<PAGE>

================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-K
  (MARK ONE)
     [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

     [_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER  0-50464


                               NETRIX CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

              DELAWARE                                 54-1345159
      (STATE OF INCORPORATION)                       (IRS EMPLOYER
                                                   IDENTIFICATION NO.)

13595 DULLES TECHNOLOGY DRIVE, HERNDON, VIRGINIA           20171
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)


      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (703) 742-6000


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

                                      NONE


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

                         COMMON STOCK, $0.05 PAR VALUE


   INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES  X  NO  _____
                                              --
   INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.[ ]

   AGGREGATE MARKET VALUE OF COMMON STOCK (PAR VALUE $.05 PER SHARE) HELD BY
NON-AFFILIATES OF REGISTRANT ON MARCH 13, 1998:  $14,580,593.

   THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK (PAR VALUE $.05 PER SHARE)
OUTSTANDING AS OF MARCH 13, 1998:  9,643,240.

                      DOCUMENTS INCORPORATED BY REFERENCE

   NONE.

===============================================================================
<PAGE>

ITEM 1.  BUSINESS

  Netrix Corporation ("Netrix" or the "Company") is a worldwide provider of
voice and data networking products.  Netrix develops, manufactures, markets, and
supports  networking equipment for voice, data, and image networks.  Netrix
products are designed to transport voice over data networks to enable its
customers to realize significant cost savings.  Netrix was incorporated in 1985.
The Company maintains operations in the United Kingdom through its wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation), and in
Germany and Italy through its wholly-owned subsidiaries Netrix GmbH and Netrix
S.r.l., respectively.

  The Company's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and third party
contract manufacturers, and dependence on key management personnel.

BACKGROUND

  Recent trends in network equipment investment have shown that network
infrastructures have been consolidated, resulting in fewer networks and
protocols to support an increasing number of applications. The Internet Protocol
(IP) for the LAN, along with Frame Relay and Asynchronous Transfer Mode (ATM)
for the Wide Area (WAN) has displaced most of the previous networking
technologies in this market space.  These technological trends, combined with
the proliferation of global trade, have created a growing reliance on
telecommunications to facilitate commerce.  In an environment in which wide area
networking is critical to daily operations, voice and data communications
represent a significant and increasing component of operating costs.  Netrix has
re-focused its new products to support the `voice over' needs of this new
network model.

  The varying traffic characteristics of different types of networking
applications, together with the need to transmit voice and image as well as
data, has created the need for vendors to supply multi-service platforms to meet
the user requirements within a single network fabric. Technologies in use today
include IP, Frame Relay, Integrated Services Digital Network (ISDN), and ATM.
Multi-service platforms, such as the Netrix Network Exchange products, enable
the Company's customers to support multiple applications across a single
network, thereby resulting in improved connectivity, reduced communications
costs, and improved network performance.

  The increasing availability of IP and Frame Relay services on the public
networks has fueled a trend toward building corporate networks that access these
services on an as-needed basis. Netrix products can be used to implement voice
and data networks based upon private lines, public services, or a combination of
private and public services. Netrix believes that the trend toward the use of
services will continue to grow, especially with global telecommunications
deregulation. The use of the Internet will also expand for voice and fax
applications.

  In January 1998, the Company entered the voice/data/fax-over-IP gateway market
with the announcement of the Vodex software for the 2210.  Vodex is one of the
industry's first voice gateways to simultaneously deliver high quality voice
over IP and voice over Frame Relay with the ability to gateway between the two.
Vodex positions the Company firmly in the IP telephony market space, which is
emerging as the next wave of network consolidation and which leverages the vast
worldwide IP infrastructures being deployed.

                                       1
<PAGE>

NETRIX PRODUCTS

     The Company currently offers products that focus on providing voice over
packet solutions which leverage the emerging IP Telephony space as well as the
Frame Relay space. The products scale from a gateway consisting of as few as 2
voice ports to a network comprised of many remote sites connected to large
central sites via the largest Network Exchange switches  the 2550. This
scaleable product family permits the customer to choose the most appropriate
platform for each site based upon functionality and performance requirements.
All are designed to enhance the efficiency and cost-effectiveness of the
communications infrastructure.  The Company has two platforms which comprise the
Network Exchange product line, the 2210 and the 2550.

     NETWORK EXCHANGE 2210.  The Network Exchange 2210 is a voice gateway that
combines switched compressed voice and switching in a single platform.  The 2210
incorporates the Company's recently announced Vodex voice gateway software, one
of the industry's first voice gateways to simultaneously deliver high quality
voice over IP and voice over Frame Relay with the ability to gateway between the
two. This scaleable product, designed to take advantage of available IP and
frame relay facilities/services, is based upon enhanced voice over frame
capabilities developed by the Company.  In 1997, the 2210 Voice gateway gained a
higher quality voice compression algorithm, higher performance and capacity,
support for IP, and a cost effective analog voice/fax capabilities with the
release of a 2/4 port  voice/fax card.  This card, which provides high quality
switched compressed voice which can be connected to most analog lines, E&M, FXO,
and/or FXS.  The 2210 also received significant performance enhancements to
better address the needs of our larger clients; a single 2210 can support up to
six E1 or seven T1 digital interfaces.  The 2210 has a complete set of features
which support switched compressed voice, LAN traffic as well as the traditional
capabilities found in typical access level products.  The 2210 can process up to
180 simultaneous voice calls  one of the largest VoIP/VoFR gateways currently on
the market and can be interconnected to incrementally add to the overall
capacity of the site.  For a fully redundant large site, the 2550 can augment
the 2210s.

