                                PAGE
NUMBER                                                                                             NUMBER
------                                                                                             ------
<S>                                                                                                <C>

                                     PART I

1.   Business                                                                                           1
2.   Properties                                                                                        19
3.   Legal Proceedings                                                                                 19
4.   Submission of Matters to a Vote of Security Holders                                               20


                                     PART II

5.   Market for the Registrant's Common Equity and Related Stockholder Matters                         21
6.   Selected Financial Data                                                                           21
7.   Management's Discussion and Analysis of Financial Condition and Results of Operations             23
7A.  Quantitative and Qualitative Disclosures About Market Risk                                        41
8.   Financial Statements and Supplementary Data                                                       41
9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure              41


                                    PART III

10.  Directors and Executive Officers of the Registrant                                                41
11.  Executive Compensation                                                                            43
12.  Security Ownership of Certain Beneficial Owners and Management                                    46
13.  Certain Relationships and Related Transactions                                                    47


                                     PART IV

14.  Exhibits, Financial Statements, Financial Statement Schedules, and Reports on Form 8-K            50

Signatures                                                                                             55

Financial Statements                                                                                  F-1

Financial Schedules                                                                                   S-1
</TABLE>


                                       i

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

     We believe that it is important to communicate our plans and expectations
about the future to our stockholders and to the public. Some of the statements
in this report are forward-looking statements about our plans and expectations
of what may happen in the future, including in particular the statements about
our plans and expectations under the headings "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". Statements that are not historical facts are forward-looking
statements. These forward-looking statements are made pursuant to the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. You can sometimes identify forward-looking statements by our use of
forward-looking words like "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of these terms and other similar expressions.

     Although we believe that the plans and expectations reflected in or
suggested by our forward-looking statements are reasonable, those statements are
based only on the current beliefs and assumptions of our management and on
information currently available to us and, therefore, they involve uncertainties
and risks as to what may happen in the future. Accordingly, we cannot guarantee
you that our plans and expectations will be achieved. Our actual results and
stockholder values could be very different from and worse than those expressed
in or implied by any forward-looking statement in this report as a result of
many known and unknown factors, many of which are beyond our ability to predict
or control. These factors include, but are not limited to, those contained in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Risk Factors Which May Impact Future Operating Results" and
elsewhere in this report. All written and oral forward-looking statements
attributable to us are expressly qualified in their entirety by these cautionary
statements.

     Our forward-looking statements speak only as of the date they are made and
should not be relied upon as representing our plans and expectations as of any
subsequent date. While we may elect to update or revise forward-looking
statements at some time in the future, we specifically disclaim any obligation
to do so, even if our plans and expectations change.

     This Form 10-K includes trademarks, servicemarks and trade names of other
companies.

OVERVIEW

     We are a leading developer, manufacturer and distributor of broadband
network access products for network service providers, commonly referred to as
NSPs, and business customers. We operate in a single business segment. We offer
solutions that enable high-speed connectivity over the existing telephone
network infrastructure and provide for cost-effective access speeds of up to 45
megabits per second, or Mbps. NSPs use our broadband products to enable
high-speed connections from the central office to the customer premise.
Moreover, our broadband products enable NSPs to more efficiently provide network
access services by allowing a high level of management, monitoring and control
over network access equipment and circuits. Business customers use our broadband
products for high-speed connection of voice and data communications to connect
their employees to corporate wide area networks and to the internet using both
public and private services provided by NSPs. Our products are designed for easy
installation by NSPs and end users, significantly reducing the need for
installation by an onsite service technician, thereby reducing costs for network
access. We believe that demand for high-speed, broadband transmission will
continue to increase as more business and residential users find narrowband
access technologies inadequate to meet their high-bandwidth requirements. We
strive to meet that demand in the broadband access market by focusing our
products on next generation digital subscriber line, or DSL, service level
management, and other broadband access products.

     We operate our business through our wholly-owned subsidiary, Paradyne
Corporation. Paradyne Corporation was originally incorporated in Delaware in
1969, acquired by AT&T in 1989 and spun out of AT&T as part of Lucent
Technologies in 1996. In July 1996, a limited partnership controlled by Texas
Pacific Group acquired Paradyne Corporation and formed Paradyne Acquisition
Corp. as a holding company. Paradyne Acquisition Corp. changed its name to
Paradyne Networks, Inc. in June 1999. In July 1999 and September 1999, Paradyne
Networks, Inc. issued shares of common stock in the public marketplace through
an initial public offering and secondary offering, respectively.

     In December 2001, we announced the acquisition of Elastic Networks Inc., or
Elastic Networks, of Alpharetta, Georgia. On March 5, 2002 the acquisition was
completed and we acquired 100% of the capital stock of Elastic Networks in
exchange for 7,623,875 shares of our common stock. Using an average market value
of $3.77 per share (using the average of the closing prices during the 7 trading
days surrounding the December 27, 2001 announcement of the acquisition), the
purchase price was approximately $28.7 million. Elastic Networks designs
high-speed, broadband communications products that have the advantages of
high-speed access for the in-building broadband market and can


                                       1
<PAGE>

operate effectively over lower quality lines. Elastic Networks was acquired for
several reasons including: it launches Paradyne into the in-building DSL market;
Elastic Networks has a strong complimentary base of independent telephone
companies as customers; Elastic Networks' EtherLoop product is an important
technology to Paradyne; and Elastic Networks' cash and working capital will
improve our balance sheet. As of the close of the acquisition, Elastic Networks
became a wholly owned subsidiary of Paradyne. This transaction was accounted for
using purchase accounting. In connection with the acquisition of Elastic
Networks, Paradyne's stockholders approved an increase in the authorized number
of shares of Paradyne common stock from 60,000,000 to 80,000,000.

     We have a long history of technological innovation. As of the end of 2001,
we had been issued over 295 U. S. patents, hold over 210 patents and have over
80 U. S. patent applications pending. With our acquisition of Elastic Networks
in March 2002, we acquired an additional 2 U.S. patents and 2 U.S. patent
applications pending. Our equipment has been sold to over 50% of the Fortune
500(R)companies. We estimate that sales to NSPs represented approximately 73% of
our total revenues in 2001. With our reputation and history as a supplier of
access solutions to a large customer base, we believe that we are well
positioned to provide broadband access solutions to NSPs and business customers
as they upgrade their networks.

INDUSTRY BACKGROUND

     Over the past several years, data traffic generated by computer users
accessing the Internet or business networks has increased significantly.
Industry analysts believe that the volume of this data traffic, referred to as
wide area network traffic, will continue to expand rapidly due to four key
trends:

     - the dramatic growth in the use of high bandwidth applications over the
       Internet;

     - the proliferation of distributed computing applications, such as
       electronic mail, electronic transaction processing, enterprise resource
       planning and inter-enterprise information transfer based on
       Web-technologies;

     - the deregulation of the telecommunications services industry which has
       increased the number of service providers and intensified competition;
       and

     - the continued deployment of high capacity fiber optic networks and the
       emergence of high-volume bandwidth network access technologies that
       increase the ability to transfer large volumes of information.

     In order to accommodate increasingly high volumes of data, NSPs have
invested significant resources to upgrade central office switching centers and
the interconnecting infrastructure, known as the network backbone. While
capacity constraints in the network backbone continue to be addressed through
the use of high-speed digital and fiber-optic equipment, the network that
connects end users to NSP central offices, typically known as the "last mile,"
remains a bottleneck that limits high-speed data transmission. The last mile was
originally constructed with copper twisted-pair wiring designed to support
analog voice traffic. There is an estimated installed base of over 180 million
copper lines in the United States, and over 900 million worldwide. End users
have been frustrated by these limitations and the ability of NSPs to cost
effectively deliver high-speed services, such as telecommuting, branch office
internetworking and Internet access, over the last mile. Standard, narrowband
dial-up connections, which are typically limited to data transmission rates of
28.8 kilobits per second, or Kbps, to 56.0 Kbps do not adequately support these
applications. We believe that most business and residential users are finding
these types of narrowband access technologies unacceptable for their high
bandwidth requirements.

     Global regulatory changes have increased the number of competitors in the
access portion of the network and are accelerating the need for NSPs to upgrade
their networks and increase their service offerings. Internationally, a number
of developed and developing nations have privatized their state-owned
telecommunications monopolies and opened their markets to new NSPs. New
competitors in these markets include cable TV operators, Internet service
providers, satellite operators and electric utilities. For example, cable TV
operators are already beginning to provide data transmission services to
customers by leveraging the high bandwidth capabilities of their coaxial cable
based infrastructure. This increase in competition for the access portion of the
network is also helping to facilitate the transition from narrowband to
broadband access over the last mile. These new competitors are delivering
broadband network access to end-user customers, which applies significant
pressure to the incumbent local exchange carriers, or ILECs, to enhance their
network infrastructure and deliver similar broadband services.

     New digital technologies have been introduced to increase the speed and
quality of digital transmission over the copper wire infrastructure, or local
loop, in the last mile and provide alternative means of accessing the network
backbone. The increased speed, lower transmission cost, higher reliability and
quality of digital networks are better suited for transmitting


                                       2
<PAGE>

the increased level of enhanced voice and high-speed data traffic that now must
pass over the last mile. NSPs have begun to aggressively install higher-speed,
digital broadband transmission technologies, such as DSL, in the last mile.
According to research data compiled by Vertical Systems, the worldwide number of
DSL connections is expected to grow from 8.4 million in 2001 to 26.7 million by
2004. At an average price of $250 per line, that would require approximately $5
billion in DSL equipment to support this volume of connections.

     NSPs have deployed various narrowband and broadband technologies across
customers' wide area networks in order to provide cost-effective access
solutions for their customers. Demand for high-speed access services has
increased and more protocols have emerged to facilitate the connections of
business customers to NSPs' network backbones. Protocols are computer languages
that allow two or more communications devices, such as modems, to communicate
with one another. These protocols include Internet Protocol, commonly referred
to as IP, Frame Relay, asynchronous transfer mode, commonly referred to as ATM,
integrated services digital network, commonly referred to as ISDN and others.
When networks must support multiple protocols, network management is more
difficult because many protocols are being used simultaneously and the network
management devices must decipher each protocol. The proliferation of protocols
makes the provisioning and management of high-speed access technologies and
services increasingly difficult. As a result, NSPs are required to operate and
maintain hybrid networks comprised of recently adopted new technologies and
existing installed equipment.

     The performance, quality and maintainability of network services are highly
dependent on the volume and type of traffic running over these hybrid networks.
As a result, NSPs and business customers need sophisticated diagnostic and
management capabilities to monitor business customer application traffic. The
required tools should analyze the physical transmission characteristics as well
as enable NSPs and business customers to evaluate compliance with service level
agreement parameters such as: how much data gets through the network; the time
it takes data to get through the network; and availability of the network.
Business customers also need management solutions that can be scaled to meet
growing demand for services, improve network quality, reduce the number of
support personnel managing their networks and lower the overall costs for
bandwidth and maintenance tools.

     As demand for high-speed transmission continues to increase, we believe
that the telecommunications industry will continue to develop and deploy new
broadband access technologies, which will become increasingly cost competitive
with traditional technologies. As a result of changes in the telecommunications
industry, NSPs are requiring flexible solutions that can be scaled to meet
growing demand for services, and also permit easy, cost-effective enhancements
in the future. With the increasing number of access protocols and equipment
options, customers are placing a higher level of importance on the ability of
equipment providers to deliver integrated system solutions.

BUSINESS OBJECTIVE AND STRATEGY

     Our objective is to maintain and build upon our position as one of the
leaders in the broadband access market by focusing on next generation DSL
solutions, conventional copper broadband solutions and SLM solutions. Key
elements of our strategy include:

Continue To Develop Innovative Broadband Technology and System Solutions

     We will continue to focus on providing innovative, cost-effective broadband
access solutions that improve communications over the traditional copper
telephone wire infrastructure for NSPs and business customers. Sales of
broadband equipment represented approximately 81% of our total Equipment Sales
revenues for 2001. We believe that our internally developed technologies play a
key role in differentiating our products from those of our competitors. We have
been issued over 295 U. S. patents, hold over 210 patents and have over 80 U. S.
patent applications pending and we expect many of these patents and patent
applications will contribute to the development of new technologies and systems.
In addition, we will continue to collaborate with technology partners to
facilitate the development of competitive products, as we have previously done
with NetScout, Lucent and others. Our DSL technological innovations include our
ReachDSL technology which continues to be further enhanced and brought to market
in the form of our Hotwire ReachDSL products. Our ReachDSL transceiver
technology, which is the core building block of our Hotwire ReachDSL products,
has demonstrated superior loop reach, immunity to typical impairments and ease
of installation over alternative DSL technologies. In January 2002, we signed an
agreement with Alcatel Microelectronics to develop a new ADSL chipset that
incorporates our ReachDSL technology. If successful, this new ADSL chipset,
called ADSL/R, will allow NSPs to deploy a single product everywhere without
concern for whether the copper lines will fully support ADSL technology. The
ADSL/R chipset will initially attempt to train up with ADSL, but if it fails, it
will train up with ReachDSL, assuring the customer of service regardless of the
line conditions. This feature can potentially save the NSP a considerable amount
of operational expense, delay and customer frustration. We believe ReachDSL
technology will continue to allow us to provide differentiated solutions, both
in products and chipset technology, which provide our NSP customers with greater
market


                                       3
<PAGE>

coverage to more customers and lower installation costs than alternative DSL
products. With the acquisition of Elastic Networks, we obtained a new set of
innovative DSL technologies called EtherLoop. Elastic Network's BitStorm product
family uses EtherLoop technology to deliver up to 10 Mbps over standard
telephone wiring. Elastic Networks had had found some success in the in-building
and hospitality (hotel) DSL markets with their BitStorm products. We intend to
continue pursuing these markets with the Elastic Networks products. Like
ReachDSL, EtherLoop also works well over "poor copper", so there are
opportunities with Paradyne's existing NSP customers that we can pursue as well.
We believe EtherLoop technology will allow us to provide differentiated
solutions to the emerging in-building and hospitality DSL markets. Our SLM
technology innovations have been implemented in our FrameSaver, NextEdge and
OpenLane products. We continue to enhance these products with innovations that
enable our NSP customers to offer more cost-effective SLM services more broadly.
We intend to enhance our Hotwire DSL solutions with products designed for the
in-building DSL market and more cost-effective DSL access multiplexer , or
DSLAM, solutions for deployment of our ReachDSL technology. In order to increase
customer premise equipment choices for our customers, we will continue to
interoperate with products that allow customers to perform additional,
high-value functions over their DSL network. These products allow voice and data
to share the DSL network, streaming audio and video over a DSL network, or
special protocols to be transmitted over a DSL network. In order to create
additional features for our DSLAMs, we plan to continue to develop new versions
of both hardware and software to support new requirements from our customers.
Further, we have integrated our FrameSaver SLM technology into additional
platforms, including those that support DSL and ATM. These new SLM DSL products
will enable service providers to offer higher profit business networking to
branch offices and expand their services beyond the commodity internet access
markets. As our customers continue to expand their DSL networks into the
application space of conventional broadband networks, we believe our
technological leadership and products will provide Paradyne with a competitive
advantage.

Continue To Capitalize On Global Buildout of DSL Infrastructure

     Revenues from worldwide sales of DSL equipment are projected by industry
sources to increase from $600 million in 2000 to more that $2.3 billion by 2002.
To capitalize on this projected growth, we intend to continue to pursue "design
wins" from NSPs that are offering or plan to offer DSL services. A "design win"
is achieved when an NSP adopts Paradyne products as one of a limited number of
DSL platforms for its central office or private network deployment. A typical
NSP build out includes DSLAMs in an NSP's central office, resulting in an
installed base into which Paradyne will be well positioned to sell DSL
line-cards for the DSLAMs and DSL customer premises equipment for the end user.
From the third quarter of 1997 through the fourth quarter of 2001, Paradyne has
shipped over 20,000 DSLAMs with a capacity of more than 3.9 million lines. Some
of our current DSL customers include Choice One Communications, Integra Telecom,
Fibernet (UK), Beijing Telecom, Broadband Technologies (Japan), Cavalier
Telephone, TDS Telecom, Northern Telephone, Shanghai Telecom, Concord Telephone,
and Guyana Telephone and Telegraph. We will continue to focus on increasing our
number of design wins with new NSPs, as well as maintain our existing
relationships with NSPs who have awarded us design wins in the past. We plan to
increase our efforts to penetrate the emerging DSL markets outside of the U.S.
These markets represent greater opportunities in 2002 than they have in the past
as many countries throughout Europe and Latin America are starting to deploy
broadband DSL networks. We also intend to continue to produce a variety of DSL
line-cards and develop or interoperate with innovative DSL customer premises
equipment to handle the diverse needs of our NSP customers. We intend to deliver
DSL solutions which improve the profitability of our NSP customers by avoiding
the hidden costs associated with many DSL technologies, such as incremental
unbudgeted truck rolls, and by providing business grade solutions that will
allow our customers to expand their services beyond basic internet access.

     With the acquisition of Elastic Networks, we launched into the in-building
and hospitality markets for high-speed access. These markets have emerged as
technologies supporting video on demand, internet access and voice have
stabilized and become affordable. Elastic's BitStorm product line is able to
deliver the bandwidth over short copper loop distances to support applications
like these. In both the in-building (multiple dwelling unit or MDU) market and
the hospitality (hotels) market, demand for services like these offer service
providers and building owners attractive business opportunities. Elastic
Networks closed significant equipment deals with Verizon Avenue, a subsidiary of
Verizon, focused on the U.S. MDU market, and with Six Continents, a hotel
holding company with over 3,200 hotels around the world such as,
Inter-Continental, Crowne Plaza, Holiday Inn, Express and Staybridge Suites by
Holiday Inn. We will continue to focus on increasing our number of design wins
with new MDU and Hospitality customers as we believe we are in position to take
advantage of these markets that are entering a new growth phase..


Increase Worldwide Deployment of FrameSaver as Part of Our NSP/ SLM Solutions

     NSPs are enhancing their service offerings by providing intelligent devices
such as certain of our FrameSaver products that provide NSPs with the diagnostic
instrumentation to remotely monitor, diagnose and isolate the source of network
performance issues. As a result, NSPs are able to provide higher uptime
services, with lower costs of operations. In


                                       4
<PAGE>

addition, NSPs are offering service level agreements for their Frame Relay and
asynchronous transfer mode business customers. Service level agreements are put
in place between an NSP and the NSP's customer to document how the NSP and the
customer expect the service to operate. Three parameters are generally measured
and documented in SLAs: (1) availability (i.e. is the service connection up?),
(2) latency (delay in traversing the network from end-to-end) and (3) throughput
(bandwidth used for the customer's connection). If the service does not operate
as specified according to these parameters, then there is typically some type of
remedy. An example might be that the service is supposed to be available 24
hours a day, 365 days a year. If the service is not available for one of those
days, then the NSP might be required to reimburse the customer for one day's
worth of charges. We believe that as service level agreements become more widely
adopted, NSPs and end user customers will increasingly require SLM solutions
and, therefore, NSPs will be required to incorporate these solutions in their
networks. We intend to focus on further integrating FrameSaver as part of our
existing NSP customers' service level agreement solutions and obtaining
additional FrameSaver design wins from new NSPs. Currently, AT&T, SBC (formerly
Ameritech), Intermedia, BroadWing (formerly IXC), WorldCom, Verizon (formerly
GTE) and Sprint offer FrameSaver solutions to their customers. In addition, we
intend to work with leading Frame Relay NSPs and DSL NSPs to deploy lower cost
Frame Relay and Virtual Private Network (VPN) solutions using our FrameSaver DSL
solutions. These solutions offer dramatic reductions in costs associated with
the access networks. In addition, the Frame Relay over DSL solutions reduce the
Frame Relay NSPs backbone costs by consolidating the number of access lines
terminated on a common Frame Relay switch. These cost reductions offer increased
opportunities to improve margins and increase service rates among the existing
Frame Relay customers. They also offer the opportunity for NSPs to migrate the
large number of business applications from lower end alternative services such
as ISDN, satellite and dial-up connections, and expand the addressable market.

Focus on Product Sales to and Through NSPS

     We intend to continue focusing on NSPs that deploy DSL, Frame Relay and IP
voice and data services to capitalize on the increased demand for such services.
Over the past five years, our sales to NSPs have increased as a result of the
efforts of our worldwide NSP direct sales force. We estimate that approximately
73% of our total revenues in 2001 were generated from sales to NSPs. We intend
to focus the efforts of our direct sales force on maintaining and increasing
sales within our current NSP customer base as well as attracting new NSP
customers worldwide.

Leverage Fortune 500(R) Customer Base as They Upgrade Their Networks to
Broadband

     We intend to leverage our installed base of Fortune 500(R) companies and
other businesses that have purchased our narrowband products and conventional
broadband products. Many of these customers have deployed networks including a
combination of our narrowband and broadband solutions, and we expect that over
the next few years many of these companies will upgrade their networks with
additional broadband solutions. We believe that our existing customers prefer to
buy our broadband products as a result of the ability to integrate our products
into their existing networks more efficiently than the products of our
competitors.

PRODUCTS AND TECHNOLOGIES

     We develop, manufacture and distribute an extensive line of broadband
network access products and technologies. Sales of broadband products
represented approximately 81% of our total equipment sales revenue in 2001. In
addition, we provide systems that allow business customers and NSPs to have a
high level of management, monitoring and control over their network access
equipment and circuits. Although advanced network management systems are an
important aspect of our products and technology, they have not been a material
aspect of our sales revenue generation. The table below includes a summary of
our principal products. A further description of these products follows the
table.

Broadband Solutions

<TABLE>
<CAPTION>
PRODUCT                                           DESCRIPTION                                  APPLICATION
-------                                           -----------                                  -----------
<S>                             <C>                                              <C>
Hotwire GranDSLAM               A DSL access multiplexer chassis that houses     Typically resides inside an NSP's
                                different line cards supporting a variety of     central office and terminates many DSL
                                DSL technologies which enable a variety of       lines and aggregates them into a
                                access services, including the ability to        high-speed connection to a network
                                support line cards that support between four     backbone.
                                and 24 ports per card.
</TABLE>



                                       5
<PAGE>


<TABLE>
<S>                             <C>                                              <C>
Hotwire ADSL/G.lite             Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSL access    create a high speed packet connection
                                multiplexer, or DSLAM, and supports asymmetric   operating at transmission rates up to 8
                                digital subscriber line, or ADSL, technologies   megabits per second over a two wire
                                that operate at the highest possible speed       telephone line. Also allows voice to be
                                based on the quality of the telephone line,      transmitted at the same time data is
                                and g.lite a lower speed, splitterless           being transmitted and allows business
                                asymmetric DSL technology.                       partners to provide endpoints that work
                                - A customer premises endpoint that connects     with Paradyne's DSLAM.
                                the users' equipment to the telephone line.

Hotwire RADSL                   Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM, and    create a high speed
                                supports ADSL and symmetric digital subscriber   packet connection operating at
                                line, or SDSL, technologies that operate at      transmission rates up to 7
                                the highest possible speed based on the          megabits per second over a two
                                quality of the telephone line.                   wire telephone line. Also allows
                                - A stand-alone endpoint that connects the       voice to be transmitted at the same
                                user to the telephone line.                      time data is being transmitted.

Hotwire MSDSL                   Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM and     create a high speed channelized
                                supports SDSL technology.                        connection operating at transmission
                                - An endpoint that connects the end user         rates up to 2 megabits per second over
                                equipment to the telephone line.                 a two wire telephone line. Allows
                                                                                 channelized voice to be transmitted at
                                                                                 the same time data is being transmitted.

Hotwire SDSL                    Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM and     create a high speed ATM based
                                supports SDSL.                                   connection operating at transmission
                                - An endpoint that connects the end user         rates up to 2 megabits per second over
                                equipment to the telephone line.                 a two wire telephone line. Also allows
                                                                                 interoperability with certified business
                                                                                 partner provided endpoints and FrameSaver
                                                                                 DSL endpoints.

Hotwire SDSL /IDSL              Consists of:                                     The card in the DSLAM and the endpoint
                                - A high density line card that fits inside      create a high speed connection
                                the DSLAM and supports SDSL/integrated digital   operating at transmission rates up to 2
                                subscriber Line, or IDSL, technology that        megabits per second over a two wire
                                operates at the highest possible speed based     telephone line. IDSL also allows
                                on the quality of the telephone line.            operation through a Digital Loop
                                - An endpoint that connects the end              Carrier (DLC) for service areas that
                                user equipment to the telephone line.            are fed by DLC based connections.


Hotwire MHDSL                   Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM and     create a high speed connection
                                supports high bit rate digital subscriber        operating at transmission rates up to 2
                                line, or HDSL, technology that operates at the   megabits per second over a four wire
                                highest possible speed based on the quality of   telephone line. Also allows voice to be
                                the telephone line.                              transmitted at the same time data is
                                - An endpoint that connects end user equipment   being transmitted.
                                to the telephone line.

Hotwire G.SHDSL                 Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM and     create a high speed connection
                                supports G.SHDSL technology that operates at     operating at transmission rates up to 2
                                up to 2 megabits per second.                     megabits per second over a two wire
                                - A customer premises endpoint that connects     telephone line. Also allows
                                the users' equipment to the telephone line.      interoperability with certified
                                                                                 business partner provided endpoints and
                                                                                 FrameSaver DSL endpoints.
</TABLE>



                                       6
<PAGE>


<TABLE>
<S>                             <C>                                              <C>
Hotwire ReachDSL                Consists of:                                     The card in the DSLAM and the endpoint
                                - A line card that fits inside the DSLAM and     create a high speed packet connection
                                supports ReachDSL (an enhancement over MVL)      operating at transmission rates up to
                                technology.                                      960 kilobits per second over a two wire
                                - An endpoint that connects the end user         telephone line. Also allows voice to be
                                equipment to the telephone line.                 transmitted at the same time data is
                                                                                 being transmitted.

BitStorm 1900 IP DSLAM          From the Elastic Networks acquisition.  A DSL    Typically resides inside an NSP's
                                access multiplexer chassis designed              central office or in a building wiring
                                specifically to support EtherLoop next           closet and terminates up to 120
                                generation IP DSL technology enabling            EtherLoop lines and aggregates them
                                bi-directional IP bandwidth up to 10 Mbps per    into a high-speed IP connection to a
                                line, all compatible with baseband voice on a    network backbone.
                                single pair.

StormPort CPE                   From the Elastic Networks acquisition. IP        Typically residents at a customer premise
                                DSL modems enabling baseband voice  nd           location where the DSL service is
                                location where the DSL service is                terminated by a Customer Ethernet port.
                                bi-directional IP bandwidth up to 10 Mbps.

FrameSaver SLM                  Consists of:                                     Many locations are connected to a Frame
(Service Level Management)      - A stand-alone endpoint that connects remote    Relay network and the SLM software is
                                offices to a frame relay network. Also           used to make sure each location is
                                available as a line card.                        operating efficiently per the
                                - SLM software for monitoring                    configuration of the Frame Relay
                                and managing a Frame Relay                       service.
                                network.

FrameSaver FLEX                 Consists of:                                     FLEX units provide connectivity to the
                                - A stand-alone endpoint that connects remote    Frame Relay network with a more basic
                                offices to a frame relay network.                set of capabilities and allow an NSP to
                                - SLM software for monitoring and managing a     deploy these units for all Frame Relay
                                Frame Relay network.                             customers.  They are upgradeable to SLM
                                                                                 capabilities for an added fee.

FrameSaver SDSL                 Consists of:                                     The SLM software is used to make sure
                                - A stand-alone endpoint that connects remote    each location connected to the Frame
                                offices to an ATM based Frame Relay network      Relay network is operating efficiently
                                and supports symmetric digital subscriber        per the configuration of the Frame
                                line, or SDSL (2B1Q) technology that operates    Relay service. FrameSaver SDSL provides
                                at the highest possible speed based on the       the same basic capabilities of the
                                quality of the telephone line.                   FrameSaver FLEX product, however, it
                                - SLM software for monitoring and managing a     incorporates SDSL as an alternative to
                                Frame Relay network.                             T1 or DDS access.

FrameSaver SDSL Router           Consists of:                                    The SLM software is used to make sure
                                - A stand-alone endpoint with an integrated      each location connected to the Frame
                                basic router that connects remote offices to     Relay network is operating efficiently
                                an ATM based Frame Relay or IP VPN Network and   per the configuration of the Frame
                                SDSL technology.                                 Relay service. FrameSaver SDSL provides
                                - Optional SLM software for monitoring and       the same basic capabilities of the
                                managing a Frame Relay network.                  FrameSaver FLEX product, however, it
                                                                                 incorporates SDSL as an alternative to
                                                                                 T1 or DDS access and includes an
                                                                                 integrated router.

FrameSaver G.SHDSL              Consists of:                                     The SLM software is used to make sure
                                - A stand-alone endpoint that connects remote    each location connected to the Frame
                                offices to an ATM based Frame Relay network      Relay network is operating efficiently
                                and supports standard G.SHDSL technology that    per the configuration of the Frame
                                operates at the highest possible speed based     Relay service. FrameSaver G.SHDSL
                                on the quality of the telephone line.            provides the same basic capabilities of
                                - SLM software for monitoring and managing a     the FrameSaver FLEX product, however,
                                Frame Relay network.                             it incorporates G.SHDSL as an
                                                                                 alternative to T1 or DDS access.

FrameSaver                      A stand-alone endpoint that connects two Frame   Allows two different Frame Relay
Network to Network              Relay networks together.                         networks to be connected together and
                                                                                 support the SLM software applications.
</TABLE>



                                       7
<PAGE>


<TABLE>
<S>                             <C>                                              <C>
FrameSaver/ATM                  A stand-alone endpoint that connects large       Allows one high-speed connection to a
                                locations to a Frame Relay network through       a Frame Relay network that is more
                                45 megabits per second connection to an ATM      efficient than many lower speed connections.
                                network.

FrameSaver NP                   Consists of:                                     Many locations are connected to a Frame
                                - A stand-alone endpoint that connects remote    Relay network and the SLM software is
                                offices to a frame relay network. Also           used to make sure each location is
                                available as a line card.                        operating efficiently per the
                                - SLM software for monitoring and managing a     configuration of the Frame Relay
                                Frame Relay network.                             service.

Acculink Broadband Digital      Stand-alone endpoints that transmit data and     Allows voice and data traffic to share
Access                          voice over high-speed circuits. Also available   a single, high-speed circuit to a
                                as a line card.                                  variety of backbone networks.

NextEdge                        A stand-alone endpoint that supports many data   Allows many different data and voice
                                and voice connections over several high- speed   services at a remote office to share
                                circuits. Also supports the FrameSaver SLM       one or two high-speed circuits to a
                                system.                                          variety of backbone networks. In
                                                                                 addition, it can be integrated into a
                                                                                 FrameSaver SLM system.
</TABLE>


Narrowband Solutions

<TABLE>
<CAPTION>
PRODUCT                             DESCRIPTION                                               APPLICATION
-------                             -----------                                               -----------
<S>                             <C>                                              <C>
Comsphere Subrate Digital       Stand-alone and line card products that          Allows data services to be connected
Access                          support data transmission over digital network   over digital leased lines at narrowband
                                facilities.                                      speeds.

Comsphere Modems                Stand-alone and line card products that          Dial-up and leased line modems that
                                support data transmission over analog network    allow narrowband connectivity over
                                facilities.                                      analog lines

Network Management Solutions
</TABLE>


<TABLE>
<CAPTION>
PRODUCT                             DESCRIPTION                                               APPLICATION
-------                             -----------                                               -----------
<S>                             <C>                                              <C>
OpenLane Network Management     Software for managing networks built with        Used as a stand-alone system or part of
System                          Paradyne products.                               a larger system to manage all the
                                                                                 Paradyne products deployed in a network.

PathView Network Management     Software for managing networks built with        Used as a stand-alone system or part of
System                          Paradyne FrameSaver NP Products.                 a larger system to manage all the
                                                                                 Paradyne FrameSaver NP products deployed
                                                                                 in a network.

StormTracker Network            Software for managing networks built with the    Used as a stand-alone system or part of
Management System               former Elastic Networks BitStorm  products.      a larger system to manage all the
                                                                                 BitStorm products deployed in a network.
</TABLE>

BROADBAND SOLUTIONS

BROADBAND DSL

     Hotwire. The Hotwire multiservices system includes DSLAM termination
equipment, which provides aggregation of services in the central office, and an
array of customer premises equipment, which extend various broadband access
services over the local loop to the customer premise. The system supports a
range of broadband multimedia access services, such as business and residential
Internet access, remote local area networks access and virtual private network
access at symmetric rates (similar transmission rate for sending and receiving
data over the same line) of up to 2 Mbps and asymmetric rates (varying
transmission rates for sending and receiving data over the same line) of up to 8
Mbps. Hotwire also supports Frame Relay, ATM and T1/E1 channelized access to the
wide area networks. With channelized access, customers can send and receive
voice or data traffic on different channels. For example, channels 1-12 could be
used to send data while channels 13-24 could be used to send voice. In addition
to supporting high density configurations for central office applications, the
efficient packaging for lower density market entry applications allows Hotwire
products to be deployed in a variety of private copper networks, including
multi-dwelling-units for both business and residential access services,
universities, hotels, and government campus private networks.


                                       8
<PAGE>

     Our primary customers for Hotwire products are CLECs, incumbent carriers
and other NSPs. An increasing segment of our DSL customer base is emerging in
the international markets, which are expanding through deregulation and the
rapidly growing interest in developing countries for broadband DSL. Our Hotwire
products are easily installed, scaleable and operate over long loops, which
enhance an NSP's ability to deploy them quickly and service new customers.
Additionally, these qualities allow our NSP customers to supply symmetric
services to their business customers and asymmetric services to their consumer
customers or they may want to use ATM on some backbone connections and Frame
Relay on other backbone connections. The Hotwire system can be configured,
monitored and controlled through our OpenLane network management system which
provides complete end-to-end management and reporting coverage of the entire
broadband DSL access solution.

     Hotwire products consist of two major product categories, DSLAMs and
customer premises equipment.