     NETWORK EXCHANGE 2550.  The 2550 performs as a central site voice/data
switch to provide a resilient fault-tolerant hub.  The 2550 interworks with the
2210 to provide complete multi-service networking support for compressed voice
traffic as well as all existing network technologies. With the 2550, networks
can be constructed to provide support for voice over IP, Frame Relay, and ATM
using narrowband or high speed broadband interfaces running at speeds up to  DS3
(45 Mbps) and E3 (34 Mbps) rates.

     The Netrix family of Network Exchanges provides flexible and scaleable
network solutions for small to large voice/data networks. The products are used
together to provide coverage from the access level through to the network
backbone. The Netrix products provide integrated voice and data network
solutions that use state of the art networking technology.

     NETRIX NETWORK MANAGEMENT SYSTEM (NMS).  Each of the products listed above
is managed by Netrix' Network Management System (NMS).  The NMS provides a full
graphical user interface and remote diagnostics, allowing nodes at several
different locations to be viewed and managed by the network manager at one
central location. The NMS has the capability to monitor attached SNMP devices,
such as a router, and to participate in global network management architecture
with other SNMP managers. Built into the NMS is the capability to support
Virtual Private Networks, remote diagnostics, and extensive "GateKeeper"
functionality such as call detail records for accounting and performance
statistics for on-going capacity planning/tuning. The NMS provides extensive
capabilities to insure non-stop operation with the lowest personnel costs. The
Company supplies network management software for operation with Windows 95' and
Sun Sparc platforms.

MARKETING AND SALES

     The Company's primary target customers are business users with multiple
locations.  To address its markets throughout the world, the Company has
established a multi-channel distribution and sales network. The Company's
products are designed to provide enterprise voice/data solutions and are
marketed mostly through indirect channels, either via carriers or enterprise
focused partners worldwide.

                                       2
<PAGE>

CUSTOMER SUPPORT AND SERVICE

     A significant element of the Company's strategy has been to provide
service, repair, and technical support for its customers throughout the world.
A substantial portion of Netrix' service and support activities relates to
software and network configuration and is provided by 24-hour per day telephone
support through the Netrix Technical Assistance Center ("TAC").  The Company's
products are designed to allow the TAC to be on line with any Netrix network in
the world to diagnose problems and to respond with solutions.  In addition,
Netrix hardware is designed to facilitate replacement of failed boards; in many
cases, the customer's personnel can replace a board themselves under the
direction of the TAC.  TAC service is provided directly to end users and as a
backup service to the Company's international distributors.

     Netrix personnel and third party providers perform most domestic hardware
maintenance and installation.  For customers outside the United States, these
services are generally provided by the Company's international VARs.  Netrix
typically offers its customers a hardware warranty ranging from 90 days to one
year and offers an optional annually renewable hardware maintenance and software
support contract with each network.

     The Company's support contracts with its customers offer a variety of
levels of support, with each option being priced as a percentage of the purchase
price of the installed equipment. In addition, Netrix provides technical
consulting and training both to end-users and to distributors.  Revenues from
the Company's service activities accounted for approximately 32% of total
revenues in 1997, 26% in 1996 and 21% 1995.  Most of the Company's customers
currently have support and maintenance contracts with the Company.

RESEARCH AND DEVELOPMENT

     Netrix believes its future success depends on its ability to continue to
enhance its products to improve performance and functionality and to develop new
products that address emerging networking market niches.  In 1997, 1996, and
1995, research and development expenses totaled approximately $8.3 million or
25% of revenues, $11.1 million or 25% of revenues, and $10.8 million or 22% of
revenues, respectively.

COMPETITION

     The Company encounters substantial competition in the marketing of its
products, and many of its competitors have greater financial, marketing and
technical resources.  Important competitive factors in the Company's product
markets are established customer base, product performance and features, service
and support, as well as price.  The Company believes that it competes favorably
with respect to these factors.  There can be no assurance that the Company's
products will compete successfully with competitive products that may be offered
in the future or that aggressive pricing will not negatively impact the
profitability of the Company.

PROPRIETARY RIGHTS

     The Company relies on a combination of patents, trade secret, copyright and
trademark law, non-disclosure agreements, and technical measures to establish
and protect their proprietary rights in their products.  Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary.  The laws of some foreign countries in which the Company
sells or may sell its products do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.

     The Company believes that because of the rapid pace of technological change
in the networking industry, patent and copyright protection, while important,
are less significant to the Company's competitive position than factors such as
the knowledge, ability, and experience of the Company's personnel, new product
development, market recognition, and ongoing product maintenance and support.
The Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties.  There can be no assurance, however, that
third parties will not assert infringement claims in the future.

                                       3
<PAGE>

     To protect the company's intellectual property rights in the "Voice Over"
market space, the prime patents held by the company in packetized compressed
voice networking have been brought to the attention of both the Voice over IP
and Frame Relay forum organizations.

     The Company also uses various licensed products of other companies in
certain of its products.

EMPLOYEES

     The Company had 166 employees at December 31, 1997.  None of the employees
are represented by collective bargaining agreements.  The Company has never
experienced any work stoppage.  The Company believes that its employee relations
are satisfactory.

YEAR 2000

     The Company is currently in the process of conducting a review of the
impact of Year 2000 on its information systems, as well as reviewing its impact
on relationships with key customers and vendors.  Based on this preliminary
review, the information systems in place at the Company will be modified with
the appropriate upgrades provided by the original software vendors.  Currently,
the aggregate costs associated with these upgrades have not been estimated.

ITEM 2. PROPERTIES

     The Company's principal administrative and research and development
facility consists of approximately 60,000 square feet located in Herndon,
Virginia.  These premises are occupied under a lease agreement expiring in April
1999, with options to extend the lease for up to two additional five-year terms.
A separate facility of 8,600 square feet is under lease in Longmont, Colorado,
for product development operations.  The Company also maintains space in
Charlotte, North Carolina, for its manufacturing operations.  This space is
leased from its main outsourcing manufacturer.  Additionally, the Company
maintains sales offices located across the US and internationally in London,
Frankfurt, Rome, and Hong Kong. The Company believes its facilities are in all
material respects, suitable, adequate and well utilized.

ITEM 3.  LEGAL PROCEEDINGS

     In December 1991, Gandalf Systems Corporation ("Gandalf") filed an action
in the Superior Court of New Jersey against Graphnet, Inc. ("Graphnet") for
approximately $2,000,000 allegedly owed to Gandalf's predecessor under a 1990
lease of equipment, which included equipment manufactured by Netrix.  Graphnet
counterclaimed, alleging that the equipment was inadequate and/or defective.
Subsequently, Graphnet demanded approximately $2,000,000 in damages from
Gandalf.  In October 1993, Gandalf filed a third-party claim against the Company
for indemnification against any judgment obtained by Graphnet.  In March 1994,
Netrix filed a third-party claim against Graphnet for moneys owed to it for
equipment purchased directly from Netrix subsequent to Graphnet's lease
transaction with Gandalf's predecessor.  Netrix and Graphnet stipulated to a
dismissal of that claim in May 1994, having resolved the matter within the
context of their ongoing business relationship.  Management believes Graphnet's
counterclaim and Gandalf's third-party claim are without merit.  The Company is
defending the suit vigorously.

     Other than the matters described above, the Company is involved in other
minor litigation and is not party to any litigation the adverse outcome of which
it believes would have a material adverse effect on its financial position or
future results of operations and is not aware that any such litigation is
threatened.

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

     None.

                                       4
<PAGE>

                                    PART II

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

MARKET INFORMATION FOR COMMON STOCK

  Netrix Corporation's common stock is traded on the NASDAQ National Market
under the symbol NTRX.  The following table reflects the range of high and low
selling prices as reported by NASDAQ for the quarters indicated.

<TABLE>
<CAPTION>
                                                         HIGH              LOW
                                                    ---------------   -------------
<S>                                                 <C>               <C>
             1996
             ----
             First Quarter.......................      $  5 31/32       $  3 3/4
             Second Quarter......................      $ 10  7/8        $  4 1/2
             Third Quarter.......................      $ 10  5/8        $  5 3/4
             Fourth Quarter......................      $  8  1/8        $  4 1/2

             1997
             ----
             First Quarter.......................      $  6 3/8         $  2 5/8
             Second Quarter......................      $  2 7/8         $  1 1/2
             Third Quarter.......................      $  2 5/8         $  1 13/16
             Fourth Quarter......................      $  2 9/16        $    21/32
</TABLE>

HOLDERS

  At March 13, 1998, there were approximately 226 holders of record of Common
Stock and estimated 2,948 total holders based on the volume of proxy and other
material mailed to shareholders.

DIVIDENDS

  The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future.


ITEM 6.  SELECTED FINANCIAL DATA

  The selected consolidated financial data presented below for the fiscal years
ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                         ---------------------------------------------------------
                                           1993        1994        1995        1996        1997
                                         ---------   ---------   ---------   ---------   ---------
                                                   (in thousands, except per share data)
<S>                                      <C>         <C>         <C>         <C>         <C>
Statement of operations data:
  Total revenues......................    $23,398     $53,021     $48,891     $43,635     $33,087
  Gross profit........................      9,752      27,557      25,225      21,572      14,647
  Loss from operations................     (7,474)       (980)     (4,500)     (6,305)     (8,773)
  Net loss............................     (7,827)       (579)     (3,795)     (5,968)     (8,577)
  Basic and diluted loss per share....      (0.94)      (0.06)      (0.40)      (0.63)      (0.90)
Balance sheet data (end of period):
  Working capital.....................     25,646      25,055      21,790      17,782      10,271
  Total assets........................     35,023      45,343      41,985      34,493      24,024
  Total long-term liabilities.........      1,413         843         943         614          96
  Stockholders' equity................     30,059      33,632      30,396      24,847      16,480
</TABLE>

                                       5
<PAGE>

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

RECENT DEVELOPMENTS

     In January 1998, the Company announced its Vodex Voice Gateway software for
its Network Exchange 2210, a Voice/Data/Fax-Over-IP Gateway Switch.  Vodex is
one of the industry's first voice gateways to simultaneously deliver high
quality voice over IP and voice over Frame Relay with the ability to gateway
between the two.