     Hotwire Multiservices DSLAMs: A DSLAM is a DSL access multiplexer installed
in NSPs' central offices and private copper networks that provides termination
and aggregation of multiple DSL lines and associated services protocol
translation. Paradyne's Multiservices DSLAMs are called the Hotwire GranDSLAM.
The Hotwire GranDSLAM systems consist of network equipment building standard
(NEBS) certified chassis and associated DSL line cards, and an aggregation
system with a variety of wide area network options and a standards based network
management system. Network equipment building standard certification is
generally necessary in order for a product to be installed in the central office
of an NSP. Key features of a Hotwire GranDSLAM system include:

     - the ability to support line cards that support between four and 24 ports
       per card;

     - multiple DSLAM configurations, which include our highly-compact,
       stackable DSLAM supporting as few as 4-8 DSL lines which is scalable to
       68 lines and our high-density DSLAM supporting as many as 432 lines per
       shelf;

     - the ability to support a range of voice and data applications that
       operate over packet technologies and channelized access technologies;

     - a broad set of available interfaces to consolidate traffic onto a
       backbone network. These interfaces operate from between 1.544 Mbps up to
       155 Mbps in asynchronous transfer mode and up to 45 Mbps to support
       Ethernet or Frame Relay. These interfaces include: 10base-T, 100base-T,
       Channelized T1 and E1, Frame Relay T1 and E1 and T1, NxT1, DS-3, E3,
       STM-1 and OC3 asynchronous transfer mode; and

     - a simple network management protocol compliant distributed network
       management architecture that supports efficient network management
       required for large NSP network deployments.

     Hotwire DSL customer premises equipment: Hotwire customer premises
equipment terminates DSL access services at the customer premise for
connectivity to local area networks, personal computers, routers and other voice
and data equipment. Hotwire customer premises equipment operates at a variety of
transmission speeds and loop lengths to meet the needs of our customers. Hotwire
customer premises equipment and associated DSLAM line cards support multiple DSL
technologies. In addition to developing our own DSL customer premises equipment,
we certify interoperability with other industry leaders to provide our customers
with a broader range of endpoints and expand the total service opportunities
supported by our Hotwire system.

     BitStorm. As a result of the Elastic Networks acquisition in March 2002, we
now develop, manufacture and distribute the BitStorm family of products. The
BitStorm system includes (1) the BitStorm 1900 IP DSLAM, which provides
aggregation of services in the central office or the building wiring closet, and
(2) StormPort customer premises equipment, which extends broadband access
services over the local loop to the customer premise. The system supports a
range of broadband multimedia access services, such as business and residential
Internet access, remote local area networks access and virtual private network
access at symmetric rates (similar transmission rate for sending and receiving
data over the same line) of up to 10 Mbps. BitStorm products are ideal for
multi-dwelling-units for both business and residential access services,
universities, hotels, and government campus private networks.

     Our primary customers for BitStorm products are in-building network
providers, hotel and hospitality network providers and incumbent carriers and
other NSPs. Our BitStorm products are based on our patented EtherLoop
technology, which is easily installed, scaleable and operates over long loops,
which enhance an NSP's ability to deploy them quickly and service new customer
applications. Additionally, EtherLoop can deliver bandwidth up to 10 Mbps over
relatively short loops, which enables high-quality video services, internet
access and baseband voice to be simultaneously offered. The BitStorm system can
be configured, monitored and controlled through our StormTracker network
management system, which provides complete end-to-end management and reporting
coverage of the entire broadband access solution.


                                       9
<PAGE>

     BitStorm products consist of two major product categories, a DSLAM and
customer premises equipment.

     BitStorm 1900 IP DSLAM: A DSLAM is a DSL access multiplexer installed in
NSPs' central offices and private copper networks that provides termination and
aggregation of multiple DSL lines. The BitStorm 1900 IP DSLAM consists of
network equipment building standard (NEBS) certified chassis and associated
EtherLoop line cards, and an aggregation system for IP networks and a standards
based network management system. Network equipment building standard
certification is generally necessary in order for a product to be installed in
the central office of an NSP. Key features of a BitStorm 1900 IP DSLAM system
include:

     - the ability to support EtherLoop line cards that support up to 12 ports
       per card;

     - the ability to support a range of voice and data applications that
       operate over packet technologies; and

     - a simple network management protocol compliant distributed network
       management architecture that supports efficient network management
       required for large network deployments.

     StormPort customer premises equipment: BitStorm customer premises equipment
terminates DSL access services at the customer premise for connectivity to local
area networks, personal computers, routers and other voice and data equipment.
BitStorm StormPort customer premises equipment operates at a variety of
transmission speeds and loop lengths to meet the needs of our customers.
StormPort customer premises equipment and associated DSLAM line cards support
our patented EtherLoop technology, which enables speeds of up to 10 Mbps across
the standard copper loop.

     DSL technology innovation: We expect to continue to implement multiple DSL
technologies in our Hotwire products, and, consistent with market requirements,
to implement additional DSL technologies, such as G.SHDSL. While we purchase
some of the DSL technologies implemented in the Hotwire GranDSLAM and customer
premises equipment, our ReachDSL product represents a new DSL technology
developed and implemented by us that does not require a telephone line splitter
and works over very long loops. The primary advantages of ReachDSL technology
are:

     - simultaneous voice and data capability over copper loops up to 24,000
       feet unaffected by multiple terminations of copper loop, commonly known
       as bridged taps, which provides for ease of customer installation and
       eliminates need for rewiring at the customer premise; and

     - higher port densities, thereby allowing more modems to be deployed in one
       DSLAM which lowers cost of deploying a DSL port. The cost is lowered
       because more ports can share the common cost of the DSLAM chassis and
       power supplies and because customers can put more ports in the same
       amount of shelf space.

     The Hotwire ReachDSL product is well suited for line sharing and spectrum
unbundling applications as specified by the Federal Communications Commission
(FCC 99-355) on December 9, 1999. The benefits of line sharing include lower
recurring loop costs, faster availability of loops for initial service
deployment and better initial loop quality than new loops that were not already
actively in service. ReachDSL can be operated in line sharing configurations
where the DSL service is delivered over the same local line that is delivering
basic telephone service. In addition, ReachDSL has demonstrated an ability to
operate consistently over a wider range of loop conditions and loop lengths than
ADSL based products. We believe Hotwire ReachDSL provides a competitive
advantage for competitive local exchange carriers and incumbent carriers in this
application. Additionally, we believe ReachDSL offers unique capabilities for
PTTs in developing countries, where the copper infrastructure is particularly
challenging for ADSL. The unique performance characteristics of ReachDSL
position us well for future business in developing countries around the world.

     We expect to continue to implement multiple DSL technologies in our
BitStorm products consistent with market demand and new technological
innovations. Our BitStorm EtherLoop product represents a new DSL technology
developed and implemented by us that does not require a telephone line splitter
and works at very high speeds over short loops and at slower, but still
broadband speeds over very long loops. The primary advantages of EtherLoop
technology are:

     - very high-speed digital services over copper loops up to 5,000-6,000
       feet, which enables simultaneous high-speed video services in addition to
       internet access and baseband voice; and

     - operation over copper loops up to 24,000 feet unaffected by bridged taps
       and other typical loop impairments, similar to ReachDSL.


                                       10
<PAGE>

BROADBAND SLM

     FrameSaver. Our FrameSaver system is an innovative SLM system for Frame
Relay and Frame Relay/ ATM networks. The FrameSaver system consists of customer
premises equipment, NSP equipment and network management software to monitor and
measure network performance across public Frame Relay networks. The FrameSaver
system is available with service level verification features that measure
performance and store the results for retrieval by our OpenLane network
management system. The storage and data retrieval mechanisms have been
implemented according to recognized industry standards, which makes the
FrameSaver system compatible and interoperable with many other systems that
business customers or NSPs may have installed. The FrameSaver network access
units also provide extensive non-disruptive diagnostic and testing capabilities
along with standard access functionality, to give enterprise customers or
service providers a complete managed solution. The optional remote monitoring
technology included in the FrameSaver System, called RMON-2, was developed by
NetScout and is included in select FrameSaver Systems pursuant to a
collaboration between Paradyne and NetScout. The significance of utilizing
RMON-2 is that it is a communications language that has been standardized.
Therefore, many different companies build products that utilize RMON-2, which
enables communication with the FrameSaver system.


     Key features of our FrameSaver system include:

     - extensive performance management with diagnostic and control capabilities
       that are used to identify and resolve problems quickly without disrupting
       the network;

     - standards based measurements that allow customers to measure data
       throughput both within and above their committed information rates;

     - available in a range of conventional network access speeds, from 64 Kbps
       up to T3;

     - also available in SDSL and G.SHDSL based configurations to enable Frame
       Relay services over DSL access networks;

     - non-disruptive management that can be accessed over the Frame Relay
       network or through an integrated dial modem;

     - the ability to install and diagnose without the presence of a router or a
       costly technician visit to the customer site;

     - dial backup through integrated service digital network to protect against
       network failures;

     - network to network interface for SLM across multiple Frame Relay
       networks;

     - auto configuration of customer premises equipment for ease of
       installation; and

     - the ability to scale from small single customer networks to large service
       provider networks.

     FrameSaver allows companies to build and manage data networks based on
public network services, while maintaining the same operational efficiency and
confidence used in the management of private networks. By deploying FrameSaver,
business customers can move applications from costly leased lines to shared
public networks and benefit from reduced network services costs, while
maintaining a high degree of control of the network. The FrameSaver system
enables NSPs and business customers to accurately monitor the performance of
individual customer connections across a public or private Frame Relay or Frame
Relay/ATM network and to report details of that performance at varying time
intervals.

     FrameSaver FLEX has been integrated into the service offerings of certain
leading Frame Relay NSPs. FrameSaver FLEX is a SLM product that can be deployed
in a basic and less expensive configuration delivering a subset of the
FrameSaver features. This product targets those customers that want a subset of
the Frame Relay diagnostic features and who may eventually wish to deploy a
complete SLM solution. FrameSaver FLEX is easily installed and is upgradeable
through software to the full set of SLM features. This product is then directed
at NSPs that wish to analyze all of their Frame Relay customer lines to enable
quick and easy problem resolution from their network operation centers. We
believe this product will enhance our ability to win new NSP business because it
offers substantial operational cost savings over conventional DSU/CSU products.


                                       11
<PAGE>

     FrameSaver DSL, an extension to the FrameSaver family, incorporates both
SDSL and G.SHDSL technologies into the FrameSaver FLEX platform. It therefore
offers the FrameSaver FLEX features with the added benefits of DSL as an access
technology. The FrameSaver DSL product is available in both basic V.35 DSU/CSU
like configurations and in a FrameSaver DSL Router model, which provides an
integrated router function for many lower-end branch office applications, which
may not have an existing router. We believe the FrameSaver DSL products will
offer both DSL NSPs and Frame Relay NSPs an opportunity to move DSL access
services into the profitable Frame Relay services market for improved
profitability and increased customer demand.

     FrameSaver NP represents the Frame Relay SLM products that were acquired
with the acquisition of Control Resources Corporation , or CRC, in 2000. The
FrameSaver NP products provide many similar features and capabilities as the
Paradyne developed FrameSaver products. FrameSaver NP products are primarily
distributed to AT&T Global Network Solutions. We intend to maintain and continue
to support these products and key features and product attributes will be
carried forward into future FrameSaver solutions.

     Acculink and NextEdge .T1/E1 Access Products, Acculink and NextEdge T1/ E1
digital access products consist of a range of products that provide an interface
between a T1 circuit, which carries data at 1.544 Mbps or an E1 circuit, which
carries data at 2.048 Mbps, and a customer's high-speed digital equipment, such
as a computer, router, multiplexer, wide area network switch or telephone
system. The Acculink and NextEdge products are managed by our OpenLane network
management system, which provides centralized management of large,
geographically disbursed networks for NSPs and businesses. Businesses, service
providers, government entities and other organizations use these products to
build low-cost, centrally managed networks for high-speed, digital applications.
Our T1/ E1 digital access products provide a broad range of features, including
centralized, standards-based network management multiple voice and data
interface ports and multiplexing.

     Acculink. Acculink products provide integrated voice and data network
access to business customers who want to take full advantage of their T1/ E1
bandwidth capacity. The products are used primarily in applications where voice
and data integration over a T1 or E1 line is required. The Acculink T1/ E1
products were introduced as a standard part of AT&T's High-Speed Accunet digital
services in the early 1990s, and have been deployed widely in large business
networks ever since.

     NextEdge. The NextEdge products add the SLM capabilities of FrameSaver to
the functionality provided by the Acculink products. NextEdge products are used
by NSPs and business customers to deploy integrated voice and data services plus
managed Frame Relay services over a common T1 infrastructure. Business customers
are seeking to maintain the SLM capabilities they have come to view as essential
for their public Frame Relay services as they integrate other network services
onto available bandwidth in their T1 access lines.

NARROWBAND SOLUTIONS

     Our Comsphere digital access products consist of a family of managed
digital service units that provide a network interface for a digital circuit
operating at up to 64 Kbps and a customer's digital equipment, such as a
computer, terminal controller, router or other narrowband digital communications
equipment. We introduced the Comsphere digital service unit in the early 1990s,
when they were offered as a standard part of AT&T's digital data services. Our
Comsphere analog modems enable communications over dial-up or dedicated analog
circuits. These analog modems are approved for use around the world and are
widely deployed in business and NSP networks. These highly managed modems
operate on both dial circuits and analog private line circuits where network
applications demand an extremely high degree of network uptime and
manageability. All of the Comsphere products are managed by our OpenLane network
management system, which provides centralized management of large,
geographically disbursed networks for NSPs and businesses.

     Businesses, service providers, government entities and other organizations
use these products to build low-cost, centrally managed networks for their
digital applications. Many of these customers have also begun installing our
Acculink, NextEdge and FrameSaver products for their broadband network access
applications. We estimate that we have shipped approximately 500,000 narrowband
access products between 1997 and 2001 and we will continue to pursue business
opportunities for these products

NETWORK MANAGEMENT SOLUTIONS

     OpenLane. The OpenLane network management system, a centralized management
platform, integrates OpenLane into all of our product families and provides NSPs
and business customers with the ability to manage their network access products
located at the edge of the wide area network. The OpenLane software is purchased
separately with each of our products in order to utilize OpenLane's management
capabilities. OpenLane consists of a suite of network management


                                       12
<PAGE>

tools that provide SLM and visibility into network circuits and network access
unit performance. The management tools work together to provide business
customers and NSPs with detailed, accurate performance metrics needed to
understand precisely how their network is performing and where performance
problems or potential problems may reside. The OpenLane network management
system offers a user-friendly graphical user interface and graphical reporting.
OpenLane is designed to work with standards based management applications such
as Hewlett-Packard's OpenView network management platform. OpenLane is based
extensively on standards, such as simple network management protocol, which
enable it to interface with many third-party network management applications
that our business and NSP customers may be using. OpenLane can provide reports
and access to screens either directly or by using the Internet for web-based
delivery. Recent releases of our OpenLane software modules are based on Java
programming to permit a platform independent system. Our NSP and business
customers depend on the OpenLane network management system as the central
management system they use to monitor and control the network access products
that they have deployed in their networks.

     PathView. The PathView network management system, a centralized management
platform, provides management of our FrameSaver NP products. PathView was
acquired as part of the CRC acquisition and is provided primarily to a limited
number of former CRC customers such as AT&T.

CORPORATE DEVELOPMENT RELATIONSHIPS

     Our success is dependent upon our continued development relationships with
a number of companies with whom we have development arrangements. We expect to
continue to collaborate with technology partners to facilitate the development
of competitive products. Currently, our development relationships include the
following:

     NetScout. In January 1998, we entered into a marketing and license
agreement with NetScout under which Paradyne agreed to utilize exclusively
NetScout's RMON-2 network management software with our FrameSaver Frame Relay
access unit products, to market and sell NetScout Manager Plus software with our
FrameSaver system and not to compete against NetScout with respect to RMON-2
based technology. NetScout agreed to reference Paradyne as a strategic partner
for digital service units, DSLs and multiplexers and agreed to give preference
to Paradyne when sourcing or integrating digital service units. NetScout granted
a non-exclusive license to promote, market, sell, license and distribute any
NetScout software or product embedded into Paradyne's FrameSaver products in
exchange for royalty fees to NetScout. The agreement will expire in January
2003, unless renewed.

     Lucent. In November 1998, we entered into a joint development and marketing
agreement with Ascend in connection with our OpenLane SLM software and Ascend's
Navis, a network management system. Lucent acquired Ascend in 1999. Under the
agreement, we developed interface software which integrates OpenLane with Navis,
creating a single integrated solution for competitive local exchange carriers,
incumbent carriers and other NSPs. Ascend and Paradyne jointly market Navis,
together with OpenLane SLM software, to NSPs. The agreement will continue unless
terminated upon 60 days written notice.

     Alcatel. Effective March 1999, we entered into a joint development and
supply arrangement with Xylan under which Xylan granted us a non-exclusive,
worldwide right to market, distribute and sell its OmniSwitch product and
related products with our DSL products. Alcatel acquired Xylan in 1999. Under
the agreement, we are Xylan's primary reseller of these products for connections
to our DSLAMs. Paradyne and Xylan have agreed upon feature enhancements to these
products to meet specific customer requirements. The agreement extends until
March 2002 and will be automatically extended one year at a time unless either
party cancels with adequate notice.

     GlobeSpan. Effective March 1999, we entered into a supply agreement with
GlobeSpan which provides for preferential pricing to Paradyne and other terms in
connection with the purchase of GlobeSpan products by Paradyne. Under the terms
of this agreement, GlobeSpan is required to honor Paradyne's orders for
GlobeSpan products in quantities at least consistent with Paradyne's past
ordering practices and agreed to afford Paradyne at least the same priority for
its orders as GlobeSpan affords other similarly situated customers. Paradyne was
also granted immunity under GlobeSpan's intellectual property rights for all
Paradyne customers that purchase Paradyne products that incorporate GlobeSpan
products. GlobeSpan has been selling products to Paradyne pursuant to these
terms since July 1998. The agreement will expire in March 2003, unless
terminated upon one year's notice. In addition to the supply agreement, Paradyne
and GlobeSpan work very closely together to develop capabilities that are
jointly defined by the two companies. Our marketing and research and development
organizations meet on a regular basis to review the status of projects.


                                       13
<PAGE>

     Conexant. In December 1999, we entered into a supply arrangement with
Conexant to provide Paradyne with Conexant's ZipWire symmetrical DSL (SDSL)
transceivers and AutoBaud technology for use in our SDSL port cards for the
Hotwire(R) GranDSLAM solution. AutoBaud is an SDSL interoperability platform
that is gaining wide acceptance from DSL vendors as well as service providers.

     Hotwire Connected Partners. Paradyne's interoperability certification
program is called Hotwire Connected. This program provides verification that
certain DSL customer premises equipment will interoperate with specific line
cards supported in Paradyne's Hotwire GranDSLAM. Certified interoperable
partners include 3Com, Adtran, Vina, Efficient Networks, Cayman, Netopia and
Xspeed.

     Alcatel (Microelectronics). In January 2002, we entered into an agreement
with the microelectronics unit of Alcatel, to jointly develop and produce a new
generation of ADSL chipsets. Known as ADSL/R, this chipset will combine standard
ADSL technology with Paradyne's patented ReachDSL technology. As part of this
agreement, Paradyne has granted to Alcatel for its microelectronics unit, a
license to use its ReachDSL technology for production of both central office
(CO) and customer premise equipment (CPE) chipsets. Additionally, both companies
have committed resources, which include research and development personnel, to
ensure the successful development of the Dual Mode ADSL/R chipsets.

SALES, MARKETING AND DISTRIBUTION

     We sell our products worldwide through a multi-tier distribution system
that includes direct sales, strategic partner sales, NSP sales and traditional
distributor or value added reseller sales. Our sales teams are supported with
marketing programs, educational programs, field technical support and telephone
technical support. Our Internet and intranet sites are used extensively to
communicate with our sales teams, our customers and our resellers.

     Our direct sales teams are organized to sell directly to NSP, value added
reseller and distributor customers. Our NSP and value added reseller customers
purchase our products and then sell them or provide them in a service offering
to their end-user customers, whether business customers or residential
customers. This team markets to business customers in support of our value added
reseller and NSP partners. Our resellers add value by providing order
processing, credit and significant sales and technical support. Our field sales
teams are comprised of sales and systems engineering personnel that are
experienced and knowledgeable about the products and technologies we provide and
support. Our field sales teams are further supported by Paradyne's telesales
team. This inside sales team answers all incoming emails and telephone calls,
makes outbound telephone calls, follows up on leads generated through
advertising and provides telephone support to our resellers.

     Our resellers are responsible for identifying potential business customers,
selling our products as part of complete solutions and, in some cases,
customizing and integrating our products at end users' sites. We establish
relationships with resellers through written agreements that provide prices,
discounts and other material terms and conditions under which the distributor is
eligible to purchase our products for resale. Such agreements generally do not
grant exclusivity to the resellers, prevent the resellers from carrying
competing product lines or require the resellers to sell any particular dollar
amount of our products, although the contracts may be terminated at our election
if specified sales targets and end user satisfaction goals are not attained. We
nurture these relationships with resellers with incentive and training programs.
This multi-channel sales strategy encourages broad market coverage by allowing
our sales personnel to create demand for our products while giving customers the
flexibility to choose the most appropriate delivery channels.

     We participate in trade shows and seminars and make extensive use of the
Internet and our web presence at www.paradyne.com to promote and generate demand
for our products. (The reference to our worldwide web address does not
constitute incorporation by reference into this Annual Report on Form 10-K of
the information contained at this web site.) Since most of our customers utilize
the Internet, we believe that our Internet presence is a low cost and highly
effective method for educating our customers about our products and creating
demand for our products. As a result, we place Internet advertising and conduct
targeted email marketing. Our web site includes product information, multimedia
presentations and customer testimonials. We also host Internet based interactive
seminars for promotional seminars, training events and press conferences.

     Channel marketing programs allow us to attract and support our resellers,
including NSPs. Our "Connect to Success" reseller program markets and sells
products directly to large resellers and through national distributors, such as
Ingram Micro, Tech Data, Graybar and SoluNET, to hundreds of value added
resellers and NSPs. Our relationships with these distributors provide
significant value to our reseller partners by giving them immediate availability
to product without the cost of stocking. These well known distributors also
extend credit to resellers, increasing their buying power, and providing


                                       14
<PAGE>

them with direct shipments to end customers further reducing costs. Our reseller
programs provide advertising support, volume incentive rebates, and exclusive
access to technical support via 1-800 numbers and through our web site. Special
programs encourage value added reseller loyalty, focus on strategic products,
and focus on winning new accounts. Specialized product training programs are
provided to our resellers at our headquarters, in the field and over the web.

     In addition to the marketing and sale of our products, we resell the
Acculink Access Controller, our private label for the IMACS system of Zhone
Technologies, Inc., through a small focused sales team. Paradyne and Zhone
entered into a distribution agreement in 1992, which has been amended and
extended, under which we have exclusive distribution rights through April 2005
for Zhone's IMACS system, which we market to Lucent and AT&T. In 1995 and 1996,
we sold the Acculink Access Controller to Lucent, AT&T and many other companies.
In 1997, we discontinued selling the product to customers other than Lucent and
AT&T for various pricing and distribution reasons. Currently, we sell the
Acculink Access Controller to Lucent and AT&T for a variety of wireless and
wireline applications. We have also developed and sell a limited number of
hardware and software enhancements for the Acculink Access Controller.

CUSTOMERS

The end-users of our equipment are primarily businesses and NSPs.

Business Customers

     Business customers include businesses around the world that purchase
equipment for their company's wide area network from Paradyne's resellers or,
for some international customers, directly from Paradyne. Set forth below is a
representative list of businesses, who purchased over $100,000 of our products
in 2001:

<TABLE>
         <S>                                   <C>                                 <C>
         Avaya                                 Farmers Insurance                   Motorola
         Bank One                              Fifth Third Bank                    Northwest Airlines
         Chase Manhattan                       General Electric                    Paine Webber
         Cigna                                 Hertz                               Salomon Smith Barney
         Citigroup                             Iowa State Univ                     State of Tennessee
         Charter One Bank                      Liberty Mutual                      Summit Bank
         Commonwealth of Mass                  Lucent                              VISA
         Credit Suisse First Boston            Marriott                            Wachovia Corp.
         Dillards                              Merrill Lynch                       Xerox
</TABLE>

Network Service Providers

     NSPs purchase equipment for their network or for resale into their
customers' networks. Set forth below is a representative list of NSPs who
purchased over $100,000 of our products in 2001:

<TABLE>
<S>                                                      <C>
Altec Sa                                                 Network Access Solutions
 AT&T                                                    North Pittsburgh Telephone Co.
 Bahamas Telecommunication Corp                          Multi-Band Communications Inc
 Bell Canada                                             North State Communications
 Bixby Telephone Co                                      Northern Telephone
 Brandenburg Telephone Co                                Primatel Communications
 Broadband Technologies (Japan)                          Rhythms Netconnections
Broadwing Communications Services Inc                    Rio Communications
Cavalier Telephone Llc                                   SBC Communications
 Choice One Communications                               Sleepy Eye Telephone Company
 Comporium Communications                                Sogetel Inc.
Concord Telephone Co                                     Sprint
Connectsouth Corp                                        Sprint Canada
Equant                                                   Sully Buttes Telephone Coop. Inc.
Fibernet                                                 TDS Telecom
 GCI Communications Corp                                 Telebec Ltee
Guyana Telephone & Telegraph Co. Ltd                     Telus Communications
Integra Telecom                                          Tularosa Basin Telephone Co.
Islandssimi                                              Verizon
 Jas Networks Inc.                                       Voda One Corp
Matanuska Telephone                                      Worldcom
</TABLE>



                                       15
<PAGE>

     In 2001, only one of our customers accounted for greater than 10% of our
revenues. Sales to Broadband Technologies (Japan) accounted for 21% of our total
revenues. Direct sales to Lucent and Avaya accounted for approximately 9% of our
total revenues. Sales to Tech Data accounted for approximately 6% of our total
revenues and we estimate that approximately 27% of our sales to Tech Data
represented products that were resold to Avaya. Collectively, we estimate that
direct and indirect sales and services performed for Lucent and Avaya accounted
for approximately 15% of our total revenues in 2001.

CUSTOMER SUPPORT

     We maintain a strong focus on customer service and support for our
resellers and end-user customers. We accomplish this at our customers' sites
through systems engineers who work with customers in a pre-sales role, and
through the support teams of our resellers. The Paradyne Technical Support
Center provides telephone based pre-and post-sales support to resellers and
customers on a seven-day, 24-hour basis and also provides proposal support to
the sales organization. Our training organization provides technical training to
end users, maintenance service providers, NSPs and sales channels. Training is
included as a part of our channel programs or is provided on a fee basis. We
provide maintenance support offerings that utilize a variety of service
organizations based on geography and skills required. Our authorized service
providers include Lucent, NCR, Netera (formerly Myriad), Vital Network Services
and Equant (formerly TechForce). These service providers provide service
offerings that include various maintenance packages, installation, remote
management, project management and other professional service options.
Warranties on most of our hardware products extend for 12 months. A few products
have an outstanding 24-month warranty and other products have outstanding
60-month warranties. Software products carry a 90-day warranty. Factory repair
or replacement is provided by us.

COMPETITION

     The telecommunications market is highly competitive. If we fail to compete
effectively our business will be adversely affected. We believe that competition
may increase substantially as the introduction of new technologies, deployment
of broadband networks and potential regulatory changes create new opportunities
for established and emerging companies in the industry. This increase in
competition may lead to price reductions of many of our products. We compete
directly with other providers of broadband and narrowband access equipment,
including Adtran, Alcatel, Carrier Access Corporation, Cisco, Copper Mountain,
Kentrox, Larscom, Motorola, Nokia, Orckit, Entrada Networks (formerly Sync
Research), 3Com, Tut Systems and Visual Networks. We expect that competition for
products that address the broadband access market will grow as more companies
and an increasing number of new companies focus on this market to develop
solutions for higher speed access to public networks. We expect that competition
for products that address the narrowband market will not dramatically change
over the course of the next few years.

     Our future success will depend on our ability to compete successfully
against our competitors based on the following factors:

     - key product features;
     - system reliability and performance;
     - technological innovation;
     - price;
     - time to market;
     - breadth of product lines;
     - conformity to industry standards;
     - ease of installation and use;
     - brand recognition;
     - ability to help customers finance purchases;
     - technical support and customer service; and
     - size and stability of operations.

RESEARCH AND DEVELOPMENT

     Since 1969, we have been developing technologies and solutions for the
communications market. We believe that our future success is dependent on our
ability to continue to rapidly deliver innovative broadband access solutions.
Time to market is critical in order to meet the requirements of our extensive
customer base and to be able to quickly adapt to the constantly emerging needs
in the market. Innovation is critical in order to provide the capabilities that
differentiate the


                                       16
<PAGE>

products and solutions that we offer from those of our competitors. We intend to
maintain an ongoing investment in research and development that will support
technological innovation.

     Our research and development efforts are focused on sustaining and
enhancing our existing products and developing innovative new solutions in the
emerging broadband market. We emphasize early and frequent interaction between
our research and development systems engineers, key technologists and customers
to arrive at unique solutions to meet specific product requirements. Customer
feedback is also obtained from resellers and through participation in industry
events, organizations, and standards bodies.

     We have developed core competencies in SLM, broadband systems
internetworking, network management, and broadband access technologies. We will
continue to rely on the use of industry and technology partnerships to further
enhance the capability to quickly introduce new solutions into the broadband
market, and we expect to continue to employ a strategy that uses a combination
of internally developed solutions and external partnering.

     We maintain research and development sites in Largo, Florida and
Alpharetta, Georgia (as a result of our March 5, 2002 acquisition of Elastic
Networks). In order to maintain a rapid pace of product introduction, we will
need to continue to attract and retain talented engineers and invest in
state-of-the-art research and development tools and processes. We will continue
to maintain core competencies in key areas, such as Java programming, embedded
system software, digital signal processing, internetworking, data communication
protocols, test automation, central office solutions, RISC processing,
transmission technologies, and telephony.

     Currently, we are developing enhancements for all of our broadband DSL and
SLM product families. We expect this work to result in feature improvements to
these products and/or a reduction in the costs associated with their manufacture
and/or deployment. We are focused on increasing the density and performance of
our ReachDSL systems and their ease of use by NSPs. Subsequent to the March 5,
2002 acquisition of Elastic Networks, we are in the process of integrating
Elastic's products and technologies with ours. We are focused on increasing the
density and performance of our EtherLoop systems and their ease of use by NSPs,
MDU owners and hospitality network operators. In addition, we plan to continue
investing in SLM system products, which facilitate the deployment of Frame Relay
over DSL.

     For a discussion of the amount spent on research and development for the
fiscal years ended December 31, 1999, 2000 and 2001, see "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Results of Operation" of this Form 10-K.

INTELLECTUAL PROPERTY

     Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws and non-disclosure agreements to protect our proprietary
technology. We have been issued over 295 patents, hold over 210 U. S. patents
and have over 80 U. S. patent applications pending. There can be no assurance
that patents will be issued with respect to pending or future patent
applications or that our patents will be upheld as valid or will prevent the
development of competitive products.

     We seek to protect our intellectual property rights by limiting access to
the distribution of our software, documentation and other proprietary
information. In addition, our employees execute proprietary information
agreements and we enter into nondisclosure agreements with some of our strategic
partners. There can be no assurance that the steps taken by us in this regard
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technologies. We also are subject to the risk of
adverse claims and litigation alleging infringement of the intellectual property
rights of others. In this regard, there can be no assurance that third parties
will not assert infringement claims in the future with respect to our current or
future products or that any such claims will not require us to enter into
license arrangements or result in protracted and costly litigation, regardless
of the merits of such claims. Furthermore, from time to time, we receive and
have received letters from others requesting licenses or indicating that our
products may require a license. These letters are not uncommon in the industry,
and these letters are dealt with according to normal business practices. In some
cases these letters are followed up with formal legal action. For example, in
July 2000, a third party filed suit against us and approximately ninety other
defendants. The suit alleges that all the defendants are violating more than a
dozen patents owned by the third party which allegedly cover the fields of
"machine vision" used extensively in pick-and-place manufacturing of circuit
boards and bar code scanning. We purchase this equipment from vendors, who we
believe may have an obligation to indemnify us in the event that the equipment
infringes any third-party patents. The complaint does not specify which
defendants or activities allegedly violated which particular patents. We have
responded with a Motion for More Definite Statement designed to identify the
allegedly infringing activities as well as the particular patents and claims
allegedly being infringed by us. We cannot assure you that we will prevail in
this action and any adverse outcome could require us, among other things, to pay



                                       17
<PAGE>

royalties to the third party patent owner. Given the lack of specificity in the
complaint, it is not currently possible to calculate the potential for, or
extent of, any liability resulting from this claim. We also cannot assure you
that we will not receive other claims alleging infringement in the future.

     Most of Paradyne's existing patent portfolio will be enforceable in the
United States for at least the next ten years, provided that periodic
maintenance fees are paid to the U. S. Patent and Trademark Office and unless
determined to be invalid or unenforceable by an appropriate court or the U. S.
Patent and Trademark Office. Most of Paradyne's inventions that are directed to
DSL and SLM technologies are covered in pending applications that have yet to
issue as patents and that have been filed in the last several years. If and once
issued, these patents will be enforceable for 20 years from the date the
application was originally filed, pursuant to applicable laws, provided that
periodic maintenance fees are paid to the U. S. Patent and Trademark Office and
unless determined to be invalid or unenforceable by an appropriate court or the
U. S. Patent and Trademark Office.

MANUFACTURING

     We manufacture substantially all of our products. All of our major
operations are ISO-9001 registered. Many of our parts are procured from a
variety of qualified suppliers per our specification. Some of our strategic
suppliers are electronically linked, and given 26 weeks visibility of demand. We
believe that this is critical in maintaining high delivery volumes and
minimizing inventory. However, because of long lead times for many of our raw
materials, we must hold sufficient quantities of all required parts to meet
forecasted demand for our products. We use a combination of standard parts and
components, which are generally available from more than one vendor and some
parts that are obtained from a single source. We have generally been able to
obtain adequate supplies in a timely manner from our current vendors or, when
necessary, to meet production needs from alternative vendors. We believe that,
in most cases, alternate vendors can be identified if current vendors are unable
to fulfill our needs. However, if we are unable to obtain sufficient quantities
of necessary supplies, or if there is a significant increase in the price of key
components or materials, delays or reductions in manufacturing or product
shipments could occur, which would have a material adverse effect on our
business, financial condition and results of operations.

     We believe that we have sufficient production capacity to meet current
demand for our product offerings and anticipate meeting future demand through a
combination of the use of additional employees and outsourcing of products or
components. In addition, we have the right of first refusal on the construction
of any building on some lands adjacent to our Largo, Florida facilities if more
space is needed to expand our manufacturing operations.

BACKLOG

     Our confirmed backlog at the beginning of each quarter is a small portion
of the quarter's revenue target. Most revenue booked in each quarter results
from orders filled within the quarter. In most circumstances orders can be
rescheduled without penalty. Therefore, backlog is not a meaningful indicator of
future revenues.

EMPLOYEES

     As of December 31, 2001, we employed approximately 564 full time employees.