     This Annual Report on Form 10-K contains forward-looking statements.  For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements.  Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements.  These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."


RESULTS OF OPERATIONS

     The results of operations for the year ended December 31, 1997 reflect
an overall decrease in the revenues and expenses of the Company from 1996.
During 1997, Netrix continued to experience a decline in revenues in the product
line it acquired from Republic Telcom, and an increase in its new products, the
2210, which combines the Republic technology with Netrix switching capability,
and the 2550, Netrix' enhanced switching platform.  In both March of 1996 and
April of 1997, the Company implemented a restructuring of operations to reduce
and economize its work force.  The restructuring resulted in the overall
reduction of compensation and travel expenses and other operating costs of the
Company for these years.

     REVENUES.   Total revenues decreased by $10.5 million or 24% from 1996
to 1997 and $5.3 million or 10% from 1995 to 1996.  Product revenues in 1997 of
$22.5 million decreased $10.0 million or 31% from product revenues in 1996 of
$32.4 million, which decreased $6.4 million or 16% from 1995 product revenues of
$38.8 million.  The decreased sales for both 1996 and 1997 were most prominent
in the Americas sales region (North, Latin and South America) which saw a
decrease in product revenues of $6.6 million or 43% from 1996 to 1997 and $6.4
million or 29% from 1995 to 1996.  The International sales region (Europe,
Middle East, Africa, Pacific Rim) experienced decreased sales to a lesser extent
from 1996 to 1997 and maintained relatively flat sales from 1995 to 1996.  The
mix of products sold contributed significantly to the decrease in revenues in
1997 and 1996.  The products acquired in the Republic Telcom acquisition saw a
steady decrease of 42% from 1995 to 1996, and 59% from 1996 to 1997, while the
Netrix product utilizing the acquired technology saw a steady increase of 72%
and 69%, respectively, over the same periods.  The series 10, the Company's main
switch product, decreased $1.1 million or 6% from 1995 to 1996 and $9.4 million
or 51% from 1996 to 1997, as the Company's new switching platform, the 2550, was
introduced into the market in the second quarter of 1997, generating $4.4
million in sales for 1997.

     Service revenue decreased $0.6 million or 5% from 1996 to 1997 and
increased $1.1 million or 11% from 1995 to 1996.  Service revenue is primarily
the result of the renewal of existing maintenance contracts as well as the
negotiation of new equipment contracts.  As such, it has remained fairly
consistent due to the elimination of older product servicing offset by new
product and customer arrangements.

                                       6
<PAGE>

          GROSS PROFIT.    Total gross profit decreased $6.9 million or 32% from
1996 to 1997 and decreased $3.7 million or 14% from 1995 to 1996.  Gross profit
as a percentage of total revenues was 44% in 1997, 49% in 1996 and 52% in 1995.
The product gross margin decreased from 57% in 1995 to 55% in 1996 to 49% in
1997.  Product margins decreased in 1997 because of lower introductory pricing
offered on the new 2550 product and the minimal configurations typical with new
products.  Product margins decreased in 1996 due to a greater proportion of
sales made through distributors, which generally have higher discounts, than
direct retail sales.  To a lesser extent, the decrease in margins was also due
to the mix of products shipped to customers in 1996.

          The service gross margin increased from 29% in 1995 to 34% in 1996 and
1997.  The increase in the service margin from 1995 to 1996 generally paralleled
the increase in service revenue, as the cost of providing that service only
increased 3% during the same period.  The 1997 service gross margin remained
relatively flat, as the decrease in service costs from 1996 to 1997 due to the
restructuring discussed above were offset by the decrease in service revenues
for the same period.

          SALES AND MARKETING.    Sales and marketing expenses decreased $1.4
million or 12% from 1996 to 1997 and decreased $2.5 million or 18% from 1995 to
1996.  The decreases are mainly attributed to the restructuring of operations as
discussed above.  Marketing program expenses were also reduced significantly in
1996, mainly in the areas of advertising, promotional programs and trade shows.

          RESEARCH AND DEVELOPMENT.    Research and development expenses
decreased $2.8 million or 25%  from 1996 to 1997 and increased $0.3 million or
3% from 1995 to 1996.  As a percentage of revenues, R&D expenses increased from
22% of revenues in 1995 to 25% of revenues in 1996 and 1997.  The decrease in
R&D expenses for 1997 is due mainly to the restructuring plan discussed above.
The increase in 1996 is due to a significant investment in developing two new
products, the 2550 switch and 2330 micro.pop, offset in part by the 1996
restructuring of operations.  Most of the 1996 increase in expenses was in the
area of project parts.  As previously discussed, the 2330 product was
discontinued in February 1997.