GOVERNMENT REGULATION

     From time to time, federal and state legislators propose legislation that
could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of our operations. Additionally,
the FCC and state regulatory bodies may adopt rules, regulations or policies
that may affect our business. We cannot predict the impact of such legislative
actions on our operations.

     In the U. S., the Telecommunications Act of 1996 changed the regulatory
environment for all NSPs, including the CLECs and incumbent local exchange
carriers, or (ILECs, among our customer base. The Telecommunications Act of 1996
removed federal, state and local barriers to entry into the local telephone
market by CLECs. The Telecommunications Act of 1996 also imposed significant
obligations on ILECs, including obligations to interconnect their networks with
competitors' networks and to unbundle their networks and provide competitors
with access to unbundled network elements. CLECs and ILECs are a significant
part of our customer base. The Telecommunications Act of 1996 also directs the
FCC to adopt local loop access rules to enable competitive providers of advanced
services, such as high-speed Internet access, to deploy new technologies on a
faster, more cost-effective basis to consumers. The U.S. Congress continues to
consider possible amendments to the Telecommunications Act of 1996.


                                       18
<PAGE>

     The FCC continues to consider changes to its regulations, including those
relating to network equipment registration and the deployment of broadband
services. From time to time, the FCC or regulatory bodies may propose
legislation or adopt rules, regulations or polices that could affect our
business, either beneficially or adversely, such as by increasing competition or
affecting the cost of our operations.


     Companies selling terminal equipment to be connected to the public switched
telephone network must register some of their products with the FCC and conform
them to technical standards promulgated by the FCC in its regulations. These
regulations are designed to protect the public switched telephone network from
harm, including interference and service degradation.

GEOGRAPHIC AREAS

     For a discussion of domestic and international revenues for the fiscal
years ended December 1999, 2000 and 2001, see "Note 2 - Summary of Significant
Accounting Policies: Concentration of Credit Risk" in the Notes to Consolidated
Financial Statements included as part of this Form 10-K.

ITEM 2. PROPERTIES

     Our principal administrative, engineering and manufacturing facilities are
located in a leased building totaling approximately 289,823 square feet in
Largo, Florida. The lease for the Largo, Florida facility expires in 2012 and
there are two five-year renewal options. In March 2001 we subleased a 29,000
square foot research and development facility in Red Bank, New Jersey as part of
a restructuring announced in February 2001. In addition, we maintain a 15,898
square foot research and development facility in Alpharetta, Georgia acquired as
part of the March 2002 acquisition of Elastic Networks, which expires in July
2003. As part of the Elastic Networks acquisition, we also acquired three
additional building leases totaling 53,000 square feet, two in Alpharetta,
Georgia and one in Hong Kong which expire in 2002 and 2003. We also lease
offices for branch sales and administration in Canada, France, Egypt, Japan,
Singapore, Korea and the People's Republic of China. Collectively, these offices
occupy approximately 17,000 square feet. Leases for these facilities expire at
various times during 2002 and 2003. We believe that the current facilities
accommodate anticipated needs in these locations over the next 24 months. In
addition, we have the right of first refusal on the construction of any building
on some lands adjacent to our Largo, Florida facilities if more space is needed
to expand our manufacturing operations.

ITEM 3. LEGAL PROCEEDINGS

     Following Paradyne's September 28, 2000 press release regarding
contemplated third quarter results, several securities class action suits
(collectively, the "Securities Actions") against Paradyne; Andrew May,
Paradyne's Chief Executive Officer and President at the time; Patrick Murphy,
Paradyne's Chief Financial Officer and Senior Vice President; and Thomas Epley,
Paradyne's Chairman of the Board (collectively, the "Defendants") were filed in
October 2000 in the United States District Court for the Middle District of
Florida, Tampa Division. Plaintiffs include the following stockholders: Steven
Barrios, Hayes Ho, Jacob Turner, Robert Preston, Ron Walker, Jerold B. Hoffman
and Amy K. Hoffman. The Securities Actions allege violations by the Defendants
of the securities anti-fraud provisions of the federal securities laws,
specifically Section 10(b) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder. The Securities Actions further allege
that the individual defendants May, Murphy and Epley are liable under Section
20(a) of the Securities Exchange Act as "control persons of Paradyne". The
plaintiffs purport to represent a class of investors during a purported class
period of September 28, 1999 through September 28, 2000 and allege, in effect,
that the Defendants during that time, through material misrepresentations and
omissions, fraudulently or recklessly inflated the market price of Paradyne's
stock by allegedly erroneously reporting that Paradyne was performing well, that
its inventories were properly stated, and that its customer base and product
demand were solid. The Securities Actions seek damages under the
fraud-on-the-market theory in an unspecified amount for the purported class for
the alleged inflated amount of the stock price during the class period. The
Defendants filed a motion on May 25, 2001, asking the court to dismiss the
complaint, with prejudice, after which the Plaintiffs filed a memorandum of law
in opposition to Defendant's dismissal motion on July 2, 2001. The Defendant's
dismissal motion is pending with the court and we are unable to predict how long
the court will take to rule on the motion. The Defendants believe the claims are
without merit and intend to vigorously defend them, although they cannot predict
the outcome. Paradyne has engaged the law firm of Holland and Knight, LLP as its
legal counsel in this litigation. As of December 31, 2001, no ruling has been
made by the court.

     A second stockholder purported class action suit was filed in December 2001
in the federal court in the Southern District of New York against us, some of
our executive officers and the chairman of our board, and the underwriters of
our initial public offering (collectively, the "IPO Defendants"). One of our
directors, Keith B. Geeslin, is employed by an affiliate of the successor to DLJ
Capitol Corporation, one of the underwriters of our initial public offering.
That action alleges that


                                       19
<PAGE>

defendants, during the period from July 15, 1999 through December 6, 2000,
violated federal securities laws by allocating shares of our initial public
offering to favored customers in exchange for their promise to purchase shares
in the secondary market at escalating prices. The IPO Defendants believe the
claims are without merit and intend to vigorously defend them, although they
cannot predict the outcome.

     Other than the legal proceedings described above, in the normal course of
business, we are subject to proceedings, lawsuits and other claims. While these
matters could affect the operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to Paradyne beyond that provided in the
consolidated balance sheet at December 31, 2001, would not be material to our
annual consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     During the fourth quarter ended December 31, 2001, no matters were
submitted to a vote of our stockholders.


                                       20
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

MARKET INFORMATION AND HOLDERS OF RECORD

     Our common stock is publicly traded on the Nasdaq National Market (NASDAQ)
under the symbol "PDYN". We completed an initial public offering in July 1999
and a secondary offering in September 1999. Prior to July 16, 1999, there was no
established public trading market for any of our securities.

     As of March 15, 2002, we had approximately 247 stockholders of record,
excluding stockholders owning shares in street name. Because there may be many
stockholders holding our common stock in street name, the actual number of
stockholders may be significantly greater than stated above.

PRICE RANGE OF COMMON STOCK

     The following table represents the range of high and low sales prices for
our publicly traded common stock, as reported on the Nasdaq National Market, for
the periods indicated. The stock prices do not include retail mark-ups,
mark-downs or commissions.

<TABLE>
<CAPTION>
          2000                                               HIGH              LOW
          ----                                               ----              ----
          <S>                                            <C>               <C>
          First Quarter                                  $  53.0000        $  25.5000
          Second Quarter                                    36.0625           17.2500
          Third Quarter                                     43.2500            5.1250
          Fourth Quarter                                     6.1250            1.5000

          2001

          First Quarter                                      3.6562            1.3750
          Second Quarter                                     2.4000            1.0000
          Third Quarter                                      3.0200            0.9700
          Fourth Quarter                                     4.2600
                                                                               1.1000

          2002

          First Quarter  (through March 15, 2002)            6.4900            2.9000
</TABLE>

DIVIDENDS

     We have never declared or paid cash dividends. We intend to retain all
future earnings for use in the operation and expansion of our business and,
therefore, do not anticipate declaring or paying cash dividends in the
foreseeable future. The payment of future cash dividends will be at the sole
discretion of our board of directors and will depend upon our profitability,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the board of directors. The payment of cash dividends is also
limited by certain covenants in our line of credit facility with Foothill
Capital Corporation. For a further discussion regarding restrictions on the
ability to pay dividends you may refer to "Item 7. Management Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."

USE OF PROCEEDS FROM REGISTERED SECURITIES

     Our Registration Statement on Form S-1 (Registration No. 333-76385) became
effective on July 15, 1999. In connection with our initial public offering, we
received net proceeds of approximately $62,240,000 after deducting estimated
underwriting discounts, commissions, and offering expenses. Through December 31,
2001, we had used approximately $52,500,000 of net proceeds to repay all the
outstanding indebtedness from our previous revolving line of credit facility
with the Bank of America, to pay for certain capital expenditures, for working
capital, and to fund the acquisition of Control Resources Corporation in April
2000. We intend to use the remainder of the net proceeds for general corporate
purposes, including working capital and capital expenditures. We continue to
assess the specific uses and allocations for these remaining funds.

ITEM 6. SELECTED FINANCIAL DATA

     The following selected consolidated financial data as of December 31, 2000
and 2001 and for the years ended December 31, 1999, 2000 and 2001 is derived
from Paradyne's consolidated financial statements which are included


                                       21
<PAGE>

elsewhere in this Form 10-K. You should read the selected financial data in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data." The selected consolidated financial data for the years
ended December 31, 1997 and 1998 is derived from audited consolidated financial
statements which are not included in this Form 10-K.

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                    Years ended
                                                                                    December 31,
                                                          1997            1998           1999            2000          2001
                                                        ---------      ---------      ---------      ---------      ---------
                                                                         (In thousands, except per share data)
<S>                                                     <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
     Sales                                              $ 178,212      $ 195,580      $ 220,723      $ 243,715      $ 142,008
     Service                                                3,040          2,256          2,617          3,674          4,425
     Royalties                                                413          1,392          3,118            293            272
                                                        ---------      ---------      ---------      ---------      ---------
          Total revenues                                  181,665        199,228        226,458        247,682        146,705
                                                        ---------      ---------      ---------      ---------      ---------
Cost of sales:
     Equipment                                             90,696        108,348        124,674        181,487         96,676
     Service                                                1,154            620            823          1,295          1,791
                                                        ---------      ---------      ---------      ---------      ---------
          Total cost of sales                              91,850        108,968        125,497        182,782         98,467
                                                        ---------      ---------      ---------      ---------      ---------

Gross margin                                               89,815         90,260        100,961         64,900         48,238

Operating Expenses:
     Research & development                                37,339         35,132         36,470         40,392         25,128
     Selling, general & administrative                     66,278         55,969         55,938         59,184         37,307
     Amortization of deferred stock compensation
      and intangible assets                                     0              0          1,501          1,350            913
     Impairment of intangible assets                            0              0              0              0          5,761
     Restructuring charges                                  1,778            984              0          1,371          3,807
                                                        ---------      ---------      ---------      ---------      ---------
          Total operating expenses                        105,395         92,085         93,909        102,297         72,916
                                                        ---------      ---------      ---------      ---------      ---------

Operating income (loss)                                   (15,580)        (1,825)         7,052        (37,397)       (24,678)

Other (income) expenses
     Interest                                               7,712          1,711           (405)        (2,439)          (743)
     Lucent settlement gain                               (51,183)             0              0              0              0
     Other, net                                            (1,753)         1,191         (3,911)           (52)          (321)
                                                        ---------      ---------      ---------      ---------      ---------

Net income (loss) before provision for                     29,644         (4,727)        11,368        (34,906)       (23,614)
     income tax

Provision (benefit) for income tax                          8,302         (1,082)         3,479           (619)             0
                                                        ---------      ---------      ---------      ---------      ---------

Net income (loss)                                       $  21,342      $  (3,645)     $   7,889      $ (34,287)     $ (23,614)
                                                        =========      =========      =========      =========      =========

(Loss) earnings per common share:
     Basic                                                   0.84          (0.14)          0.28          (1.08)         (0.72)
     Diluted                                                 0.81          (0.14)          0.26          (1.08)         (0.72)

Shares used in computing (loss) earnings per share:
     Basic                                                 25,552         25,623         28,435         31,768         32,879
     Diluted                                               26,291         25,623         30,112         31,768         32,879

Comprehensive income                                    $  21,930      $  (4,304)     $   8,400      $ (34,295)     $ (23,653)

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents                               $   3,240      $   2,356      $  62,885      $  19,821      $  37,866
Working capital                                             9,606          8,382         86,351         54,845         47,868
Total assets                                               83,200         75,063        130,485        117,280         86,079
Long-term debt                                                402            353            256            684            444
Total debt                                                 18,184         16,836            690          1,322            928
Total stockholders' equity                                 31,402         27,339        105,684         82,659         61,197
</TABLE>


                                       22
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis contains forward-looking statements
about our plans and expectations of what may happen in the future.
Forward-looking statements involve uncertainties and risk and our actual results
could differ materially from the results anticipated by our forward-looking
statements as a result of many known and unknown factors, including but not
limited to those discussed below in "Risk Factors Which May Impact Future
Operating Results" and elsewhere in this report. See also "Special Cautionary
Notice Regarding Forward-Looking Statements" at the beginning of "Item 1.
Business."

     You should read the following discussion and analysis in conjunction with
"Item 6. Selected Financial Data" and "Item 8. Financial Statements and
Supplementary Data."

OVERVIEW

     We are a leading developer, manufacturer and distributor of broadband and
narrowband network access products for network service providers, or NSPs, and
business customers. We offer solutions that enable business class, service level
managed, high-speed connectivity over the existing telephone network
infrastructure and provide for cost-effective access speeds of up to 45 Mbps.
Our equipment has been sold to over 50% of the Fortune 500(R) companies. We
estimate that sales to NSPs represented approximately 73% of our total revenues
in 2001.

     Through 1997, our revenues were derived principally from the sale and
service of narrowband network access products and, to a much lesser extent,
technology licensing. Our broadband products, including our Hotwire and
FrameSaver products, which were introduced in 1997, comprised approximately 70%
of our total revenues in 1999, approximately 76% in 2000 and approximately 81%
in 2001. Additionally, we expect broadband products to represent an increasing
portion of future revenues. Royalty revenues consist principally of licensing of
technology, and service revenues are derived from repair of out-of-warranty
products. We do not expect that either royalty or service revenues will
constitute a substantial portion of our revenues in future periods.

     In July 1999, we completed an initial public offering of 4,000,000 shares
of our common stock at an initial public offering price of $17.00 per share. We
received net proceeds of approximately $61.2 million after deducting estimated
underwriting discounts and commissions and other offering expenses. In September
1999, we and certain of our stockholders sold 20,000 and 5,000,000 shares of
common stock, respectively, in a secondary offering.

     We market and sell our products worldwide to NSPs and business customers
through a multi-tier distribution system that includes direct sales, strategic
partner sales, NSP sales and traditional distributor or value added reseller
sales. Direct sales and services performed for Lucent and Avaya in 2001
accounted for approximately 15% of our total revenues, down from 20% in the
prior year. This decrease mostly results from lower Lucent equipment sales of
some of our older products in 2001. In 2001, Broadband Technologies Corporation,
or BBT, located in Japan, became a major customer. Direct sales to BBT accounted
for approximately 21% of our total revenues in 2001. A loss or a significant
reduction or delay in sales to any of our major customers could materially and
adversely affect our business, financial condition and results of operations.

     We generally recognize revenue from product sales upon shipment. No revenue
is recognized on products shipped on a trial basis. Estimated sales returns
based on historical experience by product are recorded at the time the product
revenue is recognized. Charges for warranty work are included in cost of
equipment sales. We believe that our accrued warranty reserve is sufficient to
meet our responsibilities for potential future warranty work on products sold.
Revenue from services, which consists mainly of repair of out-of-warranty
products, is recognized when services are performed and all substantial
contractual obligations have been satisfied. License and royalty revenues are
recognized when we have completed delivery of technical specifications and
performed substantially all required services under the related agreement.

     We expect our gross margin to be affected by many factors, including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, the mix of products or system configurations sold
and timing of sales of follow-on line cards and endpoints for central office
systems. Follow-on line cards and endpoints are components that are sold
separately from central office systems and margins vary on these products.
Central office systems are often sold as stand-alone chassis with a limited
number of line cards. Customers purchase follow-on line cards and endpoints in
order to increase the capacity of their central office system. Additionally, our
gross margin may fluctuate due to changes in our mix of distribution channels.
Sales prices of many of our products are subject to significant pressure as a
result of increased competition. Price reductions may be necessary to remain
competitive. Although we have been able to offset many price declines with
reductions in our manufacturing costs, there can be no assurance that we will be
able to offset potential future price declines with cost reductions.


                                       23
<PAGE>

     Research and development expenses primarily consist of: personnel costs
related to engineering and technical support; consultant and outside testing
services fees; research and development facilities expenses; equipment and
supply expenses associated with enhancing existing products and the development
of new products; an allocation of information systems charges; and software and
software maintenance expenses. We expense all research and development expenses
as incurred. Although we believe that continued investment in research and
development is critical to attaining our strategic product and cost-reduction
objectives we will attempt to control and optimize our research and development
expenditures in order to meet our strategic goals. Therefore, if our revenues
decrease, our research and development expenditures will be expected to decrease
as well.

     Selling, general and administrative expenses primarily consist of:
salaries, commissions and related expenses for personnel engaged in marketing,
sales and field service support functions, finance, human resource and
administrative activities; advertising, promotional and trade show expenses,
including the related travel expenses; consultant fees; equipment and facilities
expenses, including intangibles amortization; supplies, software and software
maintenance; and consignments. We intend to continue to invest in selling,
marketing and promotional programs. Given the current decrease in capital
spending by our customers and other companies in the broadband technology market
we expect general and administrative expenses to decrease as we focus on
controlling expenses and eliminating unnecessary expenses in the future.

     Sales to customers outside of the United States accounted for approximately
18%, 23% and 47% of revenues in 1999, 2000 and 2001, respectively. This increase
in 2001 was primarily due to the increase in sales of our broadband products to
a major customer in Japan. In 2001, approximately 95% of our sales were
denominated in U. S. dollars. While Paradyne is subject to fluctuations in
foreign currency exchange rates with respect to income derived from
international sales not denominated in U. S. dollars, the costs associated with
a majority of these sales are in the same currency, which partially mitigates
the effect of such fluctuations. Historically, currency exchange movements have
not had a material effect on our business, financial condition or results of
operations. If our non-U. S. operations expand, the effect of currency
fluctuations may have a more significant impact on our revenues and costs. At
December 31, 2001, we had no material monetary assets, liabilities or
commitments denominated in currencies other than U. S. dollars. We do not hedge
foreign currency transactions.

     We were not profitable in 2001 as our revenues decreased significantly, and
we may continue to incur net losses in future periods. In addition to the
customer concentration we have experienced, we also have lengthy development and
sales cycles for our products, and there is often a significant delay between
the time we incur expenses and the time we realize the related revenue. To the
extent that future revenues do not increase significantly in the same periods in
which operating expenses increase, our operating results will be adversely
affected. Our quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate in the future due to a variety of factors, many of
which are outside of our control.

Acquisition of Elastic Networks Inc.

     On March 5, 2002 we acquired 100% of the capital stock of Elastic Networks
in exchange for 7,623,875 shares of our common stock. Using an average market
value of $3.77 per share (using the average of the closing prices during the 7
trading days surrounding the December 27, 2001 announcement of the acquisition),
the purchase price is approximately $28.7 million. Elastic Networks designs
high-speed, broadband communications products that have the advantages of
high-speed access for the in-building broadband market and can operate
effectively over lower quality lines. Elastic was acquired for several reasons,
including: it launches Paradyne into the in-building DSL market; Elastic
Networks has a strong complimentary base of independent telephone companies as
customers; Elastic Networks' EtherLoop product is an important technology to
Paradyne; and Elastic Networks' cash and working capital will improve our
balance sheet.

     Elastic Networks will be included in our first quarter 2002 results for the
period March 6, through March 31, 2002. There are no contingent payments
associated with this acquisition. We are in the process of assigning value to
each major asset and liability acquired including intangible assets, but we have
not yet completed the work. This information will be reported in our first
quarter 2002 Form 10-Q.


                                       24
<PAGE>

RESULTS OF OPERATIONS

The following table summarizes Paradyne's operating results as a percentage of
revenues for each of the periods shown:

<TABLE>
<CAPTION>
                                                                           YEARS ENDED
                                                                           DECEMBER 31,
                                                     1997         1998         1999         2000         2001
                                                    ------       ------       ------       ------       ------
<S>                                                 <C>          <C>          <C>          <C>          <C>
Revenues:
     Sales                                            98.1%        98.2%        97.5%      98.4 %         96.8%
     Service                                           1.7          1.1          1.2          1.5          3.0
     Royalties                                         0.2          0.7          1.3          0.1          0.2
                                                    ------       ------       ------       ------       ------
          Total revenues                             100.0        100.0        100.0        100.0        100.0
                                                    ------       ------       ------       ------       ------

Cost of sales:
     Equipment                                        49.8         54.3         55.1         73.3         65.9
     Service                                           0.7          0.3          0.3          0.5          1.2
                                                    ------       ------       ------       ------       ------
          Total cost of sales                         50.5         54.6         55.4         73.8         67.1
                                                    ------       ------       ------       ------       ------

Gross margin                                          49.5         45.4         44.6         26.2         32.9

Operating expenses:
     Research & development                           20.6         17.7         16.1         16.3         17.1
     Selling, general & administrative                36.5         28.1         24.7         23.9         25.5
     Amortiz of deferred stock compensation and
       intangible assets                               0.0          0.0          0.7          0.5          0.6
     Impairment of intangible assets                   0.0          0.0          0.0          0.0          3.9
     Restructuring charges                             1.0          0.5          0.0          0.6          2.6
                                                    ------       ------       ------       ------       ------
          Total operating expenses                    58.1         46.3         41.5         41.3         49.7
                                                    ------       ------       ------       ------       ------

Operating income (loss)                               (8.6)        (0.9)         3.1        (15.1)       (16.8)

Other (income) expenses
     Interest                                          4.3          0.9         (0.2)        (1.0)        (0.5)
     Lucent settlement gain                          (28.1)         0.0          0.0          0.0          0.0
     Other, net                                       (1.0)         0.6         (1.7)         0.0         (0.2)
                                                    ------       ------       ------       ------       ------

Net income (loss) before provision for                16.4         (2.4)         5.0        (14.1)       (16.1)
     income tax

Provision (benefit) for income tax                     4.6         (0.6)         1.5         (0.1)         0.0
                                                    ------       ------       ------       ------       ------

Net income (loss)                                     11.8%        (1.8)%        3.5%       (13.8)%      (16.1)%
</TABLE>


YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Revenues. Total revenues decreased $101.0 million, or 40.8%, to $146.7
million for the year ended December 31, 2001 from $247.7 million for the same
period in 2000. The decrease was primarily due to significant decreases in the
volume of sales of our broadband access products as a result of the continued
deterioration in the overall competitive local exchange carrier (CLEC) market.
Additionally, most of our larger existing customers significantly decreased
their purchases in 2001 from prior year levels primarily due to a slowdown in
their businesses. Partially offsetting this decline in revenues, during the
third and fourth quarter of 2001, we sold a significant amount of product to a
new customer, BBT, in Japan. We expect BBT to continue as a significant customer
through at least the first quarter of 2002. Equipment sales were 96.8% of total
revenues for the year ended December 31, 2001 compared to 98.4% for the year
ended December 31, 2000. The percentage decrease was mostly due to a combination
of lower equipment revenues and an increase in service revenues in 2001 versus
2000.

     Gross Margin. Gross margin decreased $16.7 million or, 25.7%, to $48.2
million for the year ended December 31, 2001 from $64.9 million for the year
ended December 31, 2000. The decrease in gross margin was primarily due to the


                                       25
<PAGE>

reduction in volume of sales of our broadband access products which decreased as
a result of reduced demand from our existing customers brought on by the
continued deterioration in the CLEC market. Offsetting part of the gross margin
decrease was a $24.0 million improvement to margin that resulted from a smaller
provision for the write-down of inventory during 2001 compared with the prior
year. The gross margin for the year ended December 31, 2000 included a large
provision for excess inventory and loss on non-cancelable purchase commitments
in the total amount of $34.9 million, whereas the gross margin for the twelve
months ended December 31, 2001 included a $10.9 million provision for excess
inventory. The net impact of the smaller provision for the write-down of
inventory during 2001 compared to 2000 is a $24.0 million improvement to margin.
Gross margin as a percentage of total revenues increased to 32.9% in 2001 from
26.2% in 2000, mostly due to the net impact of the above mentioned inventory
provisions.

     Research and Development Expenses. Research and development expenses
decreased $15.3 million, or 37.8%, to $25.1 million for the year ended December
31, 2001 from $40.4 million for the year ended December 31, 2000. This decrease
resulted primarily from reductions in personnel-related costs, expenditures for
engineering prototype supplies and professional fees for contracted labor. Most
of the reduced expenditures were the result of our business restructuring in the
first quarter of 2001 that included the termination of approximately 120
research and development employees and the closing of facilities in Redbank and
Fairlawn, New Jersey. (See "Note 3 -Restructuring Charges" in the Notes to
Consolidated Financial Statements included as part of this Form 10-K for further
information). As a percentage of total revenues, research and development
expense increased to 17.1% for the year ended December 31, 2001 from 16.3% for
the year ended December 31, 2000 primarily due to the decreased revenues for the
year.

     Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased by $21.9 million, or 37.0% to $37.3 million for the year ended
December 31, 2001 from $59.2 million for the year ended December 31, 2000. These
decreases mostly result from decreases in expenses related to personnel, travel,
advertising and facilities. The decrease in advertising is mostly the result of
joint advertising expenses with a major customer associated with the sales of
new products in the prior year not repeated in 2001. The decrease in the other
expenses was primarily the result of our first quarter business restructuring
that included the termination of approximately 80 SG&A employees and the closing
of facilities in Redbank and Fairlawn, New Jersey. (See "Note 3 - Restructuring
Charges" in the Notes to Consolidated Financial Statements included as part of
this Form 10-K for further information). SG&A as a percentage of total revenues
increased to 25.4% for the year ended December 31, 2001 from 23.9% for the year
ended December 31, 2000. This increase was primarily due to the decrease in
total revenue during 2001.

     Impairment of Intangible Assets. Impairment of intangible assets included a
$4.2 million charge that occurred in the second quarter of 2001 and a $1.6
million charge that occurred in the first three months of 2001 resulting in a
total of $5.8 million for the year ended December 31, 2001. The $4.2 million
charge resulted from the write-off of the unamortized balance of goodwill that
was originally recorded as part of the Control Resources Corporation , or CRC,
purchase in April 2000. Revenues from the sale of the products and technology
acquired as part of the CRC acquisition were minimal in 2001. Because of
uncertainty related to our ability to sell the products from the product line
acquired from CRC, we determined that this intangible asset had no future
economic value, and consequently, we were required to write-off the unamortized
balance of the asset. The $1.6 million charge for impairment of intangible
assets resulted from the write-off of the net book value of an "Acquired
Workforce" intangible that was originally recorded in the second quarter of 2000
as part of the purchase of substantially all of the assets of CRC. As part of
the restructuring that occurred in the first quarter of 2001, we announced that
we were closing the Fairlawn, New Jersey facility and that substantially all of
the employees at that facility would be terminated in 2001. Since the value of
the in-place work force (who were terminated) was the basis of recording the
acquired workforce intangible, we recorded an impairment charge for the
remaining value of the asset.

     Amortization of Intangible Assets and Deferred Stock Compensation. The
amortization of intangible assets and deferred stock compensation decreased by
$.4 million, or 32.4%, to $.9 million for the year ended December 31, 2001 from
$1.3 million for the year ended December 31, 2000. The amortization of
intangible assets is attributable to goodwill and acquired work force that
resulted from the purchase of substantially all of the assets of CRC in the
second quarter of 2000 (see discussion above of "Impairment of Intangible
Asset"). Since all ($5.8 million) intangible assets were written off in the
first six months of 2001 as a result of the impairment of intangible assets,
amortization of these intangible assets amounting to approximately $1.5 million
on an annual basis will no longer be recorded. The amortization of deferred
stock compensation was related to the granting of stock options to key employees
at prices deemed to be below fair market value for financial reporting purposes.

     Restructuring Charges. During the first quarter of 2001 we incurred
expenses of $3.8 million related to our plans to reduce expenses. This action
was necessitated by the deterioration of the telecommunications equipment
market, which has resulted in reduced demand for our equipment. These expenses
included severance payments for the termination of approximately 220 employees
in addition to costs incurred in conjunction with the consolidation of our
facilities by closing


                                       26
<PAGE>

two development centers located in New Jersey and one office building in
Florida. No additional restructuring expenses were incurred during the second,
third and fourth quarters of 2001.

     Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, decreased by $1.4 million, or 57.3%, to $1.1 million of income for
the year ended December 31, 2001 from $2.5 million of income for the year ended
December 31, 2000. Interest and other (income) expense, net, was related to
interest on notes payable and borrowings under lines of credit, interest on
short term investments, gains and losses on equity investments and foreign
exchange gains and losses. This decrease was primarily attributable to a
reduction in interest income due to our significantly lower cash position during
the first half of 2001, resulting in lower earnings on short-term investments
and a reduction in the amount of income from the sale of patents, offset in part
by a decrease in exchange losses and the recognition of commitment fee income
net of expenses, received in connection with the termination of a credit
facility with a customer.

     Provision (Benefit) For Income Taxes. Benefit for income taxes decreased by
$.6 million to $0 for the year ended December 31, 2001, from $.6 million of
benefit for the same period in 2000. Since we incurred a pretax loss for 2001,
had a loss carryover from the prior year and did not generate pretax income as
of the end of the year, no tax provision was required.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     Revenues. Total revenues increased $21.3 million, or 9.4%, to $247.7
million for the year ended December 31, 2000 from $226.4 million for the same
period in 1999. The increase was primarily due to an increase in the volume of
sales of our broadband access products to new and existing customers. Most of
this increase occurred in the first six months of the year as a few of our new
customers purchased significant amounts of broadband product during the first
six months of 2000, but significantly decreased their purchases in the third and
fourth quarters of 2000. Equipment sales were 98.4% of total revenues for the
year ended December 31, 2000 compared to 97.5% for the year ended December 31,
1999. The percentage increase is mostly due to lower royalty income in 2000
versus 1999 as royalty revenues in 1999 included a one-time royalty fee from
GlobespanVirata, Inc. related to termination of an existing agreement and a
one-time license fee from a third party for intellectual property relating to
narrowband technology.

     Gross Margin. Gross margin decreased $36.0 million, or 35.7%, to $64.9
million for the year ended December 31, 2000 from $100.9 million for the year
ended December 31, 1999. The decrease was primarily the result of recording a
provision for excess inventory and loss on non-cancelable purchase commitments
in the total amount of $34.9 million because a few of our NSP customers
significantly reduced the levels of Paradyne equipment that they planned to
purchase because they had significantly changed their plans for rolling out DSL
services. Additionally, earlier in 2000 we experienced a critical shortage of
certain raw materials resulting in higher costs. Gross margin as a percentage of
total revenues decreased to 26.2% in 2000 from 44.6% in 1999, mostly due to the
above mentioned inventory provision.

     Research and Development Expenses. Research and development expenses
increased $3.9 million, or 10.8%, to $40.4 million for the year ended December
31, 2000 from $36.5 million for the year ended December 31,1999. This increase
was primarily due to the additional research and development personnel resulting
from the April 14, 2000 acquisition of substantially all the assets of CRC from
P-Com, Inc. The effects of this increase were partially offset by a decrease in
professional fees related to engineering contractors. As a percentage of total
revenues, research and development expense increased to 16.3% for the year ended
December 31, 2000 from 16.1% for the year ended December 31, 1999 primarily due
to the increased expenses associated with the purchase of CRC.

     Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased by $3.3 million, or 5.8% to $59.2 million for the year ended December
31, 2000 from $55.9 million for the year ended December 31, 1999. These
increases mostly resulted from increases in advertising expenses, increases in
facilities and travel related expenses and increases in corporate administrative
expenses, offset in part by decreases in consignments of equipment to customers
and decreases in employee related expenses. SG&A as a percentage of total
revenues decreased to 23.9% for the year ended December 31, 2000 from 24.7% for
the year ended December 31, 1999. This decrease was primarily due to the
increase in total revenue during the period.

     Amortization of Intangible Assets and Deferred Stock Compensation. The
amortization of intangible assets and deferred stock compensation decreased by
$200,000, or 10% to $1.3 million for the year ended December 31, 2000 from $1.5
million for the year ended December 31, 1999. The amortization of intangible
assets was attributable to goodwill and acquired work force that resulted from
the purchase of substantially all of the assets of CRC from P-Com in the second
quarter of 2000. The amortization of deferred stock compensation was related to
the granting of stock options to key employees at prices deemed to be below fair
market value for financial reporting purposes. The decreases in amortization


                                       27
<PAGE>

for the year ended December 31, 2000 resulted from a large decrease in the
amortization of deferred stock compensation offset in part by an increase in
amortization of intangible assets.

     Restructuring Charges. During 2000, we incurred expenses of $1.4 million,
or 0.5% of total revenues, related to our reorganization into focused North
American and international sales and marketing divisions, necessitated by the
substantial change in the broadband access market. In this restructuring,
approximately 35 employees were terminated from employment. In addition, charges
were incurred to exit from leased facilities in international locations.

     Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, decreased by $1.8 million, or 42.3%, to $2.5 million of income for
the year ended December 31, 2000 from $4.3 million of income for the year ended
December 31, 1999. Interest and other (income) expense, net, is related to
interest on notes payable and borrowings under lines of credit, interest on
short term investments, gains and losses on equity investments and foreign
exchange gains and losses. This decrease was primarily attributable to the
receipt by us of approximately $500,000 in 2000 compared to $4.3 million in 1999
from the sale of patents, offset in part by a $2.0 million increase in net
interest income in 2000 as a result of earnings from the investment of proceeds
from the initial public offering and the retirement of debt using the initial
public offering proceeds during the third quarter of 1999.

     Provision (Benefit) For Income Taxes. Benefit for income taxes decreased by
$4.1 million, or 117.8%, to $.6 million of benefit for the year ended December
31, 2000 from $3.5 million of provision for the same period in 1999. As a result
of the loss incurred in 2000, we reversed the net deferred tax liability on our
books resulting in a tax benefit for the year ended December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

      Our cash and cash equivalents increased $18.1 million to $37.9 million at
December 31, 2001 from $19.8 million at December 31, 2000. Working capital
decreased $7.0 million from $54.9 million at December 31, 2000 to $47.9 million
at December 31,2001. The increase in cash and cash equivalents was primarily
attributable to several factors including a $10.3 million reduction in inventory
(which excludes a $10.9 million reserve for inventory write-off in the second
quarter of 2001 because it is a non-cash item) and an $8.3 million reduction in
accounts receivable.