          GENERAL AND ADMINISTRATIVE.   General and administrative expenses
decreased $0.3 million or 6% from 1996 to 1997 and decreased $0.5 million or 11%
from 1995 to 1996.  Reductions from the restructuring of operations discussed
above and reduced consulting costs contributed to the lower 1997 and 1996
expenses.

          RESTRUCTURING EXPENSE.   In 1997, the Company recorded restructuring
expense of approximately $875,000, representing anticipated costs associated
with an overall reduction in work force and the discontinuance of its micro.pop
product.  In 1996, the Company implemented a restructuring plan and recorded a
related charge of approximately $900,000, representing anticipated costs
associated with the consolidation and relocation of facilities and a 15%
reduction in personnel levels.  These costs included severance and related
expenses for the reduction in work force and amounts for unrecoverable lease
obligations associated with the consolidation of the Longmont, Colorado, and
Herndon, Virginia, operations facilities into one facility leased in Charlotte,
North Carolina.  Additionally, the relocation of operations from Boulder,
Colorado, to the Company's headquarters in Herndon, Virginia, was completed
during 1995, and an additional amount of approximately $84,000 was charged to
the facility relocation reserve established in 1994.

          INTEREST AND OTHER, NET.  Net interest income decreased 71.0% from
1996 to 1997 and decreased 45.0% from 1995 to 1996, primarily as a result of
lower short-term investment balances during 1997 and 1996. Additionally, the
Company recorded a foreign currency gain of $54,000 in 1997, loss of $86,000 in
1996, and gain of $106,000 in 1995. These gains and losses resulted from the
Company's subsidiary operations in Germany, Italy and the United Kingdom.

          PROVISION FOR INCOME TAXES.  As of December 31, 1997, the Company had
net operating losses of approximately $34.2 million available for carryforward
to offset future income for Federal income tax purposes subject to limitations.
These carryforwards expire in years 1998 through 2012.

                                       7
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     During 1997, the Company sold investments of $5.3 million to fund
operational and capital needs  as well as contribute to an increase in cash
balances.  At December 31, 1997, the Company had approximately $2.8 million in
cash and investments compared to $6.0 million at December 31, 1996.

     For the year ended December 31, 1997, the Company used $1.7 million of cash
for operations.  Non-cash items consisting of depreciation and amortization of
$3.3 million coupled with a reduction in accounts receivable of $5.4 million
partially offset the losses of $8.6 million and the reduction in accounts
payable and accrued expenses of $1.7 million.  The reduction in accounts
receivable was the result of the lower sales volumes along with an improvement
in the average collection time.

     Inventory levels at December 31, 1997 were $82,000 lower than  at December
31, 1996 and were $581,000 lower than at September 30, 1997.  This reduction is
the result of efforts during the last half of 1997 to bring inventories in line
with current sales volume and the expected phase out of older products.  Accrued
expenses decreased by $1.3 million as payments have been made for those items
accrued as part of the restructuring reserves established in 1996 and 1997 as
well as the usage of accruals established at the time of the Republic Telecom
acquisition.

     Capital acquisitions during 1997 were $1.7 million compared to $2.1 million
in 1996.  These acquisitions were mostly for equipment used for research and
development purposes along with some computer and test equipment.

     In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital.  This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%.  The line of credit agreement includes a covenant that requires
the Company to maintain a tangible net worth of at least $13.5 million.  At
December 31, 1997, tangible net worth was approximately $15.7 million.  The
facility, which matures on November 30, 1999, is collateralized by the Company's
assets.  Borrowings under the line are based on qualified accounts receivable.
At December 31, 1997, the Company had $2.0 million available under the line of
credit, of which $1.1 million was outstanding and was in compliance with the
tangible net worth covenant.

     The success of the Company is dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash for
such needs is in part dependent on its success in increasing sales of its
products. The Company has developed a plan to increase revenues through sales of
its Network Exchange product line; however, due to market conditions and other
factors beyond its control, there can be no assurance the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets including technologies or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional cash through such sales, such sales may be
dilutive and there can be no assurances that adequate funds will be available or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company.
Therefore, the Company has also developed a plan to implement certain cost
control measures to mitigate its liquidity risk.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.

                                       8
<PAGE>

     The success of the Company is dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash for
such needs is in part dependent on its success in increasing sales of its
products. The Company has developed a plan to increase revenues through sales of
its Network Exchange product line; however, due to market conditions and other
factors beyond its control, there can be no assurance the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets including technologies or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional cash through such sales, such sales may be
dilutive and there can be no assurances that adequate funds will be available or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company.
Therefore, the Company has also developed a plan to implement certain cost
control measures to mitigate its liquidity risk.

     The Company's future operating results are difficult to predict and may be
affected by a number of factors including the timing of new product
announcements or introductions by the Company and its competitors, competitive
pricing pressures and economic conditions in the United States and international
markets.  As a result of these and other factors, there can be no assurance that
the Company will not experience material fluctuations in future operating
results on a quarterly or annual basis.