     Cash provided by operations for the year ended December 31, 2001 totaled
$18.6 million and was principally driven by the reduction in receivables of $9.2
million and inventory of $10.3 million due to better collections and improved
inventory management. The decrease in accounts receivable reflected a Days Sales
Outstanding, or DSO, of 25 in December 2001 versus 43 in December 2000. This low
DSO was favorably impacted by the strong collections under the letter of credit
arrangement with BBT, a Japanese service provider for our Hotwire (R) Reach DSL
product. Although we incurred a net loss of $23.6 million in 2001, this loss did
not result in a reduction in cash provided from operations because it was
principally due to three large non-cash items, an inventory reserve of $10.9
million, depreciation and amortization of $8.0 million, and impairment of
intangible assets of $5.8 million.

     Net cash used in investing activities for the year ended December 31, 2001
totaled $1.9 million. Of this total, $1.5 million was contingent consideration
paid during the first quarter for the acquisition of substantially all the
assets of CRC, a developer and manufacturer of broadband network access and SLM
systems acquired in April 2000. Product sales generated by the CRC business in
2000 exceeded the 2000 target, which entitled the sellers to this contingent
consideration. The remaining $.4 million was the result of $1.1 million in
capital expenditures offset by $.7 million in proceeds from the sale of
property, plant and equipment.

     Capital expenditures in support of operations totaled $1.1 million, $9.2
million, and $6.7 million for the years ended December 31, 2001, 2000, and 1999,
respectively. Capital expenditures in 2001 were managed very closely to conserve
cash in a very competitive marketplace. During the third and fourth quarters of
2001 when we needed additional capital to meet the sharply increased demand
created by the BBT contract, we leased the additional manufacturing equipment
for a six month period rather than buying additional equipment. The leased
equipment was returned to the lessor at the end of the six-month period.
Expenditures in 2000 included improvements to our manufacturing production line
totaling $1.2 million, investments in test and production equipment associated
with new product development totaling $4.0 million and investments in our
information systems totaling $1.6 million. Net expenditures in 1999 related
primarily to improvements to our manufacturing facility, investments in test and
production equipment associated with new product development and to the support
of operations.

     Net cash provided by financing activities for the year ended December 31,
2001 totaled $1.3 million. Exercises of stock options and purchases of stock
through the Employee Stock Purchase Plan provided $1.8 million which was
partially


                                       28
<PAGE>

offset by $.5 million of financing activity associated with capital expenditures
under capital leases. We estimate that cash as of March 31, 2002 cash will
increase by approximately $10.0 million as a result of the acquisition of
Elastic Networks.

     On July 16, 2001, we entered into an agreement (the "Credit Agreement")
with Foothill Capital Corporation, a wholly-owned subsidiary of Wells Fargo &
Company, to provide a secured revolving line of credit in the amount of $17.5
million with availability subject to a borrowing base formula. At our option,
the interest rate will either be the prime rate published by Wells Fargo plus
..75% or the LIBOR (London Interbank Offered Rate) rate plus 2.75%. In no event
will the borrowing rate be lower than 7%. The Credit Agreement contains
financial covenants limiting the maximum amount of capital expenditures we can
make and requiring it to meet minimum Earnings Before Interest, Taxes,
Depreciation and Amortization, or EBITDA, targets. We are able to borrow up to a
maximum of $17.5 million based on the amount of our accounts receivable and
inventory. There are restrictions on the eligible amounts of both the accounts
receivable and the inventory. In order to obtain this line of credit, we paid
the lender a closing fee of $150,000, and will pay a monthly servicing fee of
$4,000 (since reduced to $3,000), an unused line fee of .375% of the balance not
borrowed under the line of credit each month, and we will be responsible for
audit and appraisal fees. If we fail to pay amounts due under the loan when due
and payable, or if we fail to perform specified terms of the Credit Agreement,
we will be in default if we have previously borrowed under the Credit Agreement.
In the event of default, we will no longer be able to borrow under the Credit
Agreement and we would have to immediately repay any amounts owed the lender. We
may cancel the loan Credit Agreement at any time but we would have to pay a
cancellation premium starting at 3% of the maximum borrowing at the inception of
the Credit Agreement, reducing as the Credit Agreement matures to 1% of the
maximum borrowing during the last year of the Credit Agreement. No borrowings
have been made under the Credit Agreement as of December 31, 2001. In March
2002, Foothill Capital and we agreed to amend the Credit Agreement to
specifically waive two provisions of the Credit Agreement, to consent to our
organization of a new subsidiary and consent to the activities of this new
subsidiary, and to consent to our acquisition of Elastic Networks. We in turn
waived the section of the Credit Agreement limiting the amount of attorney's
fees in order to allow for the fees necessary to prepare this amendment.

     In September 2001, our Board of Directors authorized a stock repurchase
program of up to $1.0 million worth of outstanding Paradyne common stock over a
period of one year. In connection with the acquisition of Elastic Networks,
which occurred on March 5, 2002, we decided not to reacquire any stock under the
existing stock repurchase program.

     Direct sales to BBT accounted for approximately 21% of our total revenues
in 2001. Our letter of credit arrangement with BBT has assisted us in
effectively managing our cash flow by enabling quick collection of payment. Most
of the financial benefit of the current contract with BBT will end at the end of
the first quarter of 2002.

     We believe that our current cash position, together with cash flows from
operations, our ability to monitor and control expenditures and our line of
credit facility with Foothill Capital, will be sufficient to meet our working
capital needs for at least the next twelve months.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our critical accounting policies are those where we have made the most
difficult, subjective or complex judgements in making estimates, where these
estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:

     - Revenue Recognition/Allowance for Doubtful Accounts
     - Inventories
     - Legal Contingencies
     - Warranty Obligations

Revenue Recognition/Allowance for Doubtful Accounts

         Our revenue recognition policy follows SEC Staff Accounting Bulletin
No. 100, Revenue Recognition in Financial Statements, which summarizes existing
accounting literature, and requires that four criteria be met prior to
recognizing revenue. These four criteria, which are the core of our accounting
policy (see Note 2 "Revenue Recognition" in our Notes to Consolidated Financial
Statements), are: (1) evidence of a sales arrangement exists; (2) delivery has
occurred or services have been rendered; (3) our price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured. It is the fourth
criteria that requires us to make significant estimates.



                                       29
<PAGE>

         Paradyne estimates amounts potentially owing to customers for incentive
offerings, special pricing agreements, price protection, promotions, volume
incentives, and in very limited cases to resellers for stock rotation. These
estimates are taken as reductions to revenue pending completion of the various
programs. In periods of slower sales growth some of these incentives may be
increased which will also decrease the amount of revenues recorded by Paradyne.
Additionally, Paradyne reduces revenue for estimated bad debts due to the
customer's inability to pay or for estimated customer billing adjustments based
on past experience. We use our best judgement to estimate these reductions to
revenue in the period they occur based on facts available at the balance sheet
date.

Inventories

         Because of the long lead times to obtain raw materials in our industry
we must maintain sufficient quantities of inventory of our many products to
meet expected demand. If actual demand is much lower than forecasted we may not
be able to dispose of our inventory at or above its cost. We write down our
inventory for estimated excess and obsolete amounts to the lower of cost or
market. With the significant decline in customer demand, for example, we
significantly wrote down our inventory in both 2000 and 2001. If future demand
is lower than currently estimated, additional write-downs may be required.

Legal Contingencies

         We currently have several legal proceedings in process including the
securities actions discussed in Item 3 - Legal Proceedings of this Form 10-K.
Although we have established a liability in an amount estimating the reasonably
probable future liability of these claims we can not be sure about the outcome
of these cases. If the outcome of one or more of these cases is adverse to us,
it could have a materially adverse impact on our business, financial condition
and results of operations.

Warranty Obligations

         We generally provide a 12-month warranty to customers for product sold.
We also have some outstanding warranty obligations for prior year sales of
products with 24 and 60-month warranties. Although we have recorded a warranty
liability that we estimate is adequate based on historical experienced, it is
possible that we could experience higher than expected warranty claims which
would subject us to increased costs. In some cases these claims could be due to
defective raw materials purchased from our vendors. If our vendor is unable to
reimburse us for the cost of repairing or replacing the defective product, we
would have to bear this cost to the customer.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

     In June 2000, the Financial Accounting Standards Board issued Statement No.
138, "Accounting for Certain Hedging Activities", which amended Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." Statement
No. 138 must be adopted concurrently with the adoption of Statement No. 133. We
adopted these new statements effective January 1, 2001. These Statements
required us to recognize all derivatives on the balance sheet at fair value.
The adoption of these statements did not have an effect on our results of
operations or financial position, as we do not have any derivative instruments
as defined in the statements or engage in hedging activities.

     On June 30, 2001, the Financial Accounting Standards Board finalized FAS
141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets.
FAS 141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method of accounting. With the adoption of FAS
142 effective Jan. 1, 2002, goodwill is no longer subject to amortization.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Under the new rules, an acquired intangible
asset should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. These intangible assets will be required to be
amortized over their useful lives. We have no goodwill and intangible assets
recorded as of December 31, 2001. The adoption of FAS 141 and FAS 142 will be
applicable to the acquisition of Elastic Networks (see Note 16 - "Subsequent
Events" in the Notes to Consolidated Financial Statements included in this Form
10-K).

     In July 2001, the Financial Accounting Standards Board finalized FAS 143,
Accounting for Asset Retirement Obligations, which requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of the
related long-lived asset is correspondingly


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<PAGE>

increased. Over time, the liability is accreted to its present value and the
related capitalized charge is depreciated over the useful life of the asset. FAS
143 is effective for fiscal years beginning after June 15, 2002. We are
currently reviewing the impact that FAS 143 will have on our results.

     In August 2001, the Financial Accounting Standards Board finalized FAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144
addresses accounting and reporting for the impairment or disposal of long-lived
assets, including the disposal of a segment of business. FAS 144 is effective
for fiscal years beginning after December 15, 2001, with earlier application
encouraged. We are currently reviewing the impact that FAS 144 will have on our
results.

INFLATION

     Because of the relatively low levels of inflation experienced in 1999, 2000
and 2001, inflation did not have a significant effect on our results in such
years.

RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS

     Investors should carefully consider the risks and uncertainties described
below before investing in our common stock. The risks and uncertainties
described below are not the only risks and uncertainties that could develop.
Other risks and uncertainties that we have not predicted or evaluated could also
affect us. If any of the following risks occur, our business, financial
condition or results of operations could be materially harmed, and the trading
price of our common stock could decline, resulting in the loss of all or part of
an investor's investment in our common stock.

     All statements regarding future events, our future financial performance
and operating results, and our business strategy and plans are forward-looking
statements. These forward-looking statements are made pursuant to the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995
and are based on management's current expectations and beliefs, as well as on
assumptions made by, and information currently available to, management.

OUR SUCCESS WILL DEPEND ON THE ACCEPTANCE OF NEW TELECOMMUNICATIONS SERVICES
BASED ON DSL TECHNOLOGY.

     Our future success is substantially dependent upon whether digital
subscriber line, or DSL, technology continues to gain widespread market
acceptance by network service providers, or NSPs, and end users of their
services. If DSL technology fails to continue growing in widespread acceptance,
our revenues and results of operations will be adversely affected. We currently
focus our business investment almost exclusively on the broadband access market.
We have invested substantial resources in the development of DSL technology, and
many of our products are based on DSL technology. Many NSPs continue to evaluate
DSL technology and other alternative high-speed data access technologies, but
they may not continue to pursue the deployment of DSL technology. Even if NSPs
adopt policies favoring full-scale deployment of DSL technology, they may not
choose to purchase our DSL product offerings. In addition, we have limited
ability to influence or control decisions made by NSPs. NSPs are continuously
evaluating alternative high-speed data access technologies and may, at any time,
adopt technologies other than the DSL technologies offered by us.


WE DEPEND ON THE SALE OF OUR PRODUCTS TO NSPS, WHO MAY REDUCE OR DISCONTINUE
THEIR PURCHASE OF PRODUCTS OR SERVICES AT ANY TIME.

     We estimate that sales to NSPs accounted for approximately 75% of our
equipment revenues in 2001. If our NSP customers are forced to defer or curtail
their capital spending programs, we could lose, or experience delays or
reductions in significant sales to such customers. Given the capital
requirements, complex regulatory framework and other barriers to entry in the
market, there are a limited number of NSPs. The United States market for many of
the services provided by NSPs has only moderately emerged since the passage of
the Telecommunications Act of 1996 and many NSPs are still building their
infrastructure and rolling out their services. Many of these NSPs still need to
develop, construct and expand their networks. The inability of our emerging NSP
customers to complete development of their networks, attract or retain
customers, respond to trends such as price reductions for their services or
diminished demand for telecommunications services generally, could cause them to
reduce their capital spending programs.


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<PAGE>

     A substantial portion of our broadband revenues is expected from several
international markets, and our expectations are based on the deregulation of
these markets. A delay in deregulation or execution of market entry by new
competitive service providers could negatively impact revenues. In addition,
recent concerns about profitability and the long term viability of competitive
service providers in both the United States and international markets has
resulted in a tightening of the capital markets which has reduced the ability of
some of our NSP customers to build out their networks as originally planned.
Additionally, Paradyne expects broadband revenue from Postal Telephone and
Telegraph authorities (PTTs) in international markets to grow over the next few
years. Sales to PTTs tend to require significant investments of time and
personnel to successfully close. Excessive or unexpected delays in closure of
these sales could negatively impact revenues.

     Generally, our NSP customers do not have an obligation to purchase
additional products or services from us. Termination of purchase arrangements
with these NSP customers or a significant reduction or delay in the amount of
our products they order could materially and adversely affect our revenues and
reduce its profitability. In addition, the telecommunications industry has
recently experienced consolidation, which may cause us to lose NSP customers.
The loss of one or more of our NSP customers could also materially and adversely
affect our revenues and reduce our profitability.

OUR SUCCESS DEPENDS ON NSPS INCORPORATING OUR PRODUCTS INTO THEIR
INFRASTRUCTURE.

     We anticipate that a significant portion of our future revenues will be
attributable to sales to NSPs of our DSL, SLM, or SLM, and other broadband
products. Our future performance will therefore be substantially dependent on
incorporation of our products by NSPs into their service offerings to
subscribers. The failure of our products to become an accepted part of NSPs'
service offerings or a slower than expected increase in the volume of sales by
us of SLM products could materially and adversely affect our revenues. Our
success in the NSP market will depend on numerous factors, many of which are
outside our control. Some of these factors include:

     - NSP and subscriber acceptance of and satisfaction with our products;

     - the realization of operating cost efficiencies for NSPs when SLM products
       are deployed and our ability to demonstrate these operational benefits;

     - subscriber demand for our products and support for our products within
       the NSPs' sales force;

     - Our successful development of systems and products that address the
       requirements for products deployed as part of an NSP's infrastructure;

     - the timing and successful completion of integration development work by
       NSPs to incorporate our SLM functionality into their operational support
       system; and

     - the absence of new technologies that make our products and systems
       obsolete before they can achieve broad acceptance.


RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE.

     The telecommunications and data communications markets are characterized by
rapid technological change. Our success will depend on our ability to adapt and
to respond to technological changes. If we fail to keep pace with technological
change, our product sales could suffer.

     Our existing products could become obsolete or unmarketable as a result of
the emergence of new industry standards or customer demands. For example, our
customers could determine that they no longer require SLM with network access
products. Furthermore, our products could become obsolete or unmarketable as a
result of any new technology or products which are superior to ours. We may be
unable to compete effectively if we are unable to adapt to changes in industry
standards, meet customer demands or develop new products or enhancements to
existing products.

     Our products compete with numerous high-speed access technologies,
including cable modems, satellite technology and other wireless technologies.
These competing technologies may ultimately prove to be superior to our
products. Our products may become uncompetitive or obsolete as a result of the
development of competing technologies that are more reliable, faster and less
expensive than our technology. For example, substantially all of our products
are deployed in networks that use standard copper telephone wires. The physical
properties of copper wire limit the speed and distance over which data can be
transmitted. Service


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<PAGE>

levels degrade as distance from the central switching station increases. Other
competing technologies, such as wireless and cable, are not subject to such
limitations.

WE MAY ENGAGE IN ACQUISITIONS, SUCH AS THE ACQUISITION OF ELASTIC NETWORKS, AND
MAY BE UNABLE TO SUCCESSFULLY INTEGRATE, BOTH OPERATIONALLY AND COST
EFFECTIVELY, ANY NEW OPERATIONS, TECHNOLOGIES, PRODUCTS OR PERSONNEL.

     As part of our ongoing corporate development activities, like the
acquisition of Elastic Networks, we will, on a regular basis, engage in
discussions with third parties concerning potential acquisitions of product
lines, technologies and businesses. In the event that another acquisition does
occur, because of the small size of our management team, we may be particularly
susceptible to risks associated with the assimilation of operations,
technologies, products and personnel and the diversion of management's attention
from other business concerns. Moreover, we may not be able to identify other
suitable acquisition candidates or other strategic opportunities, and even if we
do identify them, we may not be able to successfully complete any transaction.

     Additionally, the cost to acquire technologies and businesses is
substantial. In addition to the direct costs, there are significant indirect
costs related to integration of personnel and technologies and potential product
redesign. These costs may decrease operating income or increase operating losses
if they are not offset by comparable increases in revenue.

IF WE FAIL TO PROTECT ELASTIC'S INTELLECTUAL PROPERTY FOLLOWING OUR ACQUISITION
OF ELASTIC, OUR EXPECTED COMPETITIVE POSITION MAY SUFFER.

     The value of Elastic's business to us is based, in part, on Elastic's
intellectual property. Elastic's business relies on a combination of copyright,
trademark, patent and trade secret laws and contractual restrictions to
establish and protect Elastic's technology and other intellectual property. We
cannot be certain that Elastic has sufficiently prevented misappropriation of
Elastic's technology and other intellectual property, or that Elastic's
competitors did not independently develop technologies or other intellectual
property that are substantially equivalent or superior to those developed, owned
or licensed by Elastic. In addition, the laws of many countries do not protect
intellectual property to the same extent as the laws of the United States. If
Elastic's intellectual property rights were not or are not adequately protected,
we may not realize a significant portion of the benefits we expect to receive
upon acquiring Elastic.

WE MAY NOT BE ABLE TO FINANCE OUR GROWTH AND CAPITAL REQUIREMENTS.

     Substantial working capital is required in order to fund and continue to
build our business. If we fail to do so, we will not be able to remain
competitive or continue to meet the increasing demands for our products. We used
the net proceeds of the initial public offering in July 1999 and our secondary
offering in September 1999 for general corporate purposes, including working
capital and capital expenditures. We also spent significant amounts of cash to
fund operating losses and increased expenses and to respond to competitive
pressures. We cannot be certain that the remaining proceeds from our offerings,
together with our existing capital resources, our secured line of credit for
up to $17.5 million with Foothill Capital Corporation and our ability to reduce
expenditures, will enable us to continue to meet our capital requirements on an
ongoing basis.

     Our capital requirements depend on several factors, including the rate of
market acceptance of our products, the ability to expand our client base, the
growth of our sales and marketing efforts and other factors. If capital
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. We cannot be certain that
additional financing will be available when needed or that such financing can be
obtained on terms favorable to us. If adequate funds are not available or are
not available on acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures.

WE MAY NOT SUSTAIN REVENUE GROWTH OR BECOME PROFITABLE.

     We cannot be certain that we will achieve revenue growth or realize
sufficient revenues to achieve profitability. Excluding a one-time gain in
connection with a contract renegotiation with Lucent Technologies Inc. in 1997
and the related tax effect, we had an accumulated net deficit of approximately
$87.2 million during the period from August 1, 1996 through December 31, 2001.
Prior to 1999 we had not been profitable in any fiscal year of operations,
except in 1997, when we were profitable as a result of the non-recurring gain in


                                       33
<PAGE>

connection with the renegotiation of a contract with Lucent. In 1999, we had net
income of $7.9 million. In 2000 we had a net loss of $34.3 million. For the year
ended December 31, 2001, we had a net loss of $23.6 million. We anticipate that
we will continue to incur significant product development and selling, general
and administrative expenses and, as a result, we will need to generate higher
revenues to achieve and sustain profitability on an annual basis.

WE ARE DEFENDING SEVERAL SECURITIES CLASS ACTION LAWSUITS AND IF WE ARE
UNSUCCESSFUL, THIS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

     We have several securities class action lawsuits pending, which we are
vigorously defending. Due to the inherent uncertainties of the litigation
process and the judicial system, we are unable to predict the outcome of such
litigation. If the outcome of one or more such matters is adverse to us, it
could have a materially adverse effect on our business, financial condition and
results of operations.

     We are currently defending several securities class action lawsuits filed
against us and some of our executive officers and the chairman of our board are
defendants. The stockholder suits, filed in September 2000 in the federal court
in the Middle District of Florida, have been consolidated into one action. That
consolidated action alleges that the defendants, during the period September 28,
1999 through September 28, 2000, fraudulently or recklessly inflated the market
price of our stock by erroneously reporting that we were performing well, that
product demand was solid and that inventories were properly stated. Plaintiffs
seek damages in an unspecified amount for the alleged inflated stock price
during the class period. The Defendants filed a motion on May 25, 2001, asking
the court to dismiss the complaint, with prejudice, after which the Plaintiffs
filed a memorandum of law in opposition to Defendant's dismissal motion on July
2, 2001. The Defendant's dismissal motion is pending with the court and we are
unable to predict how long the court will take to rule on the motion. As of
December 31, 2001, no ruling has been made by the court.

     A second stockholder purported class action suit was filed in December 2001
in the federal court in the Southern District of New York against us, some of
our executive officers and the chairman of our board, and the underwriters of
our initial public offering. That action alleges that defendants, during the
period from July 15, 1999 through December 6, 2000, violated federal securities
laws by allocating shares of our initial public offering to favored customers in
exchange for their promise to purchase shares in the secondary market at
escalating prices. We believe the claims are without merit and intend to
vigorously defend them, but the outcome cannot be predicted.

NUMEROUS FACTORS COULD CAUSE OUR RESULTS TO FLUCTUATE.

     Our quarterly and annual results of operations have fluctuated in the past
and are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Fluctuations in our results
could cause our stock price to decline substantially. Some of these factors that
might affect our results of operations include:

     - Our ability to achieve cost reductions. As with all companies, we
       constantly strive to improve our margins through reductions in our cost
       of sales. Failure to reduce our costs could reduce our margins, which, in
       turn, could adversely affect our ability to operate profitably.

     - Preferential pricing arrangements. We have preferential pricing
       arrangements with some of our customers. In our effort to win new
       business we may negotiate preferential pricing arrangements in the future
       with other customers. While these arrangements are intended to provide
       greater revenue, they may have a negative impact on our margins.
       Furthermore, because our strategy relies on entering into these
       arrangements in the future, if we fail to do so, our results could be
       below expectations.

     - Our ability to attain and maintain production volumes and quality levels
       for our products. Many factors could affect our ability to maintain
       production volumes and quality levels. They include an inability to
       obtain raw materials or components, labor shortages, and the maintenance
       of adequate facilities for production. If we fail to maintain production
       volumes or quality levels, we may be unable to produce sufficient
       quantities of our products to meet demand, which would adversely affect
       our revenues.

     - The mix of products sold and the mix of distribution channels through
       which they are sold. The mix of products sold can adversely affect our
       results.  Margins vary within our newer and older products. If we fail to
       successfully sell our higher margin products, our gross margins may be
       lower than expected. In


                                       34
<PAGE>

addition, some distribution channels have higher costs associated with sales.
As a result, the mix of distribution channels may adversely affect operating
income.

     Due to these and other factors, including those discussed in this document,
period-to-period comparisons should not be relied upon as indications of future
performance. It is possible that in some future periods, our operating results
and/or our growth rate will be below what public market analysts and investors
expect.

OUR DEPENDENCE ON ONLY A FEW MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES EXPOSES US TO FINANCIAL RISKS.

     We depend on a small number of customers for a substantial portion of our
revenues. As a result, a loss or a significant reduction or delay in sales to
any of our major customers could materially and adversely affect our revenues.
Direct sales and services performed for Lucent and Avaya accounted for
approximately 20% of our total revenues in 2000 and approximately 15% for 2001.
Direct sales to BB Technologies Corporation accounted for approximately 21% of
our total revenues for 2001. Unless and until we diversify and expand our
customer base, our future success will significantly depend upon certain factors
which are not within our control, including:

     - the timing and size of future purchase orders, if any, from our larger
       customers;

     - the product requirements of our customers;

     - the financial and operational success of our customers; and

     - the success of our customers' services deployed using our products.

     Diversification and expansion of our customer base is particularly critical
because of the highly competitive nature of our business. Our contracts are
generally subject to annual renewal with the exception of our contracts with
Lucent and several other customers, which have two to five year terms, and our
customers generally do not have any obligation to purchase products solely from
us.

     Under a supply agreement between Lucent and us, which expired in the first
quarter of 2002, we were the exclusive supplier of Lucent's requirements for
stand-alone network access products. As a result of the expiration of this
supply agreement, we are no longer Lucent's exclusive supplier of stand-alone
network access products for resale, with the exception of Acculink Access
Controller products. We cannot be certain that a new agreement will be
negotiated or of the amount of future purchases, if any, from Lucent. Avaya has
signed a three-year reseller agreement with us, effective November 16, 2001
through November 16, 2004. In both cases, it is possible that our sales of these
products could decline substantially.

WE COMPETE IN HIGHLY COMPETITIVE MARKETS AND COMPETITION COULD HARM OUR ABILITY
TO SELL PRODUCTS AND SERVICES.

     The telecommunications market is highly competitive. We compete directly
with other providers of broadband and narrowband access equipment. Due to
increasing competition, we may be forced to reduce the sales prices of many of
our products in order to remain competitive. If we are unable to counter these
price declines with reductions in manufacturing costs in order to compete
effectively in the market for our products or services, our revenue and future
profitability could be materially and adversely affected. We believe that
competition may increase substantially as the introduction of new technologies,
deployment of broadband networks and potential regulatory changes create new
opportunities for established and emerging companies in the industry. We expect
that competition for products that address the broadband access market will grow
as more established and new companies focus on this market.

     Many of our current and potential competitors are larger than us and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established channels of distribution. As a result,
these competitors may be able to respond more rapidly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products. Our
competitors may enter our existing or future markets with solutions that may be
less costly, provide higher performance or additional features or be introduced
earlier than our solutions.


                                       35
<PAGE>

     Our markets are characterized by increasing consolidation both within the
data communications sector and by companies combining or acquiring data
communications products and technology for delivering voice-related services, as
exemplified by the acquisitions of Ascend by Lucent, Diamond Lane Communications
Corporation by Nokia Corp. and Xylan Corp. by Alcatel. We cannot be sure of the
impact of any of these acquisitions on the competitive environment for our
products. Increased competition and consolidation could result in price
reductions and a decrease in our market share.

OUR SALES CYCLE IS TYPICALLY LONG AND UNPREDICTABLE.

     Our business is subject to lengthy sales cycles. As a result, we may not
recognize revenues from the sale of our products for long periods of time.
Delays in product testing or approval, or cancellations of orders by customers,
especially our NSP customers, could materially and adversely affect our
revenues. On average, our sales cycle ranges from six to nine months. Sales of
our products require a substantial commitment of capital and time from our
customers, many of whom have lengthy internal procedures for approving large
capital expenditures and lengthy testing and decision making processes. Before
our NSP customers purchase products from us, they must first make a decision to
standardize their service on a particular product, which involves extensive
testing. Our sales cycle may be slowed further, or affected by, budgetary
constraints and purchasing requirements of our customers, all of which are
beyond our control. Moreover, sales of our products often require significant
training of both our customers and end users before the decision to purchase. As
a result, we may expend significant resources pursuing potential sales
opportunities that will not be completed.

OUR STOCK PRICE MAY BE VOLATILE.

     The trading price of our common stock could be subject to wide fluctuations
in response to various factors, some of which are beyond our control, such as:

     - actual or anticipated variations in quarterly results of operations;

     - changes in intellectual property rights of us or our competitors;

     - announcements of technological innovations;

     - the introduction of new products or changes in product;

     - pricing by us or our competitors;

     - changes in financial estimates by securities analysts;

     - announcements of significant acquisitions, strategic partnerships, joint
       ventures or capital commitments by us or our competitors;

     - additions or departures of key personnel; and

     - generally adverse market conditions.

OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MIGHT BE HARMED IF WE LOSE SALES OF
ACCESS PRODUCTS TO LUCENT.

     We have a relationship with Zhone Technologies, Inc. through which we have
exclusive distribution rights through April 2005 for Zhone's IMACS system, which
we intend to market to Lucent and AT&T under the name Acculink Access
Controller. We also entered into a supply and exclusivity agreement with Lucent,
which expired during the first quarter of 2002, under which we were the
exclusive supplier of Lucent's requirements for various access products, such as
the Acculink Access Controller. As a result, we are no longer Lucent's exclusive
supplier of stand-alone network access products for resale, with the exception
of Acculink Access Controller products. Sales of Acculink Access Controller
accounted for greater than 10% of our total revenues during both 1999 and 2000
and 8% for 2001. Our revenues would be adversely affected if Zhone fails to meet
its obligations under the agreement or if Lucent or AT&T were to substantially
reduce or discontinue their orders of the Acculink Access Controller.

OUR DEPENDENCE ON DEVELOPMENT RELATIONSHIPS COULD THREATEN OUR ABILITY TO SELL
PRODUCTS.

     Our success is dependent upon our continued relationship with certain
companies, including Lucent, GlobeSpan, NetScout Systems, Inc. and Alcatel. If
any of these companies breaches or terminates its


                                       36
<PAGE>

agreement or fails to perform its obligations under its agreement or if we fail
to renegotiate a new agreement upon the expiration of any agreement, we might
not be able to sustain or grow our business. In particular, if any of these
companies, other current corporate partners or future corporate partners
discontinue their support of products that we have developed in cooperation with
them, fail to continue to develop product enhancements required to meet customer
demand, fail to appropriately address performance issues related to products
that we have developed in cooperation with them, face claims of infringement of
third party intellectual property rights with respect to the technology included
in products that we have developed in cooperation with them or fail to continue
to support joint marketing programs, our ability to sell products that we have
developed in cooperation with them would be hampered. Additionally, in the event
that any of our significant relationships are terminated, we may not be able to
replace them in a timely manner, if at all.

MANAGEMENT AND OUR SINGLE LARGEST STOCKHOLDER MAY LIMIT THE ABILITY OF OUR OTHER
STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER
STOCKHOLDER MATTERS.

     Our executive officers, directors and principal stockholders and their
affiliates beneficially owned approximately 36% of our outstanding shares of
common stock as of March 15, 2002. As a result, these stockholders, if acting
together, will continue to exert substantial control over substantially all
matters requiring approval by our stockholders.

     Entities associated with Texas Pacific Group beneficially owned
approximately 27% of our outstanding shares of common stock as of March 15, 2002
and may be able to exercise substantial control over us, subject to the
fiduciary duties of its representatives on the board of directors under Delaware
law. The interests of Texas Pacific Group may not always coincide with the
interests of other stockholders. Texas Pacific Group, through its
representatives on the board of directors, could cause us to enter into
transactions or agreements which we would not otherwise consider absent Texas
Pacific Group's influence.

WE DEPEND ON SOLE AND SINGLE SOURCE SUPPLIERS, WHICH EXPOSES US TO POTENTIAL
SUPPLY INTERRUPTION.

     We currently purchase a number of important parts, such as framers,
semiconductors and embedded communications processors, from sole source vendors
for which alternative sources are not currently available. Delays or
interruptions in the supply of these components could result in delays or
reductions in product shipments. The purchase of these components from outside
suppliers on a sole source basis subjects us to risks, including the continued
availability of supplies, price increases and potential quality assurance
problems. We currently purchase key components for which there are currently no
immediate substitutes available from approximately 42 vendors. All of these
components are critical to the production of our products. While alternative
suppliers may be available to us, we must first identify these suppliers and
qualify them. We cannot be certain that any such suppliers will meet our
required qualifications or that we will be able to identify alternative
suppliers in a timely fashion, if at all. We may not be able to obtain
sufficient quantities of these components on the same or substantially the same
terms. Consolidations involving suppliers could further reduce the number of
alternatives for us and affect the cost of such supplies. An increase in the
cost of such supplies could make our products less competitive with products
which do not incorporate such components. Lower margins or less competitive
product pricing could materially and adversely affect our business, financial
condition and results of operation.

IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND A SKILLED WORKFORCE, WE
MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS.

     Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering and management
personnel, many of whom would be difficult to replace. The loss of such
personnel could materially and adversely affect our business, financial
condition and results of operations. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on Sean
E. Belanger, our president and chief executive officer. Except for agreements
with Messrs. Belanger, Patrick M. Murphy, our senior vice president, chief
financial officer, treasurer and secretary, and Michael Ward, our new senior
vice president of Worldwide Sales and Service, we do not have employment
contracts with our senior executives. In any event, employment contracts would
not prevent key personnel from terminating their employment with us.

     We believe that our future success will also depend highly upon our ability
to attract and retain highly skilled customer support and product development
personnel. The market for qualified personnel in the


                                       37
<PAGE>

telecommunications industry is highly competitive, and we frequently experience
difficulty in recruiting qualified personnel. Recruiting qualified personnel is
an intensely competitive and time-consuming process.

WE RELY HEAVILY ON DISTRIBUTORS AND RESELLERS.

     We estimate that our sales made through distributors and resellers were
over 40% of our revenues in 2000 and 52% of our revenues for 2001. We often rely
on distributors and resellers to provide installation, training and customer
support to the ultimate end users of our products. As a result, our success
depends on the continued sales and customer support efforts of our network of
distributors and resellers. Any reduction, delay or loss of orders from our
significant distributors or resellers could materially and adversely affect our
revenues.

OUR RELIANCE ON INTERNATIONAL SALES MAY MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES AND CURRENCY FLUCTUATIONS.

     We currently have nine sales offices and subsidiaries in North America,
Europe and Asia through which we market and sell our products. Sales to
customers outside of the United States accounted for approximately 18% of
revenues in 1999, 23% of revenues in 2000 and 43% of equipment sales revenues
for 2001. This increase was primarily due to the increased sales in 2001 to BB
Technologies Corporation in Japan. Our international operations subject us to
risks which may cause our results of operations to fluctuate and to which we
would not otherwise be exposed, such as:

     - impact of recessions in economies outside of the United States;

     - currency exchange rate fluctuations;

     - political and economic instability;

     - policy, legal, regulatory or other changes affecting the
       telecommunications and data communications markets;

     - uncertain intellectual property rights protection;

     - potential adverse tax consequences;

     - changes in tariffs; and

     - difficulties in accounts receivable collection.

BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS, WE INCUR SUBSTANTIAL EXPENSES
BEFORE WE EARN ASSOCIATED REVENUES.

     In order to remain competitive, we invest significant resources toward
research and development of our current and potential products. Development
costs and expenses are incurred before we generate any revenues from sales of
products resulting from these efforts. Our current or future customer base may
not purchase any products resulting from our current or future development
efforts.

A FAILURE BY US TO PROTECT OUR TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO
COMPETE.

     Our success and ability to compete is substantially dependent upon our
technology. A failure to protect our technology could result in competitors
offering similar products, potentially resulting in a loss of competitive
advantage and decreased revenues. We rely on a combination of patent, trademark,
copyright and trade secret laws and non-disclosure agreements to protect such
technology. Currently, we hold over 210 United States patents and have over 80
United States patent applications pending. However, we cannot be certain that
patents will be issued with respect to any of its pending or future patent
applications. In addition, we do not know whether any of our issued patents will
be upheld as valid or that they will prevent the development of competitive
products.

     We seek to protect our intellectual property rights by limiting access to
the distribution of our software, documentation and other proprietary
information. If any third parties infringe our proprietary rights, such
infringement could materially and adversely affect our competitive positions. As
with our issued patents, we cannot be certain that the steps we have taken to
protect our intellectual property will adequately prevent the misappropriation
of any of our technology. Our competitors may independently develop technologies
that


                                       38
<PAGE>

are substantially equivalent or superior to our technologies. In addition, the
laws of certain foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States. Third parties may attempt to
copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
protect our proprietary rights against unauthorized third party copying or use.

     We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. These claims may
require us to enter into license arrangements or may result in protracted and
costly litigation, regardless of the merits of such claims. We may not be able
to obtain necessary licenses on commercially reasonable terms, if at all. From
time to time, we receive and have received letters from others requesting
licenses or indicating that our products may require a license. These letters
are not uncommon in the industry, and these letters are dealt with according to
normal business practices. In some cases these letters are followed up with
formal legal action. For example, in July 2000, a third party filed suit against
us and approximately ninety other defendants. The suit alleges that all the
defendants are violating more than a dozen patents owned by the third party
which allegedly covers the field of "machine vision" used extensively in
pick-and-place manufacturing of circuit boards and bar code scanning. We
purchase this equipment from vendors, who we believe may have an obligation to
indemnify us in the event that the equipment infringes any third party patents.
The complaint does not specify which defendants or activities allegedly violated
which particular patents. We have responded with a Motion for More Definite
Statement designed to identify the allegedly infringing activities as well as
the particular patents and claims allegedly being infringed by us. We cannot
assure you that we will prevail in this action and any adverse outcome could
require us, among other things, to pay royalties to the third party patent
owner. Given the lack of specificity in the complaint, it is not currently
possible to calculate the potential for, or extent of, any liability resulting
from this claim. We also cannot assure you that we will not receive other claims
alleging infringement in the future.

IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END-USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES.

     Our products are complex and, despite extensive testing, may therefore
contain undetected errors or failures. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
research and development resources, injury to our reputation or increased
service and warranty costs. We also have exposure to significant liability
claims with respect to our customers because our products are designed to
provide critical communications services. Although we attempt to limit such
exposure through product liability insurance and through contractual limitations
in our customer agreements, such precautions may not cover all potential claims
resulting from a defect in one of our products.

CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE
DEMAND FOR OUR PRODUCTS.

     If our NSP customers are required to comply with new laws, new regulations
or new interpretations of existing laws or regulations, or if they are required
to comply with additional existing regulations due to changes in the nature of
their services, those changes could materially and adversely affect the market
for our products. A large percentage of our customers are NSPs whose voice
services, and many of their other network services, must comply with the
Communications Act of 1934, as amended by the Telecommunications Act of 1996 and
regulations prescribed by the FCC. Furthermore, most of our NSP customers' voice
services are subject to regulation by state public utilities commissions. Some
of our NSP customers are subject to foreign government regulation. Many of these
federal, state and foreign regulations continue to evolve due to ongoing
judicial and administrative proceedings, particularly those federal regulations
designed to define rights and obligations under the Telecommunications Act of
1996. From time to time, the FCC or regulatory bodies may propose legislation or
adopt rules, regulations or polices that could affect our business, either
beneficially or adversely, such as by increasing competition or affecting the
cost of our operations.

OUR FAILURE TO COMPLY WITH REGULATIONS COULD AFFECT OUR PRODUCT OFFERINGS.

     We are subject to a significant number of communications regulations and
standards, some of which are evolving as new technologies are deployed and due
to ongoing judicial and administrative proceedings. New regulations or new
interpretations of existing laws or regulations, or compliance with additional
existing regulations due to changes in the nature of our products could result
in significant additional cost to us. Moreover, failure of our products to
comply, or delays in compliance, with the various existing and evolving industry
regulations and standards could delay the introduction of our products. Our
products may be required


                                       39
<PAGE>

to comply with various regulations, including those promulgated by the FCC,
state public utilities commissions and various foreign governments. Our products
must comply with the Communications Act of 1934 and FCC regulations such as
those governing devices that may emit radio frequency or be connected to the
telephone network. In the United States, in addition to complying with FCC
regulations, our products are required to meet certain safety requirements. For
example, NSPs may require that our products that are located in their facilities
be network equipment building standard certified before they purchase the
products from us. Outside of the United States, our products are subject to the
regulatory requirements of each country in which the products are manufactured
or sold. These requirements vary widely, and we may be unable to obtain on a
timely basis, if at all, necessary approvals for the manufacture, marketing and
sale of our products.

     Enactment by federal, state or foreign governments of new laws or
regulations, changes in the interpretation of existing laws or regulations or a
reversal of the trend toward deregulation in the telecommunication industry
could materially and adversely affect our customers, and thereby materially and
adversely affect our business, financial condition and results of operations.

COMPLIANCE WITH EVOLVING INDUSTRY STANDARDS COULD ADVERSELY AFFECT OUR PRODUCT
OFFERINGS.

     Many of our products must comply with equipment standards adopted by
national and international standards bodies. If we are required, or deem it
otherwise necessary or advisable, to comply with new standards or with
additional existing standards due to changes in standards, we may have to modify
our current or future products. The costs of any modification could materially
and adversely affect our business, financial condition and results of
operations. Compliance with these standards is important because it often
enhances the marketability of our products. Many of those standards are
influenced by industry committees that develop draft standards and technical
reports. These industry committees often include us and our customers, as well
as our competitors and their customers.

OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
PROVIDE ADEQUATE CUSTOMER SUPPORT.

     Our ability to continue to grow our company and to retain current and
future customers depends in part upon the quality of our customer support
operations. A failure to offer adequate customer support could materially and
adversely affect our reputation or cause demand for our products to decline. Our
customers generally require significant support and training prior to the
installation and deployment of our products. Providing adequate levels of
support to our customers requires significant expenditures of resources and
capital. As the market for high-speed access devices grows and as the technology
for these devices continues to evolve, we will need to augment and improve upon
our customer support operations.

A FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.

     We have experienced expansions and contractions of our operations in the
past. If we are unable to manage our growth effectively, our future
profitability could be adversely affected. We may not have adequate resources to
support our future operations.

OUR CORPORATE CHARTER AND BYLAWS MAY DISCOURAGE TAKE-OVER ATTEMPTS AND DEPRESS
THE MARKET PRICE OF OUR STOCK.

     Provisions in our amended and restated certificate of incorporation, as
amended, and amended and restated bylaws, as amended, may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include:

     - the right of the board of directors to elect a director to fill a vacancy
       created by the expansion of the board of directors;

     - the ability of the board of directors to alter our amended and restated
       bylaws without obtaining stockholder approval;

     - if not called by our board of directors or the chairman of our board of
       directors, the requirement that at least 50% of the outstanding shares of
       common stock are needed to call a special meeting of stockholders;



                                       40
<PAGE>

     - the division of the board of directors into three classes, with each
       class serving staggered three-year terms; and

     - the requirement that all actions by stockholders must be effected at a
       duly called meeting of the stockholders and may not be effected by a
       consent in writing.

These provisions could discourage take-over attempts and could adversely affect
the market price of our common stock. In addition, these provisions may limit
the ability of stockholders to remove our current management. In addition, our
board of directors can issue up to 5,000,000 shares of preferred stock without
the approval of the holders of common stock. Any preferred stock may have rights
senior to the common stock. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and reduce the likelihood
that such holders will receive dividend payments and payments upon liquidation.
Such issuance could have the effect of decreasing the market price of the common
stock. The issuance of preferred stock could also have the effect of delaying,
deterring or preventing a change in control of us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not engage in investing in or trading market risk sensitive
instruments. We also do not purchase, for investing, hedging, or for purposes
"other than trading", instruments that are likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk, except as noted in the following paragraph. We have not entered into
any forward or futures contracts, purchased any options or entered into any
interest rate swaps. Additionally, we do not currently engage in foreign
currency hedging transactions to manage exposure for transactions denominated in
currencies other than U.S. dollars.

     We do not currently have any indebtedness other than capital lease
obligations of approximately $0.8 million as of December 31, 2001. If we were
to borrow from our revolving line of credit facility with Foothill Capital
Corporation, we would be exposed to changes in interest rates. We are also
exposed to changes in interest rates from investments in some held-to maturity
securities. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our consolidated financial statements for each of the fiscal years in the
three-year period ended December 31, 2001, together with the report thereon of
PricewaterhouseCoopers LLP dated February 1, 2002, except for the information in
Note 16 of "Notes to Consolidated Financial Statements in this Form 10-K, as to
which the dates are March 5, 2002, and March 9, 2002", are included in this
report commencing on page F-1 and are listed under Part IV, Item 14 in this
report.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information for the persons who are
members of the board of directors or who are executive officers of our company.

<TABLE>
<CAPTION>
NAME                          AGE                         POSITION
----                          ---                         --------
<S>                           <C>      <C>
Sean E. Belanger               46      President and Chief Executive Officer; Director (term expires 2004)
Patrick M. Murphy              45      Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Michael Ward                   40      Senior Vice President of World Wide Sales and Service
Thomas E. Epley                61      Chairman, Board of Directors (term expires 2003), Audit Committee member
David Bonderman                59      Director (term expires 2003)
Keith B. Geeslin               49      Director (term expires 2004); Audit and Compensation Committee member
William R. Stensrud            51      Director (term expires 2002); Audit and Compensation Committee member
</TABLE>


                                       41
<PAGE>

     Sean E. Belanger has served as Chief Executive Officer and President since
December 2000, when he also became a director. From April 2000 to December 2000
he served as Paradyne's President and Chief Operating Officer. From June 1997 to
May 2000 he served as Senior Vice President of WorldWide Sales. From November
1996 to May 1997, he served as Vice President and General Manager of 3Com
Corporation's Network Service Provider division. From September 1992 to November
1996, he was Vice President of Sales for Primary Access Corporation. Mr.
Belanger holds a B.S. in business management from Virginia Polytechnic Institute
and State University.

     Patrick M. Murphy has served as Senior Vice President, Chief Financial
Officer and Treasurer since August 1996 and Secretary since August 2000. He also
has served as a director and Chief Executive Officer of Paradyne Credit Corp.
since July 2001, and Vice President, Chief Financial Officer, and Treasurer from
August 1996 to July 2001. From August 1996 to July 1998 he served as Vice
President, Treasurer and Chief Financial Officer of GlobeSpan, Inc., a broadband
digital communications company. From January 1987 to August 1996, he served as
Chief Financial Officer of Continental Broadcasting, Ltd., a television and
radio broadcast company. Mr. Murphy holds a B.S./B.A. in finance from John
Carroll University and is a certified public accountant.


      Michael S. Ward has served as Senior Vice President of Worldwide Sales and
Service since January 17, 2002. From July 2000 to November 2001, Mr. Ward was
President of Sales, North America for Corvis Corporation. From April 1995 to
July 2000 Mr. Ward was a Sales Vice President at Ascend Communications (which
was purchased by Lucent Technologies in July 1999) and Lucent Technologies. Mr.
Ward holds a B.S. in electrical engineering from Virginia Tech and a M.S. in
electrical management from the University of South Florida.


     Thomas E. Epley has served as the Chairman of the board of directors since
August 1996. He also served as President from August 1996 to December 1996 and
Chief Executive Officer from August 1996 to May 1997. From August 1996 to April
1997, Mr. Epley was Chief Executive Officer and President of GlobeSpan, Inc. He
has served as a director of GlobeSpan from August 1996 to June 16, 2001 and was
Chairman of the board of directors from August 1996 to March 1999. He has served
as a director and President and Chief Executive Officer of Paradyne Credit Corp.
from August 1996 to June 1999. From 1993 to 1996, he was a director of Carlton
Communications. From 1991 to 1996, he served as Chairman and Chief Executive
Officer of Technicolor, a provider of services and products to the entertainment
industry. He is also a limited partner in Communication Partners, L.P. Mr. Epley
holds a BS degree in mechanical engineering from the University of Cincinnati
and an MBA from the Kellogg School of Northwestern University.

     David Bonderman has served as a director of Paradyne since June 1999. Mr.
Bonderman has been a managing partner of Texas Pacific Group, a limited partner
in Communication Partners, LP, since its formation in 1992. Prior to forming
Texas Pacific Group, Mr. Bonderman had served as the Chief Operating Officer of
the Robert M. Bass Group, Inc. since 1983. He is a director of several public
and privately held companies including Continental Airlines, Inc., ProQuest
Company (formerly Bell & Howell, Inc.), Ducati Motor Holding, S.P.A., Costar
Group, Inc., Denbury Resources, Inc., Washington Mutual, Inc., Oxford Health
Plans, Inc., Agenesys, Inc., J. Crew Group, Inc., Ryanair Holdings, plc., Punch
Group Ltd., Korea First Bank, Evolution Global Managing Partners, LDC, ON
Semiconductor Corporation, Seagate Technology, Inc. and Magellan Health
Services, Inc. Mr. Bonderman holds a B.A. degree from the University of
Washington and a JD from Harvard Law School.

     Keith B. Geeslin has served as a director of Paradyne since June 1999. Mr.
Geeslin is a general partner of The Sprout Group, a venture capital firm, where
he has been employed since July 1984. In addition, he is a general or limited
partner in a series of investment funds associated with The Sprout Group, a
division of DLJ Capital Corporation, which is a subsidiary of Credit Suisse
First Boston (USA), Inc. The Sprout Group are direct and indirect equity owners
in Communication Partners, L.P. Mr. Geeslin is also a director of Innoveda, Inc.
and Synaptics and several privately held companies. Mr. Geeslin received a B.S.
degree in electrical engineering from Stanford University, an M.A. degree in
philosophy, politics and economics from Oxford University and a M.S. degree in
engineering and economic systems from Stanford University.

     William R. Stensrud has served as a director of Paradyne since June 1996.
Mr. Stensrud has been a general partner at the venture capital investment firm
of Enterprise Partners since January 1997. From February 1997 to June 1997, he
served as President and Chief Executive Officer of Rhythms NetCommunications,
Inc., a network service provider. From January 1992 to July 1995, Mr. Stensrud
served as President and Chief Executive Officer of Primary Access Corporation
which was acquired by 3Com Corporation, and where Mr. Stensrud remained as an
executive at Primary Access Corporation through March 1996. Mr. Stensrud is a
director of several public and privately held companies, including iAsiaWorks,
Inc., Packeteer, Inc., and Juniper Networks, Inc. Mr. Stensrud holds a B.S. in
electrical engineering and computer science from the Massachusetts Institute of
Technology.


                                       42
<PAGE>
     Andrew S. May, whose term was scheduled to expire at the 2002 annual
meeting of stockholders, resigned as a director on March 6, 2002. On March 28,
2002, Peter F. Van Camp, whose term was scheduled to expire at the 2004 annual
meeting of stockholders, resigned. Neither Mr. May or Mr. Van Camp resigned
because of a disagreement with Paradyne's operations, policies or practices. In
connection with these resignations, the Board of Directors of Paradyne has
reduced the size of the Board of Directors to five members.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     The United States securities laws require our directors, executive officers
and any persons who beneficially own more than 10% of our common stock to file
with the SEC and the Nasdaq Stock Market initial reports of ownership and
subsequent reports of changes in ownership. To our knowledge, based solely on a
review of the copies of the reports furnished to us and written representations
that no other reports were required, during fiscal 2001 all directors, executive
officers and beneficial owners of more than 10% of our common stock made all
required filings.

ITEM 11. EXECUTIVE COMPENSATION.

     The following table summarizes the compensation paid or accrued by us in
each of the fiscal years ended December 31, 1999, 2000 and 2001 with regard to
Sean E. Belanger, our President and Chief Executive Officer, Patrick M. Murphy
and John Koehler executive officers as of December 31, 2001 whose annual
compensation and bonus was $100,000 or more for 2001. We refer to these
individuals as our "named executive officers" in this Form 10-K. In 2001,
Paradyne only had three executive officers. This table does not include
information for Michael Ward who began serving as an executive officer in
January 2002. For further information, see "- Employment Agreements" below.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                      LONG-TERM
                                                                                    COMPENSATION
                                                                                       AWARDS
                                                 ANNUAL COMPENSATION (1)            ------------
                                        ----------------------------------------     SECURITIES
                                        FISCAL                                       UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION              YEAR         SALARY($)         BONUS($)      OPTIONS(#)     COMPENSATION($)
---------------------------             ------        ---------         --------    ------------     ---------------
<S>                                     <C>           <C>               <C>         <C>              <C>
Sean E. Belanger                         2001         301,473(2)         244,450         24,739          454(3)
President, Chief Executive Officer;      2000         219,402(2)          49,750      2,050,000          306(3)
Director                                 1999         200,838(2)          98,333         80,000          389(3)

Patrick M. Murphy                        2001         206,280(4)         174,360         16,926          281(5)
Senior Vice President, Chief Financial   2000         225,663(4)          23,333        740,000          211(5)
Officer, Treasurer and Secretary         1999         224,396(4)          70,000        110,000          383(5)

John Koehler                             2001         178,107             56,869        414,989          336(7)
Former Senior Vice President and
General Manager - DSL and World
Wide Service (6)
</TABLE>

(1)  In accordance with the rules of the SEC, the compensation described in this
     table does not include medical, group life insurance or other benefits
     which are available generally to all salaried employees of Paradyne and
     other perquisites and personal benefits received which do not exceed the
     lesser of $50,000 or 10% of any officer's salary and bonus disclosed in
     this table.
(2)  Includes $0, $60,000 and $47,344 contributed to the Key Employee Stock
     Option Plan for the years 2001, 2000 and 1999 respectively.
(3)  Mr. Belanger received life insurance benefits during 2001, 2000 and 1999.
(4)  Includes $0, $29,999 and $60,000 contributed to the Key Employee Stock
     Option Plan for the years 2001, 2000 and 1999 respectively.
(5)  Mr. Murphy received life insurance benefits during 2001, 2000 and 1999.
(6)  Mr. Koehler was hired by Paradyne in January 2001 and resigned in January
     2002.
(7)  Mr. Koehler received life insurance benefits during 2001.


                                       43
<PAGE>


OPTION GRANTS

The following table provides information with regard to stock option grants to
the named executive officers pursuant to The Amended and Restated 1996 Equity
Incentive Plan, or the 1996 Plan, and the 2000 Broad-Based Plan, or the
Broad-Based Plan, during 2001. With certain exceptions, as noted in footnote
"(2)" below, most options expire ten years from the date of grant and become
exercisable at the rate of 25% on the first anniversary of the grant date and
6.25% every three months thereafter, for full vesting after four years.

                       OPTIONS GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                         PERCENT OF                                  POTENTIAL REALIZABLE VALUE AT
                                           TOTAL                                        ASSUMED ANNUAL RATES OF
                            NUMBER OF      OPTIONS                                    STOCK PRICE APPRECIATION FOR
                            SECURITIES   GRANTED TO                                          OPTION TERM
                            UNDERLYING    EMPLOYEES   EXERCISE OR                    ---------------------------
                             OPTIONS      IN FISCAL    BASE PRICE   EXPIRATION
                            GRANTED(#)    YEAR (1)       ($/SH)        DATE            5% ($)           10% ($)
                            ----------   ----------   -----------   ----------       ---------       -----------
<S>                         <C>          <C>          <C>           <C>              <C>             <C>
Sean E. Belanger               24,739(02)    0.73%        $2.00     06/04/2011        $ 21,289       $   53,951


Patrick M. Murphy              16,926(02)    0.50%         2.00     06/04/2011          31,116           78,855

John Koehler                  400,000       11.80%         1.81     01/02/2011         455,949        1,155,463

                               14,989(02)    0.44%         2.00     06/04/2011          18,853           47,777
</TABLE>

(1)  Options to purchase a total of 3,390,565 shares of common stock were
     granted to employees in 2001 under our 1996 Plan and Broad-Based Plan.

(2)  Represents options granted to executive, based on amount of salary
     reduction incurred, which vest on a monthly basis over 36 months.

     Amounts reported in the last two columns represent hypothetical amounts
that may be realized upon exercise of options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation of the common stock over the term of the options. The numbers shown
in these two columns are calculated based on SEC rules and do not reflect our
estimate of future stock price growth. Actual gains, if any, on stock option
exercises and common stock holdings depend on the timing of such exercises and
the future performance of the common stock. We do not guarantee that the rates
of appreciation assumed in these two columns can be achieved or that the amounts
reflected will be received by the named executive officers. The two columns do
not take into account any appreciation of the price of the common stock from the
date of grant to the current date.

OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

     The following table sets forth information regarding (1) the number of
shares of common stock received upon exercise of options by the named executive
officers during 2001, (2) the net value realized upon such exercise, (3) the
number of unexercised options held at December 31, 2001 and (4) the aggregate
dollar value of unexercised options held at December 31, 2001. The net value
realized upon exercise is equal to the difference between the option exercise
price and the fair market value of our common stock at the date of exercise or
at fiscal year end. The closing sale price of our common stock on the Nasdaq
National Market on December 31, 2001 was $3.90 per share.

               AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                        Number of Securities
                                                       Underlying Unexercised        Value of Unexercised In-
                          Shares                            Options at                 The-Money Options at
                         Acquired                       December 31, 2001 (#)          December 31, 2001 ($)
                            On           Value        -------------------------      -------------------------
                       Exercise (#)  Realized ($)     Exercisable/Unexercisable      Exercisable/Unexercisable
                       ------------  ------------     -------------------------      -------------------------
<S>                    <C>           <C>              <C>           <C>              <C>              <C>
Sean E. Belanger              --         --             915,374 /   1,359,365        $1,198,248  /    $1,941,230
Patrick M. Murphy             --         --             378,655 /     513,271         411,060    /       709,042
John Koehler                  --         --               2,499 /     412,490          5,217     /       786,076
</TABLE>



                                       44
<PAGE>

DIRECTOR COMPENSATION

     Upon the commencement of their service as directors, we grant each of our
non-employee directors an option to purchase 10,000 shares of common stock under
our 1999 Non-Employee Directors Stock Option Plan. For each year they continue
to serve and attend at least 75% of the regularly scheduled meetings of the
board of directors and the committees of which they are a member during that
year, we grant each director an additional option to purchase 5,000 shares of
common stock. Options granted under the 1999 Non-Employee Director Stock Option
Plan upon the commencement of service as a director may, at the discretion of
the board of directors, be fully vested on the grant date or be vested as to 50%
of the shares with the remaining 50% vesting on the first anniversary of the
grant date. No option granted under the 1999 Non-Employee Director Stock Option
Plan may have a term in excess of ten years from the date on which it was
granted. The exercise price of options granted under the 1999 Non-Employee
Director Stock Option Plan will equal the fair market value of the common stock
on the date of grant.

     As of March 15, 2002, 100,000 options to purchase common stock had been
granted pursuant to the 1999 Non-Employee Director Stock Option Plan, of which
options to acquire 50,000 shares were outstanding on such date.

     Since July 15, 1999, our non-employee directors have received $1,500 for
participation in each meeting of the board of directors and $750 for
participation in committee each meeting held on days other than those on which
the board of directors are held. We paid a total of $24,000 in directors' fees
in 2001.

     We do not compensate directors who are also our employees for their service
as directors.

EMPLOYMENT AGREEMENTS

     Under employment agreements with Messrs. Belanger and Murphy, dated as of
December 8, 2000, Mr. Belanger serves as President and Chief Executive Officer,
and Mr. Murphy serves as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary. Each of the agreements has a term of one year with
automatic daily extensions. Under the agreement, the officer is entitled to an
annual base salary (currently $330,000 in the case of Mr. Belanger and $225,810
in the case of Mr. Murphy) and an annual performance bonus opportunity
(currently $150,000 in the case of Mr. Belanger and $70,000 in the case of Mr.
Murphy), and he is entitled to participate in all incentive, savings, retirement
and welfare plans provided by Paradyne to its senior executive officers
generally. Pursuant to his employment agreement, the executive was granted stock
options to acquire shares of Paradyne common stock (1,200,000 shares in the case
of Mr. Belanger and 430,000 shares in the case of Mr. Murphy) at an exercise
price equal to the fair market value of the underlying shares on the date of
grant. The options vest in equal monthly installments over a 36-month period,
provided that, upon the earlier occurrence of a change in control, the options
will vest immediately as to a portion of the shares (those that would have
vested in the next 12 months with respect to Mr. Belanger, and one-half of the
unvested options in the case of Mr. Murphy), and as to another portion of the
shares if the officer's employment is terminated under certain conditions within
one year after the change in control (those that would have vested in the 24
months after the change in control with respect to Mr. Belanger, and the
remainder of the unvested shares with respect to Mr. Murphy). In addition,
pursuant to the employment agreement, all of the officer's other options that
were outstanding on December 8, 2000 were amended to provide that upon the
officer's termination of employment due to his death, disability or retirement,
or his termination without cause or voluntary resignation for any reason, such
options will remain exercisable for 12 months. Either party to the employment
agreements may terminate the agreement at any time for any reason. If we
terminate the officer's employment without cause or if he resigns for good
reason, he will receive (i) a prorated target annual bonus for the year of
termination, (ii) a severance payment equal to one year's salary, and (iii)
reimbursement for the cost of twelve months of continued health insurance
coverage under COBRA. Each of the employment agreements provides for a
limitation of severance and other benefits to the extent necessary to avoid the
imposition of a golden parachute excise tax, but only if such limitation would
result in a more favorable after-tax result for the officer. The employment
agreements contain covenants against the disclosure of confidential information
or the solicitation of Paradyne's customers or employees for a period of six
months after the officer's termination of employment.

      We entered into an employment agreement with Michael S. Ward on January
17, 2002. Under the agreement, Mr. Ward is entitled to an annual base salary in
the amount of $200,000 and an annual commission opportunity of $100,000 based on
attainment of an annual quota. The commission rate will double for all amounts
exceeding the annual quota. Mr. Ward will also be entitled to a quarterly bonus
of $12,500 if he meets quarterly objectives. He is entitled to participate in
all incentive, savings, retirement and welfare plans provided by Paradyne to its
senior executive officers generally. Pursuant to his employment agreement, the
executive was granted stock options to acquire 550,000 shares of Paradyne common
stock, of which 400,000 shares were granted with a fair market value option
price at the date of grant and the remaining 150,000 shares were granted at $1
per share. The options vest over a four year period with the first vesting of
25% of the total


                                       45
<PAGE>

occurring one year from the date of grant. Thereafter, options vest on a
quarterly basis. Upon the earlier occurrence of a change in control, however,
the options will vest immediately as to a portion of the shares (those that
would have vested in the next 12 months), and as to another portion of the
shares if the officer's employment is terminated under certain conditions within
one year after the change in control (those that would have vested in the 24
months after the change in control). Any options exercisable upon the officer's
termination of employment due to his death, disability or retirement, or his
termination without cause or voluntary resignation for any reason, will remain
exercisable for 6 months. Either party to the employment agreements may
terminate the agreement at any time for any reason. If we terminate the
officer's employment without cause or if he resigns for good reason and within
90 days after the occurrence of the event giving rise to good reason he will
receive (i) a severance payment equal to one year's salary, and (ii)
reimbursement for the cost of twelve months of continued health insurance
coverage under COBRA.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     From January 1, 2001 to September 30, 2001, the Compensation Committee
consisted of David M. Stanton and William R. Stensrud. Since October 1, 2001 the
Compensation Committee has consisted of Keith B. Geeslin and William R.
Stensrud.

     In 2001, Mr. Stanton (who resigned as a director of Paradyne on September
30, 2001), served as a director of Globespan, Inc. and Paradyne Credit Corp.,
Mr. Geeslin served as director of Rhythms Net Connections and Globespan; and
Mr. Stensrud served as a director of Rhythms NetConnections, Inc. For a
description of transactions involving Communication Partners, L.P., Paradyne
Credit Corp., Globespan and Rhythms NetConnections, see the "Item 13. Certain
Relationships and Related Transactions" below.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth information as of March 15, 2002 regarding
the beneficial ownership of our voting stock by each person known by us to own
more than 5% of any class of our voting securities, each director, each named
executive officer, and all current directors and executive officers as a group.

     Pursuant to Securities and Exchange Commission rules, the number of shares
of common stock beneficially owned by a specified person or group includes
shares of our common stock subject to options that are presently exercisable or
exercisable within 60 days after March 15, 2002. Such shares are deemed to be
outstanding for the purpose of computing the percentage of the class
beneficially owned by such person or group, but are not deemed to be outstanding
for the purpose of computing the percentage of the class beneficially owned by
any other person or group.

     The persons named in the table gave us the stock ownership information
about themselves. Except as explained in the footnotes below, the named persons
have sole voting and investment power with regard to the shares shown as
beneficially owned by them.



                                       46
<PAGE>
<TABLE>
<CAPTION>
                                               AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
                                               -----------------------------------------
                                                      Total Common
                                                          Stock          Percent
                                                      Beneficially       of Class
                                                          Owned            Owned
                                                      ------------       --------
<S>                                            <C>                       <C>
FIVE PERCENT STOCKHOLDERS:
Texas Pacific Group(1)                                 10,982,870          26.60%
     301 Commerce Street
Suite 3300
     Fort Worth, Texas 76102
Nortel Networks Inc.                                    3,291,199           7.97
     8200 Dixie Road, Suite 100
       Brampton, ON L6T 5, Canada

EXECUTIVE OFFICERS AND DIRECTORS:

     Sean E. Belanger(2)                                1,201,503           2.83
     Patrick M. Murphy(3)                                 503,025           1.20
     John A. Koehler(4)                                     9,434              *

     David Bonderman(5)                                10,992,870          26.62
     Thomas E. Epley(6)                                   677,598           1.64
     Keith B. Geeslin(7)                                1,632,733           3.95
     William R. Stensrud(8)                               358,935           0.87

All directors and executive officers
     As a group (7 persons)(9)                         15,366,664          35.72%
</TABLE>

* Represents beneficial ownership of less that 1%.

(1)  Includes 9,541,209 shares held by TPG Partners, L.P., 943,680 shares held
     by TPG Parallel I, L.P., 165,336 shares held by Communication GenPar, Inc.,
     212,034 shares held by TPG Genpar, L.P., 35,726 shares held by FOF
     Partners, L.P. and 84,885 shares held by TPG Equity Partners, L.P. The
     foregoing entities are affiliated with Texas Pacific Group.
(2)  Includes 1,196,726 shares subject to options which are exercisable within
     60 days of March 15, 2002.
(3)  Includes 490,727 shares subject to options which are exercisable within 60
     days of March 15, 2002.
(4)  Mr. Koehler was no longer employed by Paradyne Networks, Inc. as of January
     2002.
(5)  Includes 10,000 shares subject to options under the 1999 Non-Employee
     Directors' Stock Option Plan and 10,982,870 shares beneficially owned by
     Texas Pacific Group. See footnote (1) for a description of Texas Pacific
     Group's beneficial ownership. Mr. Bonderman, through various investment
     partnerships and corporations, has a pecuniary interest in the shares held
     by Texas Pacific Group. However, Mr. Bonderman disclaims beneficial
     ownership of the shares beneficially owned by Texas Pacific Group, except
     to the extent of his pecuniary interest therein.
(6)  Includes 20,000 shares subject to options under the 1999 Non-Employee
     Directors' Stock Option Plan, 524,925 shares held by the Thomas E. Epley
     Trust, 110,357 shares held by the Anderson Epley Family Trust, 11,158
     shares held by the Epley Children's Trust FBO Thomas E. Epley, Jr. and
     11,158 shares held by the Epley Children's Trust FBO Jacqueline E. Epley.
     Mr. Epley is the trustee of each of these trusts.
(7)  Includes 21,781 shares held by Mr. Geeslin individually, 5,000 shares
     subject to options under the 1999 Non-Employee Directors' Stock Option Plan
     and 1,605,952 shares beneficially owned by The Sprout Group. The 1,605,962
     shares beneficially owned by The Sprout Group include 75,936 shares held by
     DLJ Capital Corporation (on a proprietary basis), 52,288 shares held by DLJ
     Capital Corporation (for the benefit of an employee deferred compensation
     plan), 628,962 shares held by Sprout Capital VII, L.P., 514,193 shares held
     by Sprout Growth II, L.P., 7,306 shares held by Sprout CEO Fund, L.P.,
     261,459 shares held by DLJ First ESC, L.P., 63,738 shares held by Credit
     Suisse First Boston (USA), Inc. (f/k/a Donaldson, Lufkin & Jenrette Inc.),
     1,417 shares held by DLJ Growth Associates II, Inc. and 653 shares held by
     DLJ Capital Associates VII, Inc. The foregoing entities are associated with
     The Sprout Group. Of the aggregate of 1,605,952 shares beneficially owned
     by these entities, 1,305,873 shares are subject to a voting trust agreement
     and are held and voted by an independent third party, Norwest Bank Indiana,
     N.A., as voting trustee. Mr. Geeslin occupies various positions of control
     of the entities associated with The Sprout Group. As such, he may be deemed
     to have voting and dispositive power over the shares beneficially owned by
     entities associated with The Sprout Group. However, Mr. Geeslin disclaims
     beneficial ownership of these shares except to the extent of his pecuniary
     interest therein.
(8)  Includes 353,690 shares held by the Stensrud Family Trust, 245 shares held
     indirectly by Mr. Stensrud's son and 5,000 shares subject to options under
     the 1999 Non-Employee Directors' Stock Option Plan.
(9)  Includes 1,727,453 shares subject to options with are exercisable within 60
     days of March 15, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     In July 1996, Communication Partners, L.P., a limited partnership
controlled by Texas Pacific Group, acquired our business as well as the
businesses of Paradyne Credit Corp. and GlobeSpan, Inc. as part of a divestiture
by Lucent Technologies Inc. As of May 1999, Communication Partners, L.P. owned
approximately 97.1% of our outstanding

                                       47
<PAGE>

common stock and approximately 83.2% of the outstanding capital stock of
GlobeSpan. In May 1999, Communication Partners, L.P. distributed its Paradyne
shares and its GlobeSpan shares to its general and limited partners.
Communication Partners, L.P. continues to own 100% of the capital stock of
Paradyne Credit Corp.