     A limited number of relatively large customer orders has accounted for and
is likely to continue to account for a substantial portion of revenues in any
particular fiscal period.  As a result, the timing of orders could significantly
affect the Company's operating results.  In any period, the unexpected loss of
or decline in revenues from a major customer, or the failure to generate
significant revenues from other customers, could have an adverse effect on the
business and operating results of the Company.  Although the Company's expense
levels are based in part on its expectations as to future revenue, most expenses
are relatively fixed and cannot be adjusted in the short term.  Accordingly if
revenue levels are below expectations, operating results could be adversely
affected.  In addition, the Company's products often represent a significant
capital expenditure for its customers and, for that reason, the Company's
operating results may vary significantly depending upon general economic
conditions and customers' budgetary cycles.

     A portion of the Company's revenues results from sales to the United States
government, primarily through systems integrators.  The revenues generated by
this government business, which is spread across numerous agencies and
departments, could be adversely affected by governmental budgetary or fiscal
restraints or changes in government policy.

     The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and changes in telecommunications
services offered by public carriers.  The introduction of products embodying new
technologies and the emergence of new industry standards or telecommunications
services may adversely affect the Company's ability to market its products.
This may require the Company to make substantial expenditures on research and
development in order to develop new products or to maintain the competitiveness
of its existing products.  The Company's ability to anticipate changes in
technology and in industry standards, to anticipate changes in market
requirements and to successfully develop and introduce new and enhanced products
on a timely basis, will be a significant factor in the Company's ability to
remain competitive.  If the Company is unable, for technological, financial or
other reasons, to develop, introduce and successfully market products in a
timely manner in response to changes in the industry, the Company's business
would be materially and adversely affected.  In addition, the Company has
experienced delays in releasing certain of its products and there can be no
assurance that it will not encounter technical or other difficulties that could
delay the introduction or release of new products in the future.

     The development and introduction of new and enhanced products requires a
significant investment of financial resources.  To the extent that the Company's
existing financial resources are insufficient to fund the Company's activities,
additional funds will be required.  There can be no assurance that additional
financing will be available on terms reasonable to the Company or at all.

                                       9
<PAGE>

     The market for networking systems is extremely competitive.  Many of the
Company's competitors are more established, benefit from greater market
recognition and have greater financial, technological, production and marketing
resources than the Company.  Competition could increase if new companies enter
the market or if existing competitors expand their product lines.  An increase
in competition could have an adverse effect on the Company's business and
operating results.  Maintaining the competitiveness of the Company's products
will require continued investment by the Company in research and development and
sales and marketing.  There can be no assurance that the Company will have
sufficient resources to make such investment or that the Company will be able to
make the technological advances necessary to maintain the competitiveness of its
products.

     A significant portion of the Company's total revenues has been derived from
international sales, and the Company expects that international business will
continue to represent an important element of its business.  Substantially all
of the Company's international sales have been made through third-party
distributors, and in many cases the Company relies upon only one distributor for
a particular country.  A reduction in the sales by some or all of these
distributors or a termination of their relationships with the Company could have
a material adverse effect on the Company's operations and financial performance.
In addition, the Company's international business may be adversely affected by
changes in demand for its products resulting from fluctuations in exchange
rates, as well as by risks such as trade and tariff regulations, political
instability, difficulties in obtaining export licenses, difficulties or delays
in collecting accounts receivable and difficulties in staffing and managing
international operations.

     The Company's success depends to a significant extent upon the continued
service of its executive officers and other key personnel.  None of the
Company's executive officers or key employees is subject to an employment or
non-competition agreement.  The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company.  The Company's future success will depend in part upon its continuing
ability to attract and retain highly qualified personnel.  There can be no
assurance that the Company will be successful in attracting and retaining such
personnel.

     The Company relies on reseller channels, including distributors and systems
integrators, for a significant portion of its revenues.  None of these resellers
are under the control of the Company and there can be no assurance that future
sales by resellers will continue at present levels or will not decline.  The
loss of one or more significant resellers could adversely affect the Company's
business.  In addition, the Company relies on resellers to provide certain
limited service and support to their customers, and any deficiencies in such
service and support could adversely affect the Company's business and operating
results.

     Certain components used in the Company's products are currently available
from only one source and others are available from only a limited number of
sources.  Although the Company has generally been able to obtain adequate
supplies of components to date, the Company's inability to develop alternative
sources if and as required in the future, or to obtain sufficient sole-source or
limited-source components as required, could result in delays or reductions in
product shipments, which could adversely affect the Company's operating results.
Certain products that are or may in the future be marketed with or incorporated
into the Company's products are supplied by or under development by third
parties.  These third parties may be the sole suppliers of such products.  The
Company also currently relies on a single contract manufacturer to assemble and
test most of the Company's products.  Although a number of such contract
manufacturers exist, the interruption or termination of the Company's current
manufacturing relationship could have a short-term adverse effect on the
Company's business.  The inability of any such third parties to supply, develop
or manufacture components or products in a timely manner or the termination of
the Company's relationship with any such third party could delay shipment of the
Company's products and could have a material adverse impact on the Company's
operating results.

     Because of these and other factors, past financial performance should not
be considered an indicator of future performance.  Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's Common Stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the networking industry, changes in earnings estimates and
recommendations by analysts or other events.