     Mr. Murphy our Senior Vice President, Chief Financial Officer, Treasurer
and Secretary is the Vice President, Chief Financial Officer and Treasurer of
Paradyne Credit Corp.

     Messrs. Epley and Stensrud, two of our directors, either directly or
through various investment partnerships and corporations, are limited partners
of Communication Partners, L.P. Mr. Bonderman is a managing partner in Texas
Pacific Group, a limited partner in Communications Partners, L.P.

TRANSACTIONS WITH GLOBESPAN, INC.

     Cross-License Agreement. As part of the divestiture by Lucent, we entered
into a cross-license agreement with GlobeSpan. Under this agreement, each party
granted to the other party a non-exclusive, non-transferable, irrevocable,
world-wide, royalty-free license to the patents Lucent assigned to the granting
party in the divestiture, for use in the other party's products that existed as
of the date of the divestiture, and subsequent modifications to those products.
Each party also granted to the other party a non-exclusive, non-transferable,
irrevocable, worldwide, royalty-free license to the granting party's other
technical information and intellectual property existing at the time of the
divestiture. These licenses give us the right to make, have made, use, sell and
import our products within the scope of the license grants as well as the tools
used to develop, manufacture, test or repair such products. We were also given
the right to convey to any of our customers the right to use and resell such
products. Each party also granted to the other party a non-exclusive,
non-transferable, irrevocable, world wide, royalty-free license to use
particular listed trademarks. All of these licenses have an indefinite duration,
subject to the expiration of patent and copyright terms.

     Cooperative Development Agreement/Termination Agreement/Supply Agreement.
Effective December 1998, GlobeSpan and we terminated a Cooperative Development
Agreement pursuant to a termination agreement. In conjunction with the signing
of the termination agreement we entered into a four-year supply agreement with
GlobeSpan, which gives us preferential pricing and other terms in connection
with the purchase of GlobeSpan products. Under the terms of this agreement,
GlobeSpan is required to honor our orders for GlobeSpan products in quantities
at least consistent with our past ordering practices and must afford us at least
the same priority for its orders as GlobeSpan affords other similarly situated
highly preferred customers. We were also granted immunity under GlobeSpan's
intellectual property rights for all our customers that purchase our products
that incorporate GlobeSpan products. GlobeSpan has been selling products to us
pursuant to these terms since July 1998. In 2001, we purchased from GlobeSpan a
total of $1.0 million of products under the supply agreement.

     Real Property Agreements. Under a sublease dated August 1997, and
subsequently amended in August 1998, between GlobeSpan and us, GlobeSpan
subleased property at 100 Schulz Drive, Red Bank, New Jersey. The sublease
reimburses us for 100% of all costs we incur under the primary lease. GlobeSpan
paid us approximately $68,000 a month for approximately 50,000 rentable square
feet, plus approximately $10,000 per month for rent and operating costs. In
October 2000, the rent increased to approximately $79,000 a month. Pursuant to a
Mutual Release and Surrender Agreement dated March 20, 2001, we terminated our
obligations as a lessor under the lease of this property which consequently
terminated our sublease arrangement with Globespan.

TRANSACTIONS WITH PARADYNE CREDIT CORP.

      As part of the divestiture by Lucent, we entered into an intercompany
services agreement with Paradyne Credit Corp., our equipment leasing affiliate,
under which we agreed to provide:

     - general management consulting and services administration, including
       rental contract servicing administration and remarketing services;
     - administrative services, including risk management, financial and cash
       management, tax management and accounting services;
     - human resources, staffing and legal services; and
     - operational services, including facilities management, office
       communications, telecommunication systems, systems management and other
       services.


                                       48
<PAGE>

     In exchange for these services, Paradyne Credit Corp. pays us a monthly
service fee to equal to the sum of: (i) all direct costs incurred by us to
provide services to Paradyne Credit Corp., (ii) all indirect costs incurred by
us to provide services to Paradyne Credit Corp. and (iii) a 5% mark up on all
charges. Paradyne Credit Corp. may terminate this agreement upon 60 days notice
and by us upon 180 days notice. Amounts charged for these services totaled
approximately $621,000 for the year ended December 31, 2001.

TRANSACTIONS WITH NORTEL NETWORKS INC.

         As a result of our March 5, 2002 acquisition of Elastic Networks,
Nortel Networks Inc. became a greater than 5% owner of our common stock. Elastic
Networks has a Distribution Agreement with Nortel that will continue after the
acquisition. Under this Distribution Agreement, Elastic Networks supplies
Nortel's customers with access product. Although Elastic Networks paid an agency
fee of 7.5% of sales to specified customers under the Distribution Agreement,
this agency fee was terminated in connection with the acquisition. During 2001
Elastic Networks sold $13.6 million through Nortel. During 2001 Paradyne's total
business transactions with Nortel were less than $60,000.

LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION

     Our bylaws and certificate of incorporation provide for indemnification and
limitation of liability of our directors and executive officers. In addition, we
have entered into indemnification agreements with Messrs. Belanger, Bonderman,
Epley, Geeslin, Andrew May (who resigned as a director on March 6, 2002),Murphy,
Stensrud, and Van Camp. Under the agreements, we agreed to reimburse and
indemnify each individual for civil or criminal proceedings or governmental
investigations relating to his actions as a director or officer, except if such
conduct was committed in bad faith or was a breach of his duty of loyalty to us.

     On December 7, 2000, in connection with the class action lawsuits described
under "Item 3: Legal Proceedings" of this report, we agreed, consistent with our
bylaws, certificate of incorporation and the above-mentioned indemnity
agreements, to reimburse Messrs. Epley, May and Murphy, each of whom is a
defendant in the lawsuits. As of March 15, 2002, we have not made any payments
to Messrs. Epley, May and Murphy.

OTHER DIRECTOR OR FIVE PERCENT STOCKHOLDER RELATIONSHIPS

     William Stensrud, a member of our board of directors, serves as director
for Rhythms NetConnections, Inc. For the year ended December 31, 2001, we sold
products totaling approximately $1.9 million to Rhythms NetConnections. We
believe that our transactions with Rhythms NetConnections were completed at
rates similar to those available to our other customers of similar size and
nature.

     As of March 15, 2002, Texas Pacific Group beneficially owns 26.60% of our
common stock and also beneficially owns convertible preferred stock representing
ownership of 15.4% of Zhone Technologies, Inc., a company with whom we have a
distribution agreement. This convertible preferred stock is convertible to
common stock on a one-to-one exchange ratio at the earlier of an election to
convert by the Texas Pacific Group or upon an initial public offering of Zhone.
Pursuant to this distribution agreement, we purchase Zhone's IMACS system and
have exclusive rights to distribute it under our private label as the Acculink
Access Controller. For the year ended December 31, 2001 we made total payments
to Zhone for purchases of IMACS of approximately $8.0 million. You may read a
further description of our relationship with Zhone under "Item 1. Business -
Sales, Marketing and Distribution" in this Form 10-K.

PROMISSORY NOTES FROM OFFICERS AND DIRECTOR

     In 1999, two of our executive officers and one former director - Sean
Belanger, Patrick Murphy and Andrew May-issued to us promissory notes in
connection with the purchase of shares of our common stock. The full recourse
notes accrued interest at rates ranging from 4.72% to 5.15%. The principal
balance of the notes and accrued interest was payable at the earlier of
termination of employment or five years from the date of the note. The notes
were secured by the shares of common stock acquired with the note, which shares
were held in escrow by us. The shares purchased vest either on a quarterly basis
or 25% vest on the first anniversary of the note with the remainder vesting in
equal quarterly installments thereafter. All unvested shares purchased with the
notes were subject to repurchase by us if these executive officers terminated
their employment prior to becoming fully vested in the shares. During 2001 and
the first quarter of 2002, Messrs. Sean Belanger and Patrick Murphy and Andrew
May paid to us the outstanding balances of $199,800, $74,925, and $37,485 and
$99,900, respectively, plus accrued interest. Therefore, all promissory notes
with our executive officers and directors and the associated interest have been
paid off as of March 15, 2002.



                                       49
<PAGE>

                                     PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
 <S>                                                                                         <C>
 (a) 1. Consolidated Financial Statements
        Report of Independent Certified Public Accountants                                           F-1
        Consolidated Balance Sheets as of December 31, 2000 and 2001                                 F-2
        Consolidated Statements of Operations for the years ended
        December 31, 1999, 2000 and 2001.                                                            F-3
        Consolidated Statements of Changes in Stockholders' Equity and
        Comprehensive Income (Loss) for the years ended December 31,
        1999, 2000 and 2001                                                                          F-4
        Consolidated Statements of Cash Flows for the years ended
        December 31, 1999, 2000 and 2001                                                             F-5
        Notes to Consolidated Financial Statements                                           F-6 to F-19

     2. Financial Statement Schedules
        Schedule II - Valuation and Qualifying Accounts                                              S-1

     3. Exhibits
</TABLE>

     The following exhibits are either (i) filed with this report or (ii) have
previously been filed with the Securities and Exchange Commission and are
incorporated in this Item 14 by reference to those prior filings. Previously
filed registration statements and reports which are incorporated by reference
are identified in the column captioned "SEC Document Reference." We will furnish
any exhibit upon request to Patrick M. Murphy, our Senior Vice President, Chief
Financial Officer, Treasurer and Secretary , 8545 126th Avenue North, Largo,
Florida 33773. We charge $.50 page to cover expenses of copying and mailing.

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>          <C>                                                      <C>
   2.1       Asset Purchase Agreement dated as of April 5, 2000       Exhibit 2 from Paradyne's Form 8-K filed on May 1, 2000.
             among, Paradyne Networks, Inc.,("Paradyne"), Paradyne
             Corporation, P-com, Inc. and Control Resources
             Corporation.

   2.2       Agreement and Plan of Merger dated as of December 27,    Exhibit 2 from Paradyne's Form 8-K filed on
             2001 by and among Paradyne, Phoenix Merger Sub, Inc.     December 31, 2001.
             and Elastic Networks Inc.

   2.3       Amendment No. 1 to Agreement and Plan of Merger dated    Exhibit 2.1 from Paradyne's Form 8-K/A filed on
             January 4, 2002 by and among Paradyne, Phoenix Merger    January 8, 2002.
             Sub, Inc. and Elastic Networks Inc. Registrant, Phoenix
             Merger Sub, Inc. and Elastic Networks Inc.

   3.1*      Amended and Restated Certificate of Incorporation, as
             amended.

   3.2       Amended and Restated Bylaws, as amended.                 Exhibit 4.2 from Paradyne's Registration Statement
                                                                      on Form S-4 (No. 333-76814).

   4.1       Reference is made to Exhibits 3.1 and 3.2.

   4.2       Specimen Stock Certificate.                              Exhibit 4.2 from Paradyne's Registration Statement
                                                                      on Form S-1 (No. 333-76385) or amendments thereto.

   10.1      Amended and Restated 1996 Equity Incentive Plan.         Exhibit 10.1 from Paradyne's Registration Statement
                                                                      on Form S-1 (No. 333-76385) or amendments thereto.

   10.2      Amendment to 1996 Equity Incentive Plan filed as         Exhibit 10.1 from Paradyne's Form 10-Q filed on
             Exhibit 10.1.                                            August 14, 2000.

   10.3      Paradyne Networks, Inc. 2000 Broad-Based Stock Plan.     Exhibit 10.1 from Paradyne's Form 10-Q filed on
                                                                      November 8, 2000.

   10.4      Form of Stock Option Agreement pursuant to the 1996      Exhibit 10.2 from Paradyne's Registration Statement
             Equity Incentive Plan.                                   on Form S-1 (No. 333-76385) or amendments thereto.

   10.5      Amendment to Form of Stock Option Agreement with Sean    Exhibit 10.5 from Paradyne's Form 10-K filed on
             E. Belanger and Patrick M. Murphy.                       April 2, 2001.


   10.6      Form of Stock Option Agreement under the Paradyne        Exhibit 99.2 from Paradyne's Registration Statement
             Networks, Inc. 2000 Broad-Based Stock Plan.              on Form S-8 filed on March 20, 2001.

   10.8      Form of Early Exercise Stock Purchase Agreement.         Exhibit 10.3 from Paradyne's Registration Statement
                                                                      on Form S-1 (No. 333-76385) or amendments thereto.
</TABLE>


                                       50
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>          <C>                                                      <C>
   10.9      1999 Employee Stock Purchase Plan                        Exhibit 99.1 from Paradyne's Registration Statement
             and related offering documents.                          on Form S-8 filed on April 26, 2001.

   10.10     1999 Non-Employee Director's Stock Option Plan.          Exhibit 10.5 from Paradyne's Registration Statement
                                                                      on Form S-1 (No. 333-76385) or amendments thereto.

   10.11     Amended and Restated Subordinated Revolving Promissory   Exhibit 10.8 from Paradyne's Registration Statement
             Note between Paradyne and Paradyne Partners, L.P.,       on Form S-1 (No. 333-76385) or amendments thereto.
             dated October 16, 1998.

   10.12     Lease Agreement between Paradyne and Shav Associates,    Exhibit 10.9 from Paradyne's Registration Statement
             dated October 8, 1996.                                   on Form S-1 (No. 333-76385) or amendments thereto.

   10.13     Sublease Agreement between Paradyne and GlobeSpan        Exhibit 10.10 from Paradyne's Registration
             Semiconductor, Inc. dated December 10, 1997.             Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.14     Amendment to Sublease Agreement, dated January 1, 1999.  Exhibit 10.11 from Paradyne's Registration
                                                                      Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.15     Mutual Release and Surrender Agreement between Paradyne  Exhibit 10.17 from Paradyne's Form 10-K filed on
             and Shav Associates, dated March 20, 2001, to Lease      April 2, 2001.
             Agreement.

   10.16     Lease Agreement between Paradyne and Townsend Property   Exhibit 10.12 from Paradyne's Registration
             Trust Lease, dated June 27, 1997.                        Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.
   10.17     Amendment to Lease Agreement, dated April 5, 2000, to    Exhibit 10.19 from Paradyne's Form 10-K filed on
             Lease Agreement.                                          April 2, 2001.

   10.18     Employment Agreement between Paradyne and Andrew May,    Exhibit 10.14 from Paradyne's Registration
             dated December 3, 1996.                                  Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.19     Amendment to Employment Agreement between Paradyne and   Exhibit 10.22 from Paradyne's Form 10-K filed on
             Andrew May, dated December 8, 2000.                      April 2, 2001.


   10.20     Key Employee Agreement between Paradyne and Patrick      Exhibit 10.15 Paradyne's Registration Statement on
             Murphy, dated August 1, 1996.                            Form S-1 (No. 333-76385) or amendments thereto.

   10.21     Employment Agreement between Paradyne and Patrick        Exhibit 10.24 from Paradyne's Form 10-K filed on
             Murphy, dated December 8, 2000.                          April 2, 2001.

   10.22     Key Employee Agreement between Paradyne and Sean E.      Exhibit 10.1 from Paradyne's Form 10-Q filed on May
             Belanger, dated April 30, 2000.                          15, 2000.

   10.23     Employment Agreement between Paradyne and Sean E.        Exhibit 10.28 from Paradyne's Form 10-K filed on
             Belanger, dated December 8, 2000.                        April 2, 2001.

   10.24     Change in Control Agreement between Paradyne and Sean    Exhibit 10.17 from Paradyne's Registration
             E. Belanger.                                             Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.25     Promissory Note, dated March 29, 1999, Sean E.           Exhibit 10.19 from Paradyne's Registration
             Belanger.                                                Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.26     Loan and Security Agreement, dated July 16, 2001 by and  Exhibit 10.1 from Paradyne's Form 10-Q filed on
             among Paradyne, Paradyne Corporation and Foothill        August 14, 2001.
             Capital Corporation.

   10.27*    Amendment Number One to Loan and Security Agreement
             dated March 14, 2002 by and among Paradyne, Paradyne
             Corporation and Foothill Capital Corporation, filed
             as Exhibit 10.26.
</TABLE>


                                       51
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>          <C>                                                      <C>
   10.28     Promissory Note, dated March 31, 1999, Andrew S. May.    Exhibit 10.26 from Paradyne's Registration
                                                                      Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.29     Promissory Note, dated March 31, 1999, Patrick M.        Exhibit 10.27 from Paradyne's Registration
             Murphy.                                                  Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.30     Promissory Note, dated April 2, 1999, Patrick M.         Exhibit 10.28 from Paradyne's Registration
             Murphy.                                                  Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.31     Promissory Note, dated April 14, 2000, between Paradyne  Exhibit 10.2 from Paradyne's Form 10-Q filed on May
             Corporation and Control Resources Corporation.           15, 2000.

   10.32     Indemnification Agreement between Paradyne and William   Exhibit 10.29 from Paradyne's Registration
             Stensrud, dated November 6, 1996.                        Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.33+    Supply Agreement between Paradyne and Lucent             Exhibit 10.30 from Paradyne's Registration
             Technologies, Inc., dated July 31, 1996.                 Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.34+    Exclusivity and Amendment Agreement between Paradyne,    Exhibit 10.31 from Paradyne's Registration
             Lucent Technologies, Inc. and GlobeSpan Semiconductor,   Statement on Form S-1 (No. 333-76385) or amendments
             Inc., dated August 6, 1998.                              thereto.

   10.35+    Noncompetition Agreement between Paradyne,               Exhibit 10.32 from Paradyne's Registration
             Communication Partners, L.P., Lucent Technologies, Inc.  Statement on Form S-1 (No. 333-76385) or amendments
             and GlobeSpan Semiconductor, Inc., dated July 31, 1996.  thereto.

   10.36     Trademark and Patent Agreement between Paradyne, Lucent  Exhibit 10.33 from Paradyne's Registration
             Technologies, Inc. and GlobeSpan Semiconductor, Inc.     Statement on Form S-1 (No. 333-76385) or amendments
             dated July 31, 1996.                                     thereto.

   10.37     Tax Matters Agreement between Paradyne, Lucent           Exhibit 10.34 from Paradyne's Registration
             Technologies, Inc., and GlobeSpan Semiconductor, Inc.,   Statement on Form S-1 (No. 333-76385) or amendments
             dated July 31, 1996.                                     thereto.

   10.38     Intellectual Property Agreement between Paradyne,        Exhibit 10.35 from Paradyne's Registration
             Lucent Technologies. Inc. and GlobeSpan Semiconductor,   Statement on Form S-1 (No. 333-76385) or amendments
             Inc., dated July 31, 1996.                               thereto.

   10.39+    OEM Agreement between Paradyne and Xylan Corporation,    Exhibit 10.36 from Paradyne's Registration
             dated March 16, 1999.                                    Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.40+    Distribution Agreement between Paradyne and Tech Data    Exhibit 10.37 from Paradyne's Registration
             Corporation, dated September 21, 1993.                   Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.41+    OEM Agreement between Paradyne and Premisys              Exhibit 10.38 from Paradyne's Registration
             Communications, Inc., dated December 4, 1992.            Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.42     Network Management Partners Agreement between Paradyne   Exhibit 10.39 from Paradyne's Registration
             and Ascend Communications, Inc., dated November 3, 1998. Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.

   10.43+    Joint Development and Distribution Agreement between     Exhibit 10.40 from Paradyne's Registration
             Paradyne and AG Communication Systems Corporation,       Statement on Form S-1 (No. 333-76385) or amendments
             dated June 10, 1998.                                     thereto.

   10.44+    Marketing & License Agreement between Paradyne and       Exhibit 10.41 from Paradyne's Registration
             NetScout Systems, Inc., dated January 26, 1998.          Statement on Form S-1 (No. 333-76385) or amendments
                                                                      thereto.
</TABLE>



                                       52
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>           <C>                                                      <C>
   10.45+     Amendment to Supply Agreement between Paradyne and       Exhibit 10.43 from the Paradyne's Registration
              Lucent Technologies, Inc., dated as of May 5, 1999.      Statement on Form S-1 (No. 333-76385) or amendments
                                                                       thereto and incorporated by reference.

   10.46      Form of Indemnification Agreement between Paradyne and   Exhibit 10.44 to Paradyne's Registration Statement on
              Messrs. Belanger, Bonderman, Epley, Geeslin, Murphy,     Form S-1 (No. 333-86965) or amendments thereto.
              Stensrud and Van Camp.

   10.48      Contribution Agreement dated as of May 12, 1999 by and   Exhibit 10.1 from Elastic Networks Inc's Registration
              between Elastic Networks Inc. and Nortel Networks Inc.   Statement on Form S-1 (No 333-40500) or amendments
                                                                       thereto.


   10.49      Amendment No. 1 to Contribution Agreement dated as of    Exhibit 99.7 from Elastic Networks Inc.'s Form 8-K
              December 27, 2001 by and between Elastic Networks Inc.   filed on December 31, 2001.
              and Nortel Networks Inc.


   10.50      Intellectual Property Transfer and License Agreement     Exhibit 10.3 from Elastic Networks Inc's Registration
              dated as of May 12, 1999 by and between Elastic          Statement on Form S-1 (No. 333-40500) or amendments
              Networks Inc. and Nortel Networks Inc.                   thereto.


   10.51      Amendment No. 1 to Intellectual Property Transfer and    Exhibit 99.8 from Elastic Networks Inc.'s Form 8-K
              License Agreement dated as of December 27, 2001 by and   filed on December 31, 2001.
              between Elastic Networks Inc. and Nortel Networks Inc.


   10.52      Patent Transfer and License Agreement dated as of May    Exhibit 10.2 from Elastic Networks Inc's Registration
              12, 1999 by and between Elastic Networks Inc. and        Statement on Form S-1 (No. 333-40500) or amendments
              Nortel Networks Inc.                                     thereto.


   10.53      Amendment No. 1 to Patent Transfer and License           Exhibit 99.9 from Elastic Networks Inc.'s Form 8-K
              Agreement dated as of December 27, 2001 by and between   filed on December 31, 2001.
              Elastic Networks Inc. and Nortel Networks Inc.


   10.54*     Letter Agreement dated as of September 14, 2001 by and
              between Elastic Networks Inc. and Nortel Networks Inc.

   10.55      Modification of Letter Agreement dated as of December    Exhibit 99.10 from Elastic Networks Inc.'s Form 8-K
              27, 2001 by and between Elastic Networks Inc. and        filed on December 31, 2001.
              Nortel Networks, Inc.

   10.56      Elastic Voting Agreement dated as of December 27, 2001   Exhibit 99.2 from Paradyne's Form 8-K filed on
              by and among Paradyne, Nortel Networks Inc. and (with    December 31, 2001.
              respect to Sections 5 and 6 only) Elastic Networks Inc.

   10.57*     Employment Agreement between Paradyne and Michael S.
              Ward, dated January 17, 2002.

   21.1*      List of Subsidiaries of Paradyne Networks, Inc.

   23.1*      Consent of PricewaterhouseCoopers LLP, Independent
              Certified Public Accountants.

   24.1*      Power of Attorney is included on the signature pages to
              this report
</TABLE>

* Filed with this report.

+ Confidential treatment has been granted for certain portions which have been
omitted in the copy of the exhibit filed with the Securities and Exchange
Commission. The omitted information has been filed separately with the
Securities and Exchange Commission pursuant to the application for confidential
treatment.



                                       53
<PAGE>


(b)  Reports on Form 8-K

     We filed a Current Report on Form 8-K dated December 31, 2001 pursuant to
Item 5 (Other Events), announcing that we had entered into an agreement and plan
of merger (the "Merger Agreement") by and among us, Phoenix Merger Sub, Inc. and
Elastic Networks, pursuant to which, subject to the terms and conditions of the
Merger Agreement, the parties agreed that we would acquire Elastic Networks
through a merger of Elastic Networks with Phoenix Merger Sub, Inc. On January 8,
2002, we filed a Current Report on Form 8-K/A to reflect that on January 4,
2002, the parties entered into an amendment of the Merger Agreement (the
"Amendment") to reflect that the anticipated amendment to Paradyne's certificate
of incorporation (to increase the number of authorized shares of common stock)
would require the approval by 66 2/3% of Paradyne's outstanding common stock.
The Amendment further revised the obligation of Elastic Networks to notify its
option holders of their exercise rights to a seven-day notice period from the
date of the Merger Agreement. No financial statements were required to be filed
as part of the Form 8-K or the amendment thereto.

     Subsequent to year-end, on January 16, 2002, we filed a Current Report on
Form 8-K under Item 5 (Other Events) regarding "Risks Related to the Business of
Paradyne Networks, Inc." No financial statements were required to be filed as
part of this Form 8-K. On January 30, 2002, we filed a Current Report on Form
8-K, under Item 5 (Other Events) regarding the announcement of our 2001 fourth
quarter and year-end results, certain forward-looking statements for the first
quarter of 2002 and our new license agreement with Alcatel Semiconductor unit.
No financial statements were required to be filed as part of this Form 8-K. On
February 28, 2002, we filed a Current Report on Form 8-K under Item 5 (Other
Events) regarding the public announcement of the "Closing Net Adjusted Working
Capital Amount" used in calculating the merger consideration under the Merger
Agreement. No financial statements were required to be filed as part of this
Form 8-K. On March 19, 2002, we filed a Current Report on Form 8-K to reflect
that on March 5, 2002 Paradyne, Merger Sub and Elastic Networks consummated the
merger of Merger Sub with and into Elastic Networks pursuant to which Elastic
Networks became a wholly-owned subsidiary of Paradyne. The financial statements
required by this item will be filed by amendment not later than 60 days after
the date of the initial report.

(c)  Exhibits

     See Item 14(a) above.



                                       54
<PAGE>

                                   SIGNATURES

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


                                          PARADYNE NETWORKS, INC.
                                  By:     /s/ Sean E. Belanger
                                       -----------------------------------------
                                          Sean E. Belanger
                                          President and Chief Executive Officer

                                                         April 1, 2002
                                       -----------------------------------------
                                                             Date


                                POWER OF ATTORNEY

     KNOWN ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Paradyne Networks, Inc. a Delaware corporation, for himself and
not for one another, does hereby constitute and appoint Sean E. Belanger and
Patrick M. Murphy and each of them, a true and lawful attorney in his name,
place and stead, in any and all capacities, to sign his name to any and all
amendments to this Annual Report on Form 10-K, and to cause the same (together
with all Exhibits thereto) to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority to do and perform any act and thing necessary and proper to be done
in the premises, as fully to all intents and purposes as the undersigned could
do if personally present, and each of the undersigned for himself hereby
ratifies and confirms all that said attorneys or any one of them shall lawfully
do or cause to be done by virtue hereof.

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              SIGNATURE                                     TITLE                                 DATE
              ---------                                     -----                                 ----
<S>                                      <C>                                              <C>
         /s/ Sean E. Belanger            President, Chief Executive Officer and Director         April 1, 2002
---------------------------------------- (Principal Executive Officer)                      -------------------------
           Sean E. Belanger                                                                           Date

         /s/ Patrick M. Murphy           Senior Vice President, Chief Financial                  March 29, 2002
---------------------------------------- Officer, Treasurer and Secretary                   -------------------------
           Patrick M. Murphy             (Principal Financial Officer and                             Date
                                          Principal Accounting Officer)


----------------------------------------
          /s/ Thomas E. Epley            Chairman of the Board                                   March 29, 2002
----------------------------------------                                                    -------------------------
            Thomas E. Epley                                                                           Date

----------------------------------------
          /s/ David Bonderman            Director                                                April 1, 2002
----------------------------------------                                                    -------------------------
            David Bonderman                                                                           Date

----------------------------------------
         /s/ Keith B. Geeslin            Director                                                March 29, 2002
----------------------------------------                                                    -------------------------
           Keith B. Geeslin                                                                           Date

----------------------------------------
        /s/ William R. Stensrud          Director                                                March 29, 2002
----------------------------------------                                                    -------------------------
          William R. Stensrud                                                                         Date

</TABLE>



                                       55
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Paradyne Networks, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 50 present fairly, in all material
respects, the financial position of Paradyne Networks, Inc. and its subsidiaries
(the "Company") at December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 50
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Tampa, Florida
February 1, 2002, except for the information in Note 16 as to which the dates
are March 5, 2002, and March 9, 2002.


                                      F-1
<PAGE>

PARADYNE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                       -------------------------------
                                                                                            2000                2001
<S>                                                                                    <C>                  <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                19,821               37,866
  Accounts receivable, less allowance for doubtful accounts of
    $3,919 and $2,950 respectively                                                         23,770               15,489
  Other receivable from affiliates                                                            268                  105
  Income tax receivable                                                                     4,000                   72
  Inventories                                                                              38,628               17,386
  Prepaid expenses and other current assets                                                 2,295                1,388
                                                                                       ----------           ----------
       Total current assets                                                                88,782               72,306

Property, plant and equipment, net                                                         20,299               13,135
Other assets                                                                                8,199                  638
                                                                                       ----------           ----------

       Total assets                                                                    $  117,280           $   86,079
                                                                                       ==========           ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                         17,032               11,239
  Current portion of long-term debt                                                           638                  484
  Payroll and benefit related liabilities                                                   7,647                6,774
  Other current liabilities                                                                 8,620                5,941
                                                                                       ----------           ----------
       Total current liabilities                                                           33,937               24,438

Long-term debt                                                                                684                  444
                                                                                       ----------           ----------
       Total liabilities                                                                   34,621               24,882
                                                                                       ----------           ----------

Commitments and contingencies (See Note 13)

Stockholders' equity:
  Preferred stock, par value $0.001; 5,000,000 shares authorized,
     none issued or outstanding                                                                --                   --
  Common stock, par value $0.001; 60,000,000 shares authorized,
     32,556,127 and 33,266,780 shares issued and outstanding as
     of December 31, 2000 and 2001, respectively                                               33                   33
  Additional paid-in capital                                                              104,019              104,996
  Deferred stock compensation                                                              (1,185)                (337)
  Retained earnings                                                                       (19,759)             (43,373)
  Notes receivable for common stock                                                          (718)                (352)
  Cumulative translation adjustment                                                           269                  230
                                                                                       ----------           ----------
       Total stockholders' equity                                                          82,659               61,197
                                                                                       ----------           ----------

       Total liabilities and stockholders' equity                                      $  117,280           $   86,079
                                                                                       ==========           ==========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.


                                      F-2
<PAGE>

PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                 ---------------------------------------------
                                                                                    1999              2000              2001
                                                                                 ---------         ---------         ---------
<S>                                                                              <C>               <C>               <C>
Revenues:
     Sales                                                                       $ 220,723         $ 243,715         $ 142,008
     Service                                                                         2,617             3,674             4,425
     Royalties                                                                       3,118               293               272
                                                                                 ---------         ---------         ---------
          Total revenues                                                           226,458           247,682           146,705
                                                                                 ---------         ---------         ---------

Cost of sales:
     Equipment                                                                     124,674           181,487            96,676
     Service                                                                           823             1,295             1,791
                                                                                 ---------         ---------         ---------
          Total cost of sales                                                      125,497           182,782            98,467
                                                                                 ---------         ---------         ---------

Gross margin                                                                       100,961            64,900            48,238

Operating Expenses:
     Research & development                                                         36,470            40,392            25,128
     Selling, general & administrative expenses                                     55,938            59,184            37,307
     Amortization of deferred stock compensation
      and intangible assets                                                          1,501             1,350               913
     Impairment of intangible assets                                                     0                 0             5,761
     Restructuring charges                                                               0             1,371             3,807
                                                                                 ---------         ---------         ---------
          Total operating expenses                                                  93,909           102,297            72,916
                                                                                 ---------         ---------         ---------

Operating income (loss)                                                              7,052           (37,397)          (24,678)

Other (income) expenses
     Interest, net                                                                    (405)           (2,439)             (743)
     Other, net                                                                     (3,911)              (52)             (321)
                                                                                 ---------         ---------         ---------

Net income (loss) before provision for                                              11,368           (34,906)          (23,614)
     income taxes

Provision (benefit) for income taxes                                                 3,479              (619)                0
                                                                                 ---------         ---------         ---------

Net income (loss)                                                                $   7,889         $ (34,287)        $ (23,614)
                                                                                 ---------         ---------         ---------

Basic income (loss) per common share                                             $    0.28         ($   1.08)        ($   0.72)
                                                                                 ---------         ---------         ---------

Weighted average number of common shares outstanding                                28,435            31,768            32,879
                                                                                 ---------         ---------         ---------

Diluted income (loss) per common share                                           $    0.26         ($   1.08)        ($   0.72)
                                                                                 ---------         ---------         ---------

Weighted average number of common shares outstanding                                30,112            31,768            32,879
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.


                                      F-3
<PAGE>

PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME, (LOSS)
(In Thousands, Except Share Data Or As Otherwise Noted)

<TABLE>
<CAPTION>
                                          COMPRE-                        ADDI-                                               TOTAL
                                          HENSIVE                       TIONAL   DEFERRED    RETAINED    NOTES               STOCK-
                                           INCOME      COMMON STOCK    PAID-IN     STOCK     EARNINGS  RECEIVABLE           HOLDERS'
                                           (LOSS)    SHARES    AMOUNT  CAPITAL COMPENSATION (DEFICIT)  FOR STOCK   OTHER    EQUITY
                                         --------   ----------   ---   -------------------- ---------  ----------  -----   --------
<S>                                      <C>        <C>          <C>   <C>      <C>          <C>        <C>        <C>     <C>
Balance, December 31, 1998               $ (4,304)  25,668,723   $26   $ 21,058              $  6,639   $  (150)   $(234)  $ 27,339

   Proceeds from exercise of stock
     options and related tax benefit                 1,146,780     1      8,056                                               8,057

   Deferred stock compensation                                            2,862    (2,862)                                       --
   Amortization of deferred stock
     compensation                                                                   1,497                                     1,497
   Net income                            $  7,889                                               7,889                         7,889
   IPO & Secondary Offering                          4,020,000     4     61,511                                              61,515
   Notes Receivable for stock                                                                            (1,124)             (1,124)
   Cumulative translation adjustment          511                                                                    511        511
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------

Balance, December 31, 1999               $  8,400   30,835,503   $31   $ 93,487   $(1,365)   $ 14,528   $(1,274)   $ 277   $105,684
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------

   Proceeds from exercise of stock
     options and related tax benefit                 1,720,624     2     10,314                                              10,316

   Deferred stock compensation                                              218      (218)                                       --
   Amortization of deferred stock
     compensation                                                                     398                                       398
   Net loss                              $(34,287)                                            (34,287)                      (34,287)
   Notes Receivable for stock                                                                               556                 556
   Cumulative translation adjustment           (8)                                                                    (8)        (8)
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------

Balance, December 31, 2000               $(34,295)  32,556,127   $33   $104,019   $(1,185)   $(19,759)  $  (718)   $ 269   $ 82,659
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------
   Proceeds from exercise of stock
    options and related tax benefit                    710,653    --      1,487                                               1,487

   Deferred stock compensation                                             (510)       --                                      (510)
   Amortization of deferred stock
     compensation                                                                     848                                       848
   Net loss                              $(23,614)                                            (23,614)                      (23,614)
   Notes Receivable for stock                                                                               366                 366
   Cumulative translation adjustment          (39)                                                                   (39)       (39)
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------

Balance, December 31, 2001               $(23,653)  33,266,780   $33   $104,996   $  (337)   $(43,373)  $  (352)   $ 230   $ 61,197
                                         --------   ----------   ---   --------   -------    --------   -------    -----   --------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.


                                      F-4
<PAGE>

PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, except share data or as otherwise noted)

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                 -----------------------------------------------
                                                                                    1999               2000               2001
<S>                                                                              <C>               <C>                <C>
Cash flows provided by (used in) operating activities:
  Net income (loss)                                                              $   7,889         $  (34,287)        $  (23,614)
  Adjustments to reconcile net income (loss) to cash provided by (used in)
     operating activities:
   Loss on purchase commitment                                                          --             11,378                 --
   Reserve for inventory write-off                                                      --             23,553             10,905
   Loss on sale of assets                                                               33                 37                412
   Increase (decrease) in allowance for bad debts                                    1,014               (103)              (969)
   Depreciation and amortization                                                     7,575              8,633              8,039
   Deferred income taxes                                                              (597)              (617)                --
   Impairment of intangible assets                                                      --                 --              5,761
   (Increase) decrease in assets:
     Receivables                                                                      (616)             5,095              9,250
     Accounts receivable from affiliates                                               416                 37                163
     Income tax receivable                                                           2,220              1,236              3,928
     Inventories                                                                     3,745            (44,368)            10,337
     Prepaid expenses and other current assets                                      (1,393)            (1,254)               907
     Other long-term assets                                                            633               (789)             1,223
   Increase (decrease) in liabilities:
     Accounts payable                                                               (8,838)            (3,814)            (4,293)
     Payroll and related liabilities                                                 1,624             (1,861)              (873)
     Other current liabilities                                                         704              2,631             (2,679)
     Other long term liabilities                                                        --                 --                144
                                                                                 ---------         ----------         ----------
       Net cash provided by (used in) operating activities                          14,409            (34,493)            18,641
                                                                                 ---------         ----------         ----------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
  Cash used to acquire net assets                                                       --             (7,596)            (1,500)
  Capital expenditures                                                              (6,720)            (9,218)            (1,121)
  Proceeds from sale of property, plant and equipment                                   26                  3                747
       Net cash used in investing activities                                        (6,694)           (16,811)            (1,874)
                                                                                 ---------         ----------         ----------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
  Proceeds from stock  and stock options                                            68,450              7,647              1,855
  Borrowings under (repayment of) bank line of credit, net                         (16,082)               (17)                --
  Borrowings under other debt obligations                                              445              1,240                231
  Repayment of other debt obligations                                                 (510)              (622)              (769)
                                                                                 ---------         ----------         ----------
       Net cash provided by  financing activities                                   52,303              8,248              1,317
                                                                                 ---------         ----------         ----------

Effect of foreign exchange rate changes on cash                                        511                 (8)               (39)
                                                                                 ---------         ----------         ----------
Net increase (decrease) in cash and cash equivalents                                60,529            (43,064)            18,045
Cash and cash equivalents at beginning of year                                       2,356             62,885             19,821
                                                                                 ---------         ----------         ----------

Cash and cash equivalents at end of year                                         $  62,885         $   19,821         $   37,866
                                                                                 ---------         ----------         ----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid (received), net, for:
    Interest                                                                     $     869         $   (2,461)        $     (753)
                                                                                 ---------         ----------         ----------
    Income taxes                                                                 $  (2,379)        $      (62)        $   (4,069)
                                                                                 ---------         ----------         ----------

Non-cash transactions:
   Contingent consideration associated with acquisition of net assets            $      --              1,500         $       --
   Stock issued for note                                                         $   1,124         $     (556)        $     (366)
   Recoverable taxes related to stock option exercises                           $      --         $    3,226         $       --
                                                                                 ---------         ----------         ----------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.


                                      F-5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data Or As Otherwise Noted)

1.       BASIS OF PRESENTATION

         Paradyne Networks, Inc. (the "Company") was formed in 1996. The Company
         is a leading developer, manufacturer and distributor of broadband
         network access products for network service providers and business
         customers. The Company and its subsidiaries offer solutions that enable
         business class, service level managed, high-speed connectivity over the
         existing telephone network infrastructure.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The significant accounting principles and practices used in the
         preparation of the accompanying consolidated financial statements are
         summarized below:

         PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the results
         of the Company and its wholly owned subsidiaries: Paradyne Corporation;
         Paradyne Canada LTD; Paradyne Japan Corporation; Paradyne International
         Ltd.; Paradyne Worldwide Corp.; Ark Electronic Products Inc.; Paradyne
         GmbH; and Paradyne International Sales Ltd. Intercompany accounts and
         transactions have been eliminated in consolidation.

         REVENUE RECOGNITION

         Revenue from equipment sales is generally recognized when the following
         has occurred: evidence of a sales arrangement exists; delivery has
         occurred or services have been rendered; our price to the buyer is
         fixed or determinable; and collectibility is reasonably assured.
         Revenue from services, which consists mainly of repair of
         out-of-warranty products, is recognized when the services are performed
         and all substantial contractual obligations have been satisfied.
         Amounts billed to customers in sales transactions related to shipping
         and handling are classified as product revenue. Provision is made
         currently for estimated product returns. Royalty revenue is recognized
         when the Company has completed delivery of technical specifications and
         performed substantially all required services under the related
         agreement. See discussion of product warranty below.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period presented. Actual results
         could differ from those estimates. The markets for the Company's
         products are characterized by intense competition, rapid technological
         development and frequent new product introductions, all of which could
         impact the future value of the Company's inventory and certain other
         assets.

         CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid instruments purchased with an
         original maturity of three months or less to be cash equivalents.

         CONCENTRATION OF CREDIT RISK

         The Company sells products to value added distributors and other
         customers and extends credit based on an evaluation of the customer's
         financial condition, generally without requiring collateral. Exposure
         to losses on receivables is principally dependent on each customer's
         financial condition. The Company monitors its exposure for credit
         losses and maintains allowances for anticipated losses. Sales to two
         customers were approximately 27% and 25% of total revenues for the year
         ended December 31, 1999. Sales to three customers were approximately
         19%, 17% and 10% of total revenues for the year ended December 31, 2000
         and sales to one customer were 21% of total revenues for the year ended
         December 31, 2001.

         Purchases from two vendors were approximately 19% and 11% of total
         purchases for the year ended December 31, 1999. There were no purchases
         totaling 10% or more from a single vendor for the year ended December
         31, 2000 and purchases from one vendor were approximately 12% of total
         purchases for the year ended December 31, 2001.


                                      F-6
<PAGE>

         International sales accounted for 18%, 23% and 47% of total revenues
         during the years ended December 31, 1999, 2000 and 2001, respectively.
         Following is a summary of domestic and international revenues and
         long-lived assets for the years ended and as of December 31, 1999, 2000
         and 2001:

<TABLE>
<CAPTION>
                                                                      REVENUES (a)
                                                                 Year Ended December 31,
         Geographic Information                           1999             2000              2001
         ----------------------                        ---------        ---------          ---------
         <S>                                           <C>              <C>                 <C>
         United States                                 $ 186,391        $ 190,111           $ 77,741
         Korea                                                --          25,643                 24
         Canada                                           25,107           14,493             14,200
         Japan                                             2,910            2,414             37,222
         Other foreign countries                          12,050           15,021             17,518
                                                       ---------        ---------          ---------
         Total                                         $ 226,458        $ 247,682          $ 146,705
                                                       =========        =========          =========
</TABLE>

<TABLE>
<CAPTION>

                                                                   LONG-LIVED ASSETS
                                                                      December 31,
         Geographic Information                           1999             2000               2001
         ----------------------                         --------        ---------          ---------
         <S>                                            <C>             <C>                <C>
         United States                                  $ 18,824         $ 28,177           $ 13,552
         Korea                                                --               22                 21
         Canada                                              511               63                 21
         Japan                                                --               --                101
         Other foreign countries                             254              236                 78
                                                        --------        ---------           --------

         Total                                          $ 19,589         $ 28,498           $ 13,773
                                                        ========         ========           ========
</TABLE>

(a)      Revenues are attributed to countries based on location of customer.

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying value of the Company's financial instruments, which
         includes cash and cash equivalents, receivables, accounts payable,
         accrued expenses and debt, approximates fair value due to the short
         maturities of those instruments.

         INVENTORIES

         Inventories are stated at the lower of cost or market. Cost includes
         material, labor and manufacturing overhead. Cost is determined on a
         first-in, first-out basis.

         INTANGIBLE ASSETS

         Intangible assets, which consist of purchased goodwill and acquired
         workforce, are included in other assets as of December 31, 2000 (see
         Note 7). The goodwill and the acquired workforce intangible resulted
         from the acquisition of substantially all of the net assets of Control
         Resources Corporation (CRC) of Fair Lawn, NJ, a wholly owned subsidiary
         of P-Com, Inc. in April 2000. During the first quarter of 2001, as part
         of a restructuring, the Company was required to record an impairment
         for the remaining value of the acquired workforce intangible asset.
         Additionally, during June 2001, the Company recorded an impairment of
         goodwill and wrote off the unamortized balance of the intangible asset.
         As of December 31, 2001 the Company had no intangible assets recorded
         on its books.

         PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost less accumulated
         depreciation. Leasehold improvements are amortized on a straight-line
         basis over the period of the lease or the estimated service lives of
         the improvements, whichever is shorter. Depreciation expense includes
         the amortization of capital lease assets. Estimated useful lives are:

<TABLE>
                  <S>                                                 <C>
                  Leasehold Improvements                              5-10 years
                  Office furniture and fixtures                       4-10 years
                  Machinery and equipment                              3-7 years
</TABLE>


                                      F-7
<PAGE>

         Expenditures for renewals and improvements that significantly add to
         productive capacity or extend the useful life of an asset are
         capitalized. Expenditures for maintenance and repairs are charged to
         operations when incurred. When assets are sold or retired, the cost of
         the asset and the related accumulated depreciation are eliminated from
         the accounts and any gain or loss is recognized at such time.

         IMPAIRMENT OF LONG-LIVED ASSETS

         The Company evaluates the recoverability of its long-lived assets
         whenever adverse events or changes in business climate indicate that
         the expected undiscounted future cash flows from the related asset may
         be less than previously anticipated. If the net book value of the
         related asset exceeds the undiscounted future cash flows of the asset,
         the carrying amount would be reduced to the present value of its
         expected future cash flows and an impairment loss would be recognized
         in accordance with Statement of Financial Accounting Standards (SFAS)
         No. 121. As of December 31, 2000 and 2001, management does not believe
         that an impairment reserve is required.

         RESEARCH AND DEVELOPMENT COSTS

         Research and development costs are expensed as incurred.

         PRODUCT WARRANTY

         The Company generally provides a return to factory warranty for a
         period of one year (two years for years prior to 2001) from the date of
         sale. A current charge to income is recorded at the time of sale to
         reflect the amount the Company estimates will be needed to cover future
         warranty obligations for products sold during the year. The accrued
         liability for warranty costs is included in the caption "other current
         liabilities" in the accompanying consolidated balance sheet.

         INCOME TAXES

         The Company accounts for income taxes under the provisions of SFAS No.
         109, "Accounting for Income Taxes," which requires use of the asset and
         liability method of accounting for deferred income taxes.

         EARNINGS (LOSS) PER SHARE

         Basic earnings (loss) per share is computed by dividing income
         available to common stockholders by the weighted average number of
         common shares outstanding during the year. Diluted earnings per share
         assumes the exercise of stock options for which market price exceeds
         exercise price, less shares assumed purchased by the Company with
         related proceeds and associated tax benefits.

         Options to purchase 1,132,150 shares of common stock ranging from
         $25.69 - $47.00 per share were outstanding during 1999 but were not
         included in the computation of diluted earnings per share because the
         options' exercise price was greater than the average market price of
         the common shares.

         Options are not included in the 2000 and 2001 calculation of diluted
         loss per share due to their antidilutive effect.

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31, 1999
                                                                              ------------------------------------------------
                                                                                 Income            Shares            Per-Share
                                                                              (Numerator)      (Denominator)           Amount
                                                                              -----------      -------------         ---------
         <S>                                                                  <C>              <C>                   <C>
         BASIC EPS
         Income available to common stockholders                                $ 7,889            28,435              $  0.28

         EFFECT OF DILUTIVE SECURITIES
         Incremental shares for employee options                                $    --             1,677                (0.02)

         DILUTED EPS
         Income available to stockholders & assumed conversions                 $ 7,889            30,112              $  0.26
</TABLE>

         In June 1999 the Company filed an amendment to its Certificate of
         Incorporation providing that effective upon the Initial Public Offering
         every two outstanding shares of the Company's common stock shall be
         combined into one share of common stock. The amendment authorized
         60,000,000 common shares at a par value of $.001. All earnings per
         share data have been adjusted to reflect this reverse split.


                                      F-8
<PAGE>

         FOREIGN CURRENCY

         The local currency is the functional currency of each of the foreign
         subsidiaries. Assets and liabilities of the Company's foreign
         subsidiaries are translated using fiscal year-end exchange rates, and
         revenue and expenses are translated using average exchange rates
         prevailing during the year. The effects of translating foreign
         subsidiaries' financial statements are recorded as a separate component
         of stockholders' equity. In addition, included in other (income)
         expense are realized foreign currency losses of $421, $370 and $310 for
         1999, 2000 and 2001, respectively.

         RECLASSIFICATIONS

         Certain prior year amounts have been reclassified for comparative
         purposes. These reclassifications had no effect on net income or
         stockholders equity.

         RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

                  In June 2000, the FASB issued Statement No. 138, "Accounting
         for Certain Hedging Activities", which amended Statement No. 133,
         "Accounting for Derivative Instruments and Hedging Activities."
         Statement No. 138 must be adopted concurrently with the adoption of
         Statement No. 133. The Company adopted these new statements effective
         January 1, 2001. These Statements required the Company to recognize all
         derivatives on the balance sheet at fair value. The adoption of these
         statements did not have an effect on the Company's results of
         operations or financial position, as the Company does not have any
         derivative instruments as defined in the statements or engage in
         hedging activities.

                  On June 30, 2001, the Financial Accounting Standards Board
         finalized FAS 141, Business Combinations, and FAS 142, Goodwill and
         Other Intangible Assets. FAS 141 requires all business combinations
         initiated after June 30, 2001, to be accounted for using the purchase
         method of accounting. With the adoption of FAS 142 effective Jan. 1,
         2002, goodwill is no longer subject to amortization. Rather, goodwill
         will be subject to at least an annual assessment for impairment by
         applying a fair-value-based test. Under the new rules, an acquired
         intangible asset should be separately recognized if the benefit of the
         intangible asset is obtained through contractual or other legal rights,
         or if the intangible asset can be sold, transferred, licensed, rented,
         or exchanged, regardless of the acquirer's intent to do so. These
         intangible assets will be required to be amortized over their useful
         lives. The Company has no goodwill and intangible assets recorded as of
         December 31, 2001. The adoption of FAS 141 and FAS 142 will be
         applicable to the acquisition of Elastic Networks (see note 16).

                  In July 2001, the Financial Accounting Standards Board
         finalized FAS 143, Accounting for Asset Retirement Obligations, which
         requires the recognition of a liability for an asset retirement
         obligation in the period in which it is incurred. When the liability is
         initially recorded, the carrying amount of the related long-lived asset
         is correspondingly increased. Over time, the liability is accreted to
         its present value and the related capitalized charge is depreciated
         over the useful life of the asset. FAS 143 is effective for fiscal
         years beginning after June 15, 2002. The Company is currently reviewing
         the impact that FAS 143 will have on its results.

                  In August 2001, the Financial Accounting Standards Board
         finalized FAS 144, Accounting for the Impairment or Disposal of
         Long-Lived Assets. FAS 144 addresses accounting and reporting for the
         impairment or disposal of long-lived assets, including the disposal of
         a segment of business. FAS 144 is effective for fiscal years beginning
         after December 15, 2001, with earlier application encouraged. The
         Company is currently reviewing the impact that FAS 144 will have on its
         results.

3.       RESTRUCTURING CHARGES

                  In 2000 and 2001, the Company recorded restructuring charges
         of $1,400 and $3,807, respectively. The charge in 2000 related to the
         Company's reorganization into focused North American and international
         sales and marketing divisions, necessitated by the substantial change
         in the broadband access market. In this restructuring approximately 35
         employees were terminated from employment. In addition, charges were
         incurred to exit from leased facilities in international locations. The
         charges in 2001 relate to the Company's plans to reduce expenses
         necessitated by the softening of the telecommunications equipment
         market, which has resulted in fewer orders for the Company's equipment.
         The charges include severance payments for the termination of
         approximately 220 employees in addition to certain costs incurred in
         conjunction with the plan to consolidate facilities located in Redbank
         and Fairlawn, New Jersey and Largo, Florida.

                  During 2001, the Company paid $4,656 related to business
         restructurings. The remaining $356 accrued as of December 31, 2001,
         substantially all of which is expected to be paid during 2002, is
         related to both U.S. and international business restructuring. The
         following table summarizes (in thousands) the activity in the business
         restructuring accrual for the year ended December 31, 2001:


                                      F-9
<PAGE>

<TABLE>
         <S>                                                                           <C>
         Beginning Balance at January 1, 2001                                          $ 1,205
         Additions to accrual in 2001                                                    3,807
         Less payments made in 2001
         (related to prior periods and current period  restructuring)                   (4,656)
                                                                                       -------
         Ending Balance at December 31, 2001                                           $   356
                                                                                       -------
</TABLE>

4.       INVENTORIES

         Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                      ----------------------
                                                                        2000          2001
                                                                      --------      --------
         <S>                                                          <C>           <C>
         Raw materials                                                $ 30,088      $ 13,233
         Work-in-process                                                 5,533         2,197
         Finished goods                                                  3,007         1,956
                                                                      --------      --------
         TOTAL                                                        $ 38,628      $ 17,386
                                                                      ========      ========
</TABLE>

         In June 2001, the Company recorded provisions for the write-down of
inventory in the amount of $10,905, and in September 2000, the Company recorded
a provision for the write-down of inventory in the amount of $23,553 and a loss
due to non-cancelable commitments in the amount of $11,378. The 2001 charge was
required because of the sustained downturn in the telecommunications equipment
sector overall and the uncertainty of the Company's ability to liquidate its
inventory at or above its current cost basis. The 2000 charge was required
because certain network service provider customers changed their plans for
rolling out DSL services resulting in a significant reduction in demand.

5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                   --------------------------------
                                                                                     2000                    2001
                                                                                   --------                --------
         <S>                                                                       <C>                     <C>
         Leasehold improvements                                                    $  2,055                $  1,389
         Office furniture and fixtures                                                2,377                   1,795
         Machinery and equipment                                                     37,571                  36,267
                                                                                   --------                --------
                                                                                     42,003                  39,451
         Less accumulated depreciation                                              (21,704)                (26,316)
                                                                                   --------                --------
                                                                                   $ 20,299                $ 13,135
                                                                                   --------                --------
</TABLE>

         Depreciation expense amounted to $5,500, $7,100 and $7,100 for 1999,
         2000 and 2001, respectively.

6.       INSTALLMENT RECEIVABLES

         Installment receivables included in "prepaid expenses and other current
         assets" and in "Other assets" (long term) consist of the following:

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                        -----------------------
                                                                                           2000           2001
                                                                                        --------        -------
         <S>                                                                            <C>             <C>
         Future minimum installment lease receivables                                   $ 1,469         $  739
         Unearned interest                                                                 (243)          (196)
                                                                                        ========        =======
         Total investment in installment receivables                                      1,226            543
                                                                                        --------        -------
         Less current portion                                                              (408)          (358)
                                                                                        --------        -------
         Long-term portion                                                              $   818         $  185
                                                                                        --------        -------
</TABLE>


                                      F-10
<PAGE>

         Installment receivables result from customer leases of products under
         agreements which qualify as sales-type leases and direct financing
         leases. Annual future receipts expected from such leases are as
         follows:

<TABLE>
                  <S>                                        <C>
                  2002                                       $ 451
                  2003                                         262
                  2004 and thereafter                           26
</TABLE>

7.       OTHER ASSETS

         Other assets consist of the following:

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                          --------------------------
                                                                                             2000              2001
         <S>                                                                              <C>                <C>
         Intangible asset, net of accumulated amortization of
                      $3,300 and $0, respectively                                         $  6,649           $    --
         Installment receivable                                                                818               185
         Notes receivable, interest at 9.25%                                                   221                --
         Security deposits                                                                     304               228
         Other                                                                                 207               225
                                                                                          --------           -------
                                                                                          $  8,199           $   638
                                                                                          ========           =======
</TABLE>

8.       OTHER CURRENT LIABILITIES

         Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                 -------------------------------
                                                                                   2000                    2001
         <S>                                                                    <C>                     <C>
         Accrued professional fees                                              $    938                $    600
         Accrued advertising                                                       1,206                     320
         Deferred Income                                                           1,669                     931
         Accrued product warranty                                                  2,031                   1,418
         Accrued taxes                                                             1,360                   1,163
         Business restructure                                                      1,205                     356
         Other                                                                       211                   1,153
                                                                                --------                --------
                                                                                $  8,620                $  5,941
                                                                                ========                ========
</TABLE>

9.   INDEBTEDNESS
     Indebtedness consists of the following:

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                -------------------------------
                                                                                   2000                   2001
         <S>                                                                    <C>                     <C>
         Capitalized lease obligations, interest ranging from 8.5%
         to 11.8%, maturing various dates through December 2003                    1,322                    784
                                                                                --------                -------
                                                                                   1,322                    784
         Less current portion                                                       (638)                  (484)
                                                                                --------                -------
                                                                                $    684                $   300
                                                                                ========                =======
</TABLE>

         Scheduled principal repayments on debt for the next five years are as
         follows: 2002 - $484; 2003 - $300; 2004 - 2006 - $0

         REVOLVING CREDIT FACILITIES

         On July 31, 1996, the Company entered into an agreement (the
         "Agreement") with a commercial lending institution to provide a
         revolving credit facility in the amount of $45.0 million with
         availability subject to a borrowing base formula. In March 1999, the
         Company voluntarily reduced the amount available for borrowing under
         this revolving credit facility to $35.0 million. In January 2000, the
         Company voluntarily reduced the amount available for borrowing under
         this facility to


                                      F-11
<PAGE>

         $30.0 million. The facility provided for a sub-limit of $5.0 million
         for letters of credit, of which none were outstanding at December 31,
         1999 or 2000. The Agreement included a fee ranging from .25% to .50% of
         the unused line. Certain assets of the Company, including accounts
         receivable, inventories, equipment and intellectual property rights,
         were pledged as collateral. The Company was subject to various
         non-financial covenants under the terms of the Agreement. For the years
         ended December 31, 1999 and 2000, the Company was in compliance with or
         had obtained waivers to the Agreement for such covenants. On July 21,
         1999, $10.4 million of the proceeds from the Company's July, 1999
         initial public offering were used to pay off the outstanding balance
         under the revolving credit facility. There have been no borrowings
         under this line since July 21, 1999. This credit facility expired on
         January 31, 2001.

         On July 16, 2001, the Company entered into an agreement (the "Credit
         Agreement") with Foothill Capital Corporation, a wholly-owned
         subsidiary of Wells Fargo & Company, to provide a secured revolving
         line of credit in the amount of $17.5 million with availability subject
         to a borrowing base formula. At the Company's option, the interest rate
         will either be the prime rate published by Wells Fargo plus .75% or the
         LIBOR (London Interbank Offered Rate) rate plus 2.75%. In no event will
         the borrowing rate be lower than 7%. The Credit Agreement contains
         financial covenants limiting the maximum amount of capital expenditures
         the Company can make and requiring it to meet minimum Earnings Before
         Interest, Taxes, Depreciation, and Amortization ("EBITDA") targets. The
         Company is able to borrow up to a maximum of $17.5 million, which is
         secured by the value of its accounts receivable and its inventory.
         There are restrictions on the eligible amounts of both the accounts
         receivable and the inventory. In order to obtain this line of credit,
         the Company paid the lender a closing fee of $150 thousand, and will
         pay a monthly servicing fee of $4 thousand, an unused line fee of .375%
         of the balance not borrowed under the line of credit each month, and
         the Company will be responsible for audit and appraisal fees. If the
         Company fails to pay amounts due under the loan when due and payable,
         or if it fails to perform specified terms of the Credit Agreement, it
         will be in default if it has previously borrowed under the Credit
         Agreement. In the event of default, the Company will no longer be able
         to borrow under the Credit Agreement and it would have to immediately
         repay any amounts owed the lender. The Company may cancel the Credit
         Agreement at any time but it would have to pay a cancellation premium
         starting at 3% of the maximum borrowing at the inception of the Credit
         Agreement, reducing as the Credit Agreement matures to 1% of the
         maximum borrowing during the last year of the Credit Agreement. No
         borrowings have been made under the Credit Agreement as of December 31,
         2001. In March 2002, Foothill Capital and the Company agreed to amend
         the Credit Agreement to specifically waive two provisions of the Credit
         Agreement and consent to the Company establishing a new subsidiary and
         consent to the activities of this new subsidiary and to consent to the
         Company's acquisition of Elastic Networks. The Company in turn waived
         the section of the Credit Agreement limiting the amount of attorneys
         fees in order to allow for the fees necessary to draft this amendment.

         Capital Leases

         The Company executed several long-term lease agreements for computer
         and other equipment. For financial reporting purposes, the leases have
         been classified as capital leases; accordingly, assets of approximately
         $1.8 million (included in machinery and equipment) and accumulated
         depreciation of $914 have been recorded at December 31, 2001. Future
         minimum lease payments for assets under capital leases at December 31,
         2001 are as follows:

<TABLE>
         <S>                                                                  <C>
         2002                                                                 $ 540
         2003                                                                   319
                                                                              -----
         Total minimum lease payments                                           859
         Less amount representing interest                                      (75)
                                                                              -----
         Present value of net minimum lease payments                            784
         Less current portion                                                  (300)
                                                                              -----
         Long-term capital lease obligations                                  $ 484
                                                                              =====
</TABLE>

10.      PENDING LITIGATION

         The Company is subject to legal proceedings, claims and liabilities
that arise in the ordinary course of business. Due to inherent uncertainties of
the litigation process and the judicial system, the Company is unable to predict
the outcome of these legal proceedings. The Company has provided, however, for
all loss contingencies where it believes it is probable and reasonably estimable
(in accordance with SFAS 5) that a liability has been incurred. Following the
Company's September 28, 2000 press release regarding contemplated third quarter
of 2000 results, several securities class action suits (collectively, the
"Securities Actions") against Paradyne and certain of its officers and
directors; Andrew May, Paradyne's Chief Executive Officer and President at the
time; Patrick Murphy, Paradyne's Chief Financial Officer and Senior Vice
President; and Thomas Epley, Paradyne's Chairman of the Board (collectively, the
"Defendants"), were filed in October 2000 in the United States District Court
for the Middle District of Florida, Tampa Division (the "Court"). Sean E.
Belanger, the Company's current President and Chief Executive Officer and a
director, was added as a Defendant in the litigation in April 2001. These
actions were later consolidated into one case and the Court appointed Frank
Gruttadauria and Larry Spitcaufsky as the lead plaintiffs and the law firms of
Milberg Weiss Bershad Hynes & Lerach LLP and Barrack Rodos & Bacine as the lead
counsel. The


                                      F-12
<PAGE>

Amended Consolidated Complaint alleges violations by the Defendants of the
securities anti-fraud provisions of the federal securities laws, specifically
Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. It further alleges that the individual Defendants are
liable under Section 20(a) of the Securities Exchange Act as "control persons of
Paradyne". The plaintiffs purport to represent a class of investors during a
purported class period of September 28, 1999 through September 28, 2000 and
allege, in effect, that the Defendants during that time, through material
misrepresentations and omissions, fraudulently or recklessly inflated the market
price of the Company's stock by allegedly erroneously reporting that the Company
was performing well, that its inventories were properly stated, and that its
customer base and product demand were solid. The Securities Actions seek damages
in an unspecified amount for the purported class for the alleged inflated amount
of the stock price during the class period. The Defendants believe the claims
are without merit and intend to vigorously defend them, although they cannot
predict the outcome. The Defendants filed a motion on May 25, 2001, asking the
court to dismiss the complaint, with prejudice, after which the Plaintiffs filed
a memorandum of law in opposition to Defendant's dismissal motion on July 2,
2001. The Defendant's dismissal motion is pending with the court and we are
unable to predict how long the court will take to rule on the motion. As of
December 31, 2001, no ruling has been made by the court.

A second stockholder purported class action suit was filed in December 2001 in
the federal court in the Southern District of New York against us, some of our
executive officers and the chairman of our board, and the underwriters of our
initial public offering (collectively, the "IPO Defendants"). One of our
directors, Keith B. Geeslin, is employed by an affiliate to the successor of
DLS Corporation, one of the underwriters of our initial public offering. That
action alleges that defendants, during the period from July 15, 1999 through
December 6, 2000, violated federal securities laws by allocating shares of our
initial public offering to favored customers in exchange for their promise to
purchase shares in the secondary market at escalating prices. The IPO Defendants
believe the claims are without merit and intend to vigorously defend them,
although they cannot predict the outcome.

Other than the legal proceedings described above, in the normal course of
business, we are subject to proceedings, lawsuits and other claims. While these
matters could affect the operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to Paradyne beyond that provided in the
consolidated balance sheet at December 31, 2001, would not be material to our
annual consolidated financial statements.

11.      INCOME TAXES

         The Company files a consolidated federal income tax return. The
         provision (benefit) for income taxes is as follows:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                          -------------------------------------------------
                                                            1999                  2000                 2001
                                                          -------                ------                ----
         <S>                                              <C>                    <C>                   <C>
         Current:
         Foreign                                         $    --                 $   (2)               $ --
         Federal                                           3,405                     --                  --
         State                                               671                     --                  --
                                                         -------                 ------                ----
                                                           4,076                     (2)                 --
                                                         -------                 ------                ----
         Deferred:
         Foreign                                              --                      --                 --
         Federal                                            (514)                  (531)                 --
         State                                               (83)                   (86)                 --
                                                         -------                 ------                ----
                                                            (597)                  (617)                 --
                                                         -------                 ------                ----
         Income tax provision (benefit)                  $ 3,479                 $ (619)               $ --
                                                         =======                 ======                ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                --------------------------------
                                                                                  2000                    2001
                                                                                --------                --------
         <S>                                                                    <C>                     <C>
         Property, plant and equipment                                          $ (2,266)               $ (1,679)
         Intangibles                                                                 877                   1,111
         U.S. net operating loss carryforwards                                        --                   5,336
         Foreign net operating loss carryforwards                                    810                   1,267
         Inventory reserve                                                        13,029                  15,886
         Other                                                                     2,524                   2,594
                                                                                --------                --------
                                                                                  14,974                  24,516
         Valuation allowance                                                     (14,974)                (24,516)
                                                                                --------                --------
         Net deferred tax liability                                             $     --                $     --
                                                                                ========                ========
</TABLE>


                                      F-13
<PAGE>

         At December 31, 2001, Paradyne Canada LTD had net operating loss
         carryforwards of approximately $1.3 million ($.8 million expiring in
         2003 and $.5 million expiring in 2008). The Company recorded a
         valuation allowance at December 31, 2000 and 2001 with respect to the
         foreign net operating losses due to the uncertainty of their ultimate
         realization. At December 31, 2001, the Company had a U.S. net operating
         loss of $14.3 million Additionally, the Company recorded a valuation
         allowance at December 31, 2001 with respect to the deferred tax asset
         due to the uncertainty of its ultimate realization.

         The provision for income taxes differed from the statutory rate as
         follows:

<TABLE>
<CAPTION>
                                                      1999                    2000                      2001
                                               -----------------      -------------------       -------------------
         <S>                                   <C>          <C>       <C>            <C>        <C>           <C>
         U.S. statutory rate                   $ 3,864      34.0 %    $ (11,868)    (34.0)%     $ (8,029)     (34.0)%
         Foreign loss                               --                                 --             --         --
         State taxes                               387       3.4         (1,155)     (3.3)          (779)      (3.3)
         Foreign sales corporation                (374)     (3.3)            --        --             --         --
         R&D credit                               (900)     (7.9)          (970)     (2.8)          (840)      (3.6)
         Other                                     502       4.4           (500)     (1.4)           106        0.5
         Valuation allowance                        --        --         13,874      39.7          9,542       40.4
                                               -------      ----      ---------      ----       --------      -----
         Provision for income taxes            $ 3,479      30.6 %    $    (619)     (1.8)%     $      0        0.0%
                                               =======      ====      =========      ====       ========      =====
</TABLE>

12.      EMPLOYEE BENEFITS

         401(K) PLAN

         The Company has a 401(k) plan covering substantially all of its
         employees. Benefits vest based on number of years of service. The
         Company's policy is to match two-thirds of an employee's contributions,
         up to six percent of an employee's annual salary. Additionally, the
         Board of Directors may grant discretionary contributions. Contributions
         to the plan were approximately $2.8 million, $2.7 million, and $1.4
         million for the years ended December 31, 1999, 2000 and 2001,
         respectively.

         KEY EMPLOYEE STOCK OPTION PLAN

         The Key Employee Stock Option Plan (the "Key Employee Plan") was
         adopted in December 1997, and covered employees holding the position of
         Vice President or above. Key Employee Plan participants could elect to
         defer a portion of their annual compensation in exchange for options to
         purchase shares of common or preferred stock of any publicly traded
         corporation, shares of the Company's common stock or shares in certain
         investment funds. Upon the grant of an option under the Key Employee
         Plan, the Company is required to acquire and hold under a trust
         arrangement, shares of the stock or investment subject to the option in
         a number equal to 75% of the shares subject to option. As of the end of
         2000 all participants in the Key Employee Plan were notified that
         beginning in 2001 they would no longer be able to defer future
         compensation but would be allowed to leave existing investments in the
         Key Employee Plan. In early January 2001, all participants elected to
         withdraw their investments from the Key Employee Plan. The Key Employee
         Plan was officially terminated in 2001.