                                       10
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and the
Shareholders of Netrix Corporation:

     We have audited the accompanying consolidated balance sheets of Netrix
Corporation (a Delaware corporation) and subsidiaries (together the "Company")
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netrix Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.



                                          ARTHUR ANDERSEN LLP

Washington, DC
February 27, 1998

                                       11
<PAGE>

                               NETRIX CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                                 ---------------------------
                                                                               1997           1996           1995
                                                                            ---------       ---------       --------
                                                                           (In thousands, except per share amounts)
<S>                                                                          <C>             <C>             <C>
Revenues:
     Product                                                                 $22,474         $32,434         $38,812
     Service                                                                  10,613          11,201          10,079
                                                                             -------         -------         -------
           Total revenues                                                     33,087          43,635          48,891
                                                                             -------         -------         -------

Cost of revenues:
     Product                                                                  11,395          14,700          16,549
     Service                                                                   7,045           7,363           7,117
                                                                             -------         -------         -------
           Total cost of revenues                                             18,440          22,063          23,666
                                                                             -------         -------         -------
                  Gross profit                                                14,647          21,572          25,225
                                                                             -------         -------         -------

Operating expenses:
     Sales and marketing                                                      10,220          11,632          14,162
     Research and development                                                  8,323          11,079          10,776
     General and administrative                                                4,002           4,266           4,787
     Restructuring charge                                                        875             900              --
                                                                             -------         -------         -------
                Loss from operations                                          (8,773)         (6,305)         (4,500)
Interest and other, net                                                          196             403             820
                                                                             -------         -------         -------
                Loss before income taxes                                      (8,577)         (5,902)         (3,680)
Provision for income taxes                                                        --             (66)           (115)
                                                                             -------         -------         -------
Net loss                                                                     $(8,577)        $(5,968)        $(3,795)
                                                                             =======         =======         =======

Net loss per share                                                           $ (0.90)        $ (0.63)        $ (0.40)
                                                                             =======         =======         =======

Shares used in per share calculation                                           9,553           9,468           9,371
                                                                             =======         =======         =======
</TABLE>




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

                                       12
<PAGE>

                               NETRIX CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                       ---------------------------------
                                                                                 1997           1996
                                                                               --------       --------
                                                                      (In thousands, except share amounts)
<S>                                                                            <C>             <C>
Current assets:
     Cash and cash equivalents                                                  $ 2,758        $   687
     Short-term investments                                                          --          5,350
     Accounts receivable, net of allowance for doubtful accounts
          of $1,505 and $1,380, respectively                                      6,212         11,649
     Inventories, net                                                             8,035          8,117
     Other current assets                                                           713          1,011
                                                                                -------        -------
          Total current assets                                                   17,718         26,814
Property and equipment, net of accumulated depreciation
     and amortization of $18,016 and $15,297, respectively                        4,969          6,023
Deposits and other assets                                                           543            244
Goodwill, net of accumulated amortization of $1,447 and
     $1,090, respectively                                                           794          1,412
                                                                                -------        -------

                                                                                $24,024        $34,493
                                                                                =======        =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Lines of credit                                                           $  1,147       $    754
     Accounts payable                                                             3,002          3,459
     Accrued liabilities                                                          3,298          4,819
                                                                               --------       --------
          Total current liabilities                                               7,447          9,032

Other liabilities                                                                    97            614
                                                                               --------       --------
     Total liabilities                                                            7,544          9,646
                                                                               --------       --------
Commitments and contingencies

Stockholders' equity:
     Preferred stock, $0.05 par value; 1,000,000 shares authorized; none
          issued and outstanding                                                     --             --
     Common stock, $0.05 par value; 15,000,000 shares authorized;
          9,593,253 and 9,510,109 shares issued and outstanding,                    480            476
          respectively
     Additional paid-in capital                                                  55,774         55,603
     Other equity adjustments                                                       (17)           (52)
     Accumulated deficit                                                        (39,757)       (31,180)
                                                                               --------       --------
          Total stockholders' equity                                             16,480         24,847
                                                                               --------       --------
                                                                               $ 24,024       $ 34,493
                                                                               ========       ========
</TABLE>


   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       13
<PAGE>

                               NETRIX CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                ADDITIONAL      OTHER
                                   COMMON        PAID-IN        EQUITY       ACCUMULATED
                                   STOCK         CAPITAL      ADJUSTMENTS      DEFICIT     TOTAL
                                  --------      ----------    -----------   ------------   -----
                                                         (in thousands)
<S>                                <C>          <C>            <C>           <C>              <C>
Balance, January 1, 1995.......    $   465      $ 54,622      $   (38)       $ (21,417)    $ 33,632
                                   -------      --------      --------       ---------     --------
Stock options exercised........          5           197           --               --          202
Employee stock purchase plan...          2           228           --               --          230
Compensation element of
    stock options..............         --            58           --               --           58
Net change in unrealized
    investment holding gain....         --            --           80               --           80
Cumulative translation
    adjustment.................         --            --          (11)              --          (11)
Net loss.......................         --            --           --           (3,795)      (3,795)
                                   -------      --------      -------        ---------     --------

Balance, December 31, 1995.....        472        55,105           31          (25,212)      30,396
                                   -------      --------      -------        ---------     --------