         STOCK OPTIONS

         Under the 1996 Equity Incentive Plan and the 2000 Broad-Based Stock
         Plan ("The Plans"), the Board of Directors may reserve common shares
         for the purpose of granting to employees (including officers and
         directors) or the employees of the Company's affiliates, options to
         purchase common stock. Nonstatutory stock options, rights to acquire
         restricted stock and stock bonuses may be granted to employees
         (including officers), directors of and consultants to the Company or
         its affiliates. Under The Plans, 18,228,631 shares have been reserved
         related to options available for grant to employees,


                                      F-14
<PAGE>

         directors and consultants through December 31, 2001. The options
         generally vest one-fourth each year, beginning on the first anniversary
         of the date of grant, and have a maximum contractual life of 10 years.
         The exercise price of options granted under The Plans is determined by
         the Board of Directors. The Company has granted 15,137,000 options to
         the Company's employees, directors and consultants, of which 13,174,803
         options were outstanding as of December 31, 2001.

         In June 1999, the Board of Directors adopted the 1999 Non-Employee
         Director's Stock Option Plan (the "Directors' Plan") and reserved
         250,000 shares under the plan to provide for the automatic grant of
         options to purchase shares of common stock to non-employee directors of
         the Company. Each non-employee director was granted an initial grant
         upon appointment. Annual grants of an additional 5,000 shares will be
         made to any of the non-employee directors, subject to attendance at
         regularly scheduled meetings of the Board as described in the plan. The
         Company has granted 115,000 options to non-employee directors of which
         65,000 were outstanding at December 31, 2001.

         During 1998, the Company granted 47,950 fixed options to purchase
         shares of common stock with exercise prices below fair market value. As
         a result, $96 of compensation expense is being recognized ratably over
         the vesting period of the related options.

         During 1998 and 1999, the Company issued options to acquire 331,750
         shares of the Company's common stock at a weighted average price of
         $5.27 per share, which was less than fair value by $1,829, and which is
         being amortized ratably over the vesting period. During 2000, the
         Company issued options to acquire 207,275 shares of the Company's
         common stock at a weighted average price of $17 per share, which was
         less than fair value by $597 and which is being amortized ratably over
         the vesting period. Additionally, the Company had previously issued
         options to employees, which vested only in the event of an initial
         public offering (IPO). As a result of the July 1999 IPO, 77,922 shares
         of options vested. During 1999, 2000 and 2001, $1,501, $398 and $338
         respectively, of compensation expense has been included in selling,
         general and administrative expenses for all vested stock options issued
         at less than fair market value.

         A summary of the status of the Company's stock options granted to
         employees as of December 31, 1999, 2000 and 2001, respectively, and
         changes during the years ended on these dates is presented below:

<TABLE>
<CAPTION>
                                                             1999                      2000                      2001
                                                   ----------------------     ----------------------    -----------------------
                                                   NUMBER OF     WEIGHTED                   WEIGHTED                   WEIGHTED
                                                     SHARES       AVERAGE                    AVERAGE                    AVERAGE
                                                   UNDERLYING    EXERCISE                   EXERCISE                   EXERCISE
                                                    OPTIONS        PRICE        SHARES        PRICE        SHARES        PRICE
                                                   ----------    --------     ----------    --------    -----------    --------
         <S>                                       <C>           <C>          <C>           <C>         <C>            <C>
         Outstanding at beginning of year           4,028,046     $  3.17      4,476,415     $ 10.30     13,538,063     $ 11.40
         Granted                                    1,574,850       24.28     10,619,071       11.74      3,390,565        2.03
         Exercised                                 (1,000,164)       2.49       (735,615)       2.32        (57,695)       2.01
         Canceled                                    (126,317)      11.16       (821,808)      18.07     (3,696,130)      11.96
                                                   ----------                 ----------                -----------
         Outstanding at end of year                 4,476,415       10.30     13,538,063       11.40     13,174,803        8.87
                                                   ----------                 ----------                -----------

         Exercisable at end of year                 1,923,707        3.30      2,372,347        6.67      5,286,280        9.61
                                                   ==========                 ==========                ===========
         Weighted-average fair value
           of all options                                         $ 12.07                    $  6.09                    $  1.01
</TABLE>


                                      F-15
<PAGE>

         The following table summarizes information about employee stock options
         outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                                        OUTSTANDING                                    EXERCISABLE
                                     -----------------------------------------------         -------------------------------
                                      NUMBER OF         WEIGHTED-           WEIGHTED                                WEIGHTED
                                       SHARES            AVERAGE             AVERAGE                                 AVERAGE
     RANGE OF EXERCISE               UNDERLYING         REMAINING           EXERCISE           NUMBER               EXERCISE
          PRICES                       OPTIONS       CONTRACTUAL LIFE         PRICE          OF OPTIONS              PRICE
     -----------------               ----------      ----------------       --------         ----------            ---------
     <S>                             <C>             <C>                    <C>              <C>                   <C>
      $ 1.00 - $ 6.00                 9,312,392            8.24               2.47            3,432,793               2.44
      $ 7.50 - $16.90                   334,700            4.89               9.98              332,294               9.99
      $17.00 - $27.50                 2,690,773            8.05              24.71            1,109,587              24.62
      $27.60 - $50.00                   836,938            7.66              28.65              411,606              28.60
                                     ----------            ----              -----            --------               -----
                                     13,174,803            8.08               8.87            5,286,280               9.61
</TABLE>

         The fair value of each stock option granted is estimated on the date of
         grant using the Black-Scholes pricing model with the following
         weighted-average assumptions:

<TABLE>
<CAPTION>
                                                                       1999           2000             2001
                                                                    -------------------------------------------
         <S>                                                        <C>             <C>             <C>
         Expected term                                                 5.0 years      5.0 years       5.0 years
         Expected volatility                                        43.46%          50.60%          50.40%
         Expected dividend yield                                     0.00%           0.00%           0.00%
         Risk-free interest rate                                     6.00%           5.83%           4.92%
</TABLE>

         EMPLOYEE STOCK PURCHASE PLANS

         In June 1999, the Board of Directors adopted the 1999 Employee Stock
         Purchase Plan (the "Purchase Plan"). Employees may elect to have up to
         15% of their earnings withheld. The amounts withheld are used to
         purchase shares of common stock, on specified dates determined by the
         Board of Directors, at 85% of the lower of the fair market value of the
         common stock at the commencement date of each offering period or the
         relevant purchase date. As of December 31, 2001, the Company is
         authorized to issue up to 2,621,309 shares of common stock to eligible
         employees. Each year, the number of shares reserved for issuance under
         the Purchase Plan will automatically be increased by 3.0% of the total
         number of shares of common stock then outstanding or, if less, by
         1,000,000 shares. Under the Purchase Plan, the Company sold 96,624
         shares to employees during the year ended December 31, 1999, 985,001
         shares during the year ended December 31, 2000 and 697,046 shares
         during the year ended December 31, 2001 which had weighted-average
         prices of $14.45, $5.56, and $1.79 respectively. The weighted average
         value of the options to purchase stock during 1999, 2000 and 2001 using
         the Black-Scholes pricing model was $5.78, $1.74 and $.66 respectively.

         The fair value of each stock option granted under the Purchase Plan is
         estimated on the date of grant using the Black-Scholes option-pricing
         model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                       1999            2000            2001
                                                     -------------------------------------------
         <S>                                         <C>             <C>             <C>
         Expected term                                 1.1 years       2.0 years        .5 years
         Expected volatility                         25.18%          38.50%          29.80%
         Expected dividend yield                      0.00%           0.00%           0.00%
         Risk-free interest rate                      5.61%           6.18%           4.50%
</TABLE>

         The Company applies APB Opinion No. 25 and related interpretations for
         accounting for stock options. Accordingly, no compensation costs at the
         grant dates are recorded for options granted at fair market value. Had
         compensation cost for the Company's option plans been determined based
         on the fair value at the grant dates as prescribed by Statement of
         Financial Accounting Standards No. 123, "Accounting for Stock Based
         Compensation" ("FAS 123"), the Company's net income and net income per
         share on a pro forma basis would have been (in thousands, except per
         share data):


                                      F-16
<PAGE>

<TABLE>
<CAPTION>
                                                           1999                    2000                 2001
                                                          -------               ---------             --------
         <S>                                              <C>                   <C>                   <C>
          Net income (loss);
          As reported                                     $ 7,889               $ (34,287)             (23,614)
                                                          =======               =========             ========
          Pro forma                                       $ 7,567               $ (49,525)             (33,248)
                                                          =======               =========             ========
          Net income (loss) per share:
          As reported                                     $  0.28               $   (1.08)            $ (0.72)
                                                          =======               =========             ========
          Pro forma basic                                 $  0.27               $   (1.56)            $ (1.01)
                                                          =======               =========             ========
          Pro forma diluted                               $  0.25               $   (1.56)            $ (1.01)
                                                          =======               =========             ========
</TABLE>

         During 1999 and 2000, various executives of the Company issued full
         recourse promissory notes, totaling $1.3 million to the Company in
         connection with the purchase of 495,095 shares of common stock. The
         principal balance of the notes and the related accrued interest ranging
         from 4.72% to 6.65% are payable at the earlier of the termination of
         employment or five years from the date of the note unless otherwise
         stated. The notes are secured by the shares of common stock acquired
         with the notes, and those shares are held in escrow by the Company. All
         unvested shares purchased with the notes are subject to repurchase by
         the Company if the respective executive terminates employment before
         becoming fully vested. The balance of all notes receivable in
         connection with the purchase of common stock as of December 31, 2001
         was $352 plus accrued interest.

13.      COMMITMENTS AND CONTINGENCIES

         OPERATING LEASES

         The Company is obligated under noncancelable operating leases for
         office and warehouse equipment and facilities. The leases expire at
         various dates through 2012. Rent expense for the years ended December
         31, 1999, 2000 and 2001 approximated $2.9 million, $3.8 million and
         $3.3 million, respectively. Minimum required future lease payments
         under noncancelable operating leases are as follows:

<TABLE>
                 <S>                                                        <C>
                 2002                                                       $  4,315
                 2003                                                          3,838
                 2004                                                          3,675
                 2005                                                          3,671
                 2006 and thereafter                                          23,812
</TABLE>

         The Company leases facilities in Red Bank, NJ and subleases this space
         to a third party under a noncancelable operating lease. Future minimum
         lease payment receivables under the leasing agreement as of December
         31, 2001 are as follows: 2002 - $626; 2003 - $151; 2004 and thereafter
         - $0.

         SALE/LEASEBACK

         In June 1997, the Company sold all of its land and the improvements
         thereon at its Largo, Florida facility at approximately net book value,
         and at the same time leased back two of the buildings. In April 2000
         the Company extended the initial term of the lease to expire in June
         2012. Under the extended lease, the initial term of the lease will be
         for fifteen years with no change in the timing or amount of scheduled
         rental payments. Annual rents will approximate $1.8 million for the
         first five years and $2.1 million for the remaining ten years. The
         Company has the option to renew the lease for two additional five-year
         terms on the same conditions as the current lease. The Company is
         responsible for paying for its proportionate share of most operating
         costs and taxes on the property.

14.      RELATED PARTY TRANSACTIONS

         The Company provides operating, management and other administrative
         services for Paradyne Credit Corp., or PCC, an affiliate. Total charges
         to this entity were approximately $1,600, $940 and $621 for 1999,
         2000 and 2001, respectively. This amount is recorded as a reduction of
         general and administrative expenses.


                                      F-17
<PAGE>

         The Company entered into an agreement to allow PCC to purchase
         equipment manufactured or sold by the Company at prices substantially
         equal to those received by the Company through normal selling channels.
         Sales to PCC under this agreement totaled $3.5 million, $341 and $0 for
         the years ended December 31, 1999, 2000 and 2001, respectively.

         In November 1996, the Company entered into a Cooperative Development
         Agreement with GlobeSpan, an affiliate at that time. Under this
         agreement, the Company was granted an unrestricted license to use
         GlobeSpan's technical information and patents. Additionally, the
         agreement provided for the Company to purchase GlobeSpan chip sets at
         prices not to exceed cost plus 15%. The Company purchased goods
         approximating $962 during 1998 under this agreement. Effective July
         1998, the Company revised its pricing arrangement with GlobeSpan such
         that GlobeSpan sold products to the Company at preferential prices. In
         exchange, GlobeSpan agreed to pay a 1.25% royalty based on net revenues
         up to an aggregate amount of $1.5 million. The Company recorded $381 of
         royalty revenue related to the agreement during the year ended December
         31, 1998. In 1999, the Company and GlobeSpan agreed to terminate the
         Cooperative Development Agreement ("Termination Agreement") effective
         December 31, 1998. In connection with such termination agreement,
         GlobeSpan agreed to pay the Company an aggregate of $1.5 million. Of
         this amount, approximately $400 was recorded in 1998 and the remaining
         $1.1 million was received in 1999 and included in royalty revenue. In
         addition, GlobeSpan and the Company as part of the Termination
         Agreement affirmed that the earlier technology license provisions of
         the Cooperative Development Agreement were never implemented. In
         conjunction with the signing of the Termination Agreement, GlobeSpan
         and the Company also entered into a four-year Supply Agreement, which
         gave the Company favorable pricing and other terms in connection with
         the sale by GlobeSpan of products to the Company. During 2000 and 2001,
         the Company purchased $8.3 million and $1.0 million, respectively, from
         Globespan under this supply agreement. In addition, under the terms of
         the Supply Agreement, GlobeSpan is required to honor the Company's
         orders for GlobeSpan's products in quantities at least consistent with
         the Company's past ordering practices and must afford the Company at
         least the same priority for the Company's orders as GlobeSpan affords
         its other similarly situated customers. GlobeSpan also granted the
         Company a standard customer immunity under GlobeSpan's intellectual
         property rights with respect to any of the Company's products which
         incorporate GlobeSpan's products. Prior to May 1999, GlobeSpan
         participated in a 401(k) plan maintained by the Company. Contributions
         paid by the Company on behalf of GlobeSpan approximated $176 for 1999.
         As of May 1999, Globespan no longer participates in the Company's
         401(k) plan. Globespan has reimbursed the Company for all payments made
         on their behalf.

15.      ACQUISITIONS

         On April 14, 2000, the Company acquired substantially all of the assets
         of CRC of Fair Lawn, NJ, a wholly owned subsidiary of P-Com, Inc. The
         accompanying Consolidated Statements of Operations include the
         activities of CRC since that date. Under the terms of the agreement,
         the purchase price (including contingent consideration) was
         approximately $9,000. The Company also granted options to purchase
         207,000 shares of its common stock at a discount to CRC employees for
         future employment services to the Company. The acquisition was
         accounted for under the purchase method of accounting, resulting in the
         recognition of approximately $7,600 in intangible assets. These
         intangible assets were being amortized over five years. In March and
         June 2001 the Company recorded impairments of all intangible assets
         resulting in a charge of $5,761.

         The following unaudited pro-forma summary presents the consolidated
         results of operations of the Company as if the acquisition had occurred
         at the beginning of the periods presented herein. This presentation is
         for informational purposes only and does not purport to be indicative
         of what would have occurred had the acquisitions been made as of these
         dates or of results which may occur in the future.

<TABLE>
<CAPTION>
                                                                    TWELVE MONTHS ENDED
                                                                         DECEMBER 31,
                                                                  1999                 2000
                                                               ---------             ---------
                  <S>                                          <C>                   <C>
                  Revenue                                      $ 232,613             $ 251,038
                  Net Income                                       2,874               (33,480)
                  Diluted Earnings Per Share                   $    0.13             $   (1.05)
</TABLE>

16.      SUBSEQUENT EVENTS

         ACQUISITION OF ELASTIC NETWORKS INC.

         On March 5, 2002 the Company acquired 100% of Elastic Networks Inc.
         ("Elastic") in exchange for 7,623,875 shares of the Company's common
         stock. Using the an average market value of $3.77 per share (using the
         average of the closing prices during the 7 trading days surrounding the
         December 27, 2001 announcement of the acquisition), the purchase price


                                      F-18
<PAGE>

         is approximately $28.7 million. Elastic designs high-speed, broadband
         communications products that have the advantages of high-speed access
         for the in-building broadband market and can operate effectively over
         lower quality lines. Commencing Wednesday, March 6, 2002, Elastic
         Networks' common stock will no longer trade on the Nasdaq National
         Market. As a result of this acquisition, Elastic Networks has become a
         wholly owned subsidiary of the Company. This transaction is being
         accounted for using purchase accounting. In connection with the
         acquisition of Elastic Networks, Paradyne's stockholders also approved
         an increase in the authorized number of shares of the Company's common
         stock from 60,000,000 to 80,000,000.

         FEDERAL TAX REFUND

         The Job Creation and Worker Assistance Act of 2002, enacted on March
         9,2002, allows the Company to carry back its net operating loss to
         1998, resulting in a tax refund of approximately $1.2 million. This
         additional benefit will be recorded in the first quarter of 2002.

17.      SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

         The following table presents unaudited quarterly operating results for
         each of the Company's last eight fiscal quarters. This information has
         been prepared by the Company on a basis consistent with the Company's
         audited financial statements and includes all adjustments, consisting
         only of normal recurring adjustments that the Company considers
         necessary for a fair presentation of the data.

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                                ----------------------------------------------------------------
                                                                MARCH 31,        JUNE 30,        SEPTEMBER 30,      DECEMBER 31,
                                                                  2001             2001               2001             2001
                                                                ---------        --------        -------------      ------------
         <S>                                                    <C>              <C>             <C>                <C>
         Net Sales                                                33,107           28,215            34,237             51,146
         Gross Profit                                             13,412            1,330            14,340             19,156
         Income from operations                                  (12,635)         (18,280)            1,269              4,968
         Net income                                              (12,060)         (18,113)            1,511              5,048
         Earnings per common share - assuming dilution             (0.37)           (0.55)             0.05               0.14
         Earnings per common share - basic                         (0.37)           (0.55)             0.05               0.15

</TABLE>

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                             MARCH 31,    JUNE 30,     SEPTEMBER 30,    DECEMBER 31,
                                                                2000        2000           2000             2000
                                                             ---------    --------     -------------    ------------
         <S>                                                 <C>          <C>          <C>              <C>
         Net Sales                                            64,481       75,597          55,716           51,888
         Gross profit                                         27,113       30,883        (15,263)           22,167
         Income from operations                                2,268        1,212        (38,113)          (2,764)
         Net income                                            2,455        1,286         (35,502)         (2,526)
         Earnings per common share - assuming dilution         0.075         0.04          (1.12)           (0.08)
         Earnings per common share - basic                     0.079         0.04          (1.12)           (0.08)
</TABLE>

         There are always variances in financial results from quarter to quarter
         for many reasons including timing of product shipments, the mix of
         products sold, and the timing of expenditures. In the third quarter of
         2000, as a result of customers changing their plans for rolling out DSL
         services, the Company experienced a reduction in demand for our
         products. As a result, the Company recorded a provision for the
         writedown of inventory and a loss on non-cancelable purchase
         commitments in the total amount of $34.9 million. Additionally, in the
         third quarter of 2000, the Company made an accounting reclassification
         related to its marketing development fund agreement with Rhythms Net
         Connections, Inc., a major customer. In this reclassification, revenues
         were reduced by $6.7 million and selling expenditures were reduced by a
         like amount. In the second quarter of 2001 the Company recorded a
         provision for the write-down of inventory in the amount of $10.9
         million. This charge was required because of the sustained downturn in
         the telecommunications equipment sector overall and the uncertainty of
         the Company's ability to liquidate its inventory at or above its
         current cost basis.


                                      F-19
<PAGE>

PARADYNE NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
000'S

<TABLE>
<CAPTION>
           Column A                              Column B              Column C              Column D       Column E
--------------------------------               ------------     ----------------------    --------------   ----------
                                                                      Additions
                                                                ----------------------
                                                                Charged To     Charged
                                                Balance At       Cost and     To Other                     Balance At
                                               Beginning of      Expenses     Accounts      Deductions         End of
          Description                             Period                        (1)            (2)           Period
--------------------------------               ------------     ----------    --------      ----------     ----------
<S>                                            <C>              <C>           <C>           <C>            <C>
Allowance for Doubtful accounts

Year ended:

December 31, 1997                                 2,785             267         5,800         (5,886)         2,966
December 31, 1998                                 2,966             125        12,382        (12,466)         3,007
December 31, 1999                                 3,007              32         7,470         (6,487)         4,022
December 31, 2000                                 4,022               1         4,107         (4,211)         3,919
December 31, 2001                                 3,919              59           983         (2,010)         2,950
</TABLE>

(1)      Represents amounts charged to contra revenue accounts for discounts,
         rebates, and billing adjustments.

(2)      Represents amounts charged to accounts receivable reserve accounts for
         discounts, rebates, and billing adjustments.


                                       S-1
<PAGE>
Exhibit Index

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>         <C>                                                             <C>
   2.1      Asset Purchase Agreement dated as of April 5, 2000              Exhibit 2 from Paradyne's Form 8-K filed on May 1,
            among, Paradyne Networks, Inc. ("Paradyne"), Paradyne           2000.
            Corporation, P-com, Inc. and Control Resources
            Corporation.

   2.2      Agreement and Plan of Merger dated as of December 27,           Exhibit 2 from Paradyne's Form 8-K filed on
            2001 by and among Paradyne, Phoenix Merger Sub, Inc.            December 31, 2001.
            and Elastic Networks Inc.

   2.3      Amendment No. 1 to Agreement and Plan of Merger dated           Exhibit 2.1 from Paradyne's Form 8-K/A filed on
            January 4, 2002 by and among Paradyne, Phoenix Merger           January 8, 2002.
            Sub, Inc. and Elastic Networks Inc. Registrant, Phoenix
            Merger Sub, Inc. and Elastic Networks Inc.

   3.1*     Amended and Restated Certificate of Incorporation, as
            amended.

   3.2      Amended and Restated Bylaws, as amended.                        Exhibit 4.2 from Paradyne's Registration Statement
            on Form S-4 (No. 333-76814).

   4.1      Reference is made to Exhibits 3.1 and 3.2.


   4.2      Specimen Stock Certificate.                                     Exhibit 4.2 from Paradyne's Registration Statement
                                                                            on Form S-1 (No. 333-76385) or amendments thereto.

  10.1      Amended and Restated 1996 Equity Incentive Plan.                Exhibit 10.1 from Paradyne's Registration Statement
                                                                            on Form S-1 (No. 333-76385) or amendments thereto.

  10.2      Amendment to 1996 Equity Incentive Plan filed as                Exhibit 10.1 from Paradyne's Form 10-Q filed on
            Exhibit 10.1.                                                   August 14, 2000.

  10.3      Paradyne Networks, Inc. 2000 Broad-Based Stock Plan .           Exhibit 10.1 from Paradyne's Form 10-Q filed on
                                                                            November 8, 2000.

  10.4      Form of Stock Option Agreement pursuant to the 1996             Exhibit 10.2 from Paradyne's Registration Statement
            Equity Incentive Plan.                                          on Form S-1 (No. 333-76385) or amendment thereto.

  10.5      Amendment to Form of Stock Option Agreement with Sean           Exhibit 10.5 from Paradyne's Form 10-K filed on
            E. Belanger and Patrick M. Murphy.                              April 2, 2001.


  10.6      Form of Stock Option Agreement under the Paradyne               Exhibit 99.2 from Paradyne's Registration Statement
            Networks, Inc. 2000 Broad-Based Stock Plan.                     on Form S-8 filed on March 20, 2001.

  10.8      Form of Early Exercise Stock Purchase Agreement.                Exhibit 10.3 from Paradyne's Registration Statement
                                                                            on Form S-1 (No. 333-76385) or amendments thereto.

  10.9      1999 Employee Stock Purchase Plan                               Exhibit 99.1 from Paradyne's
            and related offering documents.                                 Registration Statement on Form S-8 filed on
                                                                            April 26, 2001.

  10.10     1999 Non-Employee Director's Stock Option Plan.                 Exhibit 10.5 from Paradyne's Registration Statement
                                                                            on Form S-1 (No. 333-76385) or amendments thereto.

  10.11     Amended and Restated Subordinated Revolving Promissory          Exhibit 10.8 from Paradyne's Registration Statement
            Note between Paradyne and Paradyne Partners, L.P.,              on Form S-1 (No. 333-76385) or amendments thereto.
            dated October 16, 1998.

  10.12     Lease Agreement between Paradyne and Shav Associates,           Exhibit 10.9 from Paradyne's Registration Statement
            dated October 8, 1996.                                          on Form S-1 (No. 333-76385) or amendments thereto.

  10.13     Sublease Agreement between Paradyne and GlobeSpan               Exhibit 10.10 from Paradyne's Registration
            Semiconductor, Inc. dated December 10, 1997.                    Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.14     Amendment to Sublease Agreement, dated January 1, 1999.         Exhibit 10.11 from Paradyne's Registration
                                                                            Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.15     Mutual Release and Surrender Agreement between Paradyne         Exhibit 10.17 from Paradyne's Form 10-K filed on
            and Shav Associates, dated March 20, 2001, to Lease             April 2, 2001.
            Agreement.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>         <C>                                                             <C>
  10.16     Lease Agreement between Paradyne and Townsend Property          Exhibit 10.12 from Paradyne's Registration
            Trust Lease, dated June 27, 1997.                               Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.
  10.17     Amendment to Lease Agreement, dated April 5, 2000, to           Exhibit 10.19 from Paradyne's Form 10-K filed on
            Lease Agreement.                                                April 2, 2001.

  10.18     Employment Agreement between Paradyne and Andrew May,           Exhibit 10.14 from Paradyne's Registration
            dated December 3, 1996.                                         Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.19     Amendment to Employment Agreement between Paradyne and          Exhibit 10.22 from Paradyne's Form 10-K filed on
            Andrew May, dated December 8, 2000.                             April 2, 2001.

  10.20     Key Employee Agreement between Paradyne and Patrick             Exhibit 10.15 Paradyne's Registration Statement on
            Murphy, dated August 1, 1996.                                   Form S-1 (No. 333-76385) or amendments thereto.

  10.21     Employment Agreement between Paradyne and Patrick               Exhibit 10.24 from Paradyne's Form 10-K filed on
            Murphy, dated December 8, 2000.                                 April 2, 2001.

  10.22     Key Employee Agreement between Paradyne and Sean E.             Exhibit 10.1 from Paradyne's Form 10-Q filed on May
            Belanger, dated April 30, 2000.                                 15, 2000.

  10.23     Employment Agreement between Paradyne and Sean E.               Exhibit 10.28 from Paradyne's Form 10-K filed on
            Belanger, dated December 8, 2000.                               April 2, 2001.

  10.24     Change in Control Agreement between Paradyne and Sean           Exhibit 10.17 from Paradyne's Registration
            E. Belanger.                                                    Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.25     Promissory Note, dated March 29, 1999, Sean E.                  Exhibit 10.19 from Paradyne's Registration
            Belanger.                                                       Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.26     Loan and Security Agreement, dated July 16, 2001 by and         Exhibit 10.1 from Paradyne's Form 10-Q filed on
            among Paradyne, Paradyne Corporation and Foothill               August 14, 2001.
            Capital Corporation.

  10.27*    Amendment Number One to Loan and Security Agreement
            dated March 14, 2002 and among Paradyne, Paradyne
            Corporation and Foothill Capital Corporation, filed as
            Exhibit 10.26.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
-------                              -----------                                  ----------------------
<S>         <C>                                                             <C>
  10.28     Promissory Note, dated March 31, 1999, Andrew S. May.           Exhibit 10.26 from Paradyne's Registration
                                                                            Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.29     Promissory Note, dated March 31, 1999, Patrick M.               Exhibit 10.27 from Paradyne's Registration
            Murphy.                                                         Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.30     Promissory Note, dated April 2, 1999, Patrick M.                Exhibit 10.28 from Paradyne's Registration
            Murphy.                                                         Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.31     Promissory Note, dated April 14, 2000, between Paradyne         Exhibit 10.2 from Paradyne's Form 10-Q filed on May
            Corporation and Control Resources Corporation.                  15, 2000.

  10.32     Indemnification Agreement between Paradyne and William          Exhibit 10.29 from Paradyne's Registration
            Stensrud, dated November 6, 1996.                               Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.33+    Supply Agreement between Paradyne and Lucent                    Exhibit 10.30 from Paradyne's Registration
            Technologies, Inc., dated July 31, 1996.                        Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.34+    Exclusivity and Amendment Agreement between Paradyne,           Exhibit 10.31 from Paradyne's Registration
            Lucent Technologies, Inc. and GlobeSpan Semiconductor,          Statement on Form S-1 (No. 333-76385) or amendments
            Inc., dated August 6, 1998.                                     thereto.

  10.35+    Noncompetition Agreement between Paradyne,                      Exhibit 10.32 from Paradyne's Registration
            Communication Partners, L.P., Lucent Technologies, Inc.         Statement on Form S-1 (No. 333-76385) or amendments
            and GlobeSpan Semiconductor, Inc., dated July 31, 1996.         thereto.

  10.36     Trademark and Patent Agreement between Paradyne, Lucent         Exhibit 10.33 from Paradyne's Registration
            Technologies, Inc. and GlobeSpan Semiconductor, Inc.            Statement on Form S-1 (No. 333-76385) or amendments
            dated July 31, 1996.                                            thereto.

  10.37     Tax Matters Agreement between Paradyne, Lucent                  Exhibit 10.34 from Paradyne's Registration
            Technologies, Inc., and GlobeSpan Semiconductor, Inc.,          Statement on Form S-1 (No. 333-76385) or amendments
            dated July 31, 1996.                                            thereto.

  10.38     Intellectual Property Agreement between Paradyne,               Exhibit 10.35 from Paradyne's Registration
            Lucent Technologies. Inc. and GlobeSpan Semiconductor,          Statement on Form S-1 (No. 333-76385) or amendments
            Inc., dated July 31, 1996.                                      thereto.

  10.39+    OEM Agreement between Paradyne and Xylan Corporation,           Exhibit 10.36 from Paradyne's Registration
            dated March 16, 1999.                                           Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.40+    Distribution Agreement between Paradyne and Tech Data           Exhibit 10.37 from Paradyne's Registration
            Corporation, dated September 21, 1993.                          Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.41+    OEM Agreement between Paradyne and Premisys                     Exhibit 10.38 from Paradyne's Registration
            Communications, Inc., dated December 4, 1992.                   Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.42     Network Management Partners Agreement between Paradyne          Exhibit 10.39 from Paradyne's Registration
            and Ascend Communications, Inc., dated November 3, 1998.        Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.

  10.43+    Joint Development and Distribution Agreement between            Exhibit 10.40 from Paradyne's Registration
            Paradyne and AG Communication Systems Corporation,              Statement on Form S-1 (No. 333-76385) or amendments
            dated June 10, 1998.                                            thereto.

  10.44+    Marketing & License Agreement between Paradyne and              Exhibit 10.41 from Paradyne's Registration
            NetScout Systems, Inc., dated January 26, 1998.                 Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                               Description                                  SEC Document Reference
------                               -----------                                  ----------------------
<S>         <C>                                                             <C>
  10.45+    Amendment to Supply Agreement between Paradyne and              Exhibit 10.43 from the Paradyne's Registration
            Lucent Technologies, Inc., dated as of May 5, 1999.             Statement on Form S-1 (No. 333-76385) or amendments
                                                                            thereto and incorporated by reference.

  10.46     Form of Indemnification Agreement between Paradyne and          Exhibit 10.44 to Paradyne's Registration Statement on
            Messrs. Belanger, Bonderman, Epley, Geeslin, Murphy,            Form S-1 (No. 333-86965) or amendments thereto.
            Stensrud and Van Camp.

  10.48     Contribution Agreement dated as of May 12, 1999 by and          Exhibit 10.1 from Elastic Networks Inc's Registration
            between Elastic Networks Inc. and Nortel Networks Inc.          Statement on Form S-1 (No. 333-40500) or amendments
                                                                            thereto.

  10.49     Amendment No. 1 to Contribution Agreement dated as of           Exhibit 99.7 from Elastic Networks Inc.'s Registration
            December 27, 2001 by and between Elastic Networks Inc.          Statement on Form 8-K filed on December 31, 2001.
            and Nortel Networks Inc.

  10.50     Intellectual Property Transfer and License Agreement            Exhibit 10.3 from Elastic Networks Inc's Registration
            dated as of May 12, 1999 by and between Elastic                 Statement on Form S-1 (No. 333-40500) or amendments
            Networks Inc. and Nortel Networks Inc.                          thereto.


  10.51     Amendment No. 1 to Intellectual Property Transfer and           Exhibit 99.8 from Elastic Networks Inc.'s Form 8-K
            License Agreement dated as of December 27, 2001 by and          filed on December 31, 2001.
            between Elastic Networks Inc. and Nortel Networks Inc.

  10.52     Patent Transfer and License Agreement dated as of May           Exhibit 10.2 from Elastic Networks Inc's Registration
            12, 1999 by and between Elastic Networks Inc. and               Statement on Form S-1.(No. 333-40500) or amendments
            Nortel Networks Inc.                                            thereto.


  10.53     Amendment No. 1 to Patent Transfer and License                  Exhibit 99.9 from Elastic Networks Inc.'s Form 8-K
            Agreement dated as of December 27, 2001 by and between          filed on December 31, 2001.
            Elastic Networks Inc. and Nortel Networks Inc.

  10.54*    Letter Agreement dated as of September 14, 2001 by and
            between Elastic Networks Inc. and Nortel Networks Inc.

  10.55     Modification of Letter Agreement dated as of December           Exhibit 99.10 from Elastic Networks Inc.'s Form 8-K
            27, 2001 by and between Elastic Networks Inc. and               filed on December 31, 2001.
            Nortel Networks Inc.

  10.56     Elastic Voting Agreement dated as of December 27, 2001          Exhibit 99.2 from Paradyne's Form 8-K filed on
            by and among Paradyne, Nortel Networks Inc. and (with           December 31, 2001.
            respect to Sections 5 and 6 only) Elastic Networks Inc.

  10.57*    Employment Agreement between Paradyne and Michael S.
            Ward, dated January 17, 2002.

  21.1*      List of Subsidiaries of Paradyne Networks, Inc.

  23.1*      Consent of PricewaterhouseCoopers LLP, Independent
             Certified Public Accountants.

  24.1*      Power of Attorney is included on the signature pages to
             this report
</TABLE>

*        Filed with this report.

+        Confidential treatment has been granted for certain portions which have
         been omitted in the copy of the exhibit filed with the Securities and
         Exchange Commission. The omitted information has been filed separately
         with the Securities and Exchange Commission pursuant to the application
         for confidential treatment.