Stock options exercised........          2           218           --               --          220
Employee stock purchase plan...          2           144           --               --          146
Retire escrow shares...........         --           (36)          --               --          (36)
Compensation element of
    stock options..............         --           172           --               --          172
Net change in unrealized
    investment holding loss....         --            --          (49)              --          (49)
Cumulative translation
    adjustment.................         --            --          (34)              --          (34)
Net loss.......................         --            --           --           (5,968)      (5,968)
                                   -------      --------      -------        ---------     --------

Balance, December 31, 1996.....        476        55,603          (52)         (31,180)      24,847
                                   -------      --------      -------        ---------     --------

Stock options exercised........          3           134           --               --          137
Employee stock purchase plan...          1            37           --               --           38
Net change in unrealized
    investment holding loss....         --            --            7               --            7
Cumulative translation
    adjustment.................         --            --           28               --           28
Net loss.......................         --            --           --           (8,577)      (8,577)
                                   -------      --------      -------        ---------     --------

Balance, December 31, 1997.....    $   480      $ 55,774      $   (17)       $ (39,757)    $ 16,480
                                   =======      ========      =======        =========     ========

</TABLE>

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

                                       14
<PAGE>

                               NETRIX CORPORATION

                         CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                      Years Ended December 31,
                                                                                     ---------------------------
                                                                                     1997         1996       1995
                                                                                   --------    ----------   -------
                                                                                             (in thousands)
<S>                                                                                <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                          $(8,577)    $(5,968)   $ (3,795)
  Adjustments to reconcile net loss to net cash provided by
  (used in) operating activities:
  Depreciation and amortization                                                       3,338       3,602       3,510
  Noncash compensation expense                                                           --         172          58
  Changes in assets and liabilities, net of acquisition -
     Accounts receivable                                                              5,437        (597)      3,701
     Inventories                                                                         82         505        (930)
     Other current assets                                                               298         (49)        188
     Deposits and other assets                                                         (299)         38         (70)
     Accounts payable                                                                  (457)     (1,485)        439
     Accrued liabilities                                                             (1,280)        224      (1,080)
     Other liabilities                                                                 (278)       (248)       (218)
                                                                                    -------     -------    --------

  Net cash (used in) provided by operating activities                                (1,736)     (3,806)      1,803
                                                                                    -------     -------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                                                (2,473)     (9,395)    (17,399)
  Sales and maturities of short-term investments                                      7,823      11,320      16,303
  Purchases of property and equipment                                                (1,665)     (2,059)     (3,294)
                                                                                    -------     -------    --------
     Net cash provided by (used in) investing activities                              3,685        (134)     (4,390)
                                                                                    -------     -------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from lines of credit, net                                                    393           4         561
  Principal payments of long-term debt                                                 (481)        (80)         --
  Proceeds from exercise of stock options                                               137         220         202
  Proceeds from employee stock purchase plan                                             38         146         230
  Payments under capital lease obligations                                               --          --         (25)
                                                                                    -------     -------    --------
     Net cash provided by financing activities                                           87         290         968
                                                                                    -------     -------    --------

Effect of foreign currency exchange rate changes on cash and cash equivalents            35         (33)        (11)

Net increase (decrease) in cash and cash equivalents                                  2,071      (3,683)     (1,630)

Cash and cash equivalents, beginning of period                                          687       4,370       6,000
                                                                                    -------     -------    --------

Cash and cash equivalents, end of period                                            $ 2,758     $   687    $  4,370
                                                                                    =======     =======    ========

Supplemental disclosure of cash flow information:
  Cash paid during the year for interest                                            $   117     $   139    $     94
  Cash paid during the year for income taxes                                              5           5          66
</TABLE>

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

                                       15
<PAGE>

                               NETRIX CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Significant Accounting Policies:

     These consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany transactions have been
eliminated.

RISKS AND OTHER IMPORTANT FACTORS

     For the year ended December 31, 1997, the Company experienced declining
revenues and a net loss of $8.6 million due to declining sales of the Company's
mature products. The success of the Company is dependent on its ability to
generate adequate cash for operations and capital needs. Its ability to generate
adequate cash for such needs is in part dependent on its success in increasing
sales of its products. The Company has developed a plan to increase revenues
through sales of its Network Exchange product line; however, due to market
conditions and other factors beyond its control, there can be no assurance the
Company will be able to adequately increase product sales. Therefore, the
Company may have to generate additional cash through the sales of assets
including technologies or the sale of debt or equity securities. Although the
Company believes it has the ability to generate additional cash through such
sales, such sales may be dilutive and there can be no assurances that adequate
funds will be available or available on terms that are reasonable or acceptable
to the Company. If the Company is unable to generate adequate cash, there could
be a material and adverse effect on the business and financial condition of the
Company. Therefore, the Company has also developed a plan to implement certain
cost control measures to mitigate its liquidity risk.

     Future operating results may be affected by a number of other factors
including the timing of new products in the market place, competitive pricing
pressures and economic conditions.  As the market for the Company's products is
characterized by rapidly changing technology, the development and introduction
of competitive products may require a significant investment of financial
resources.  Additionally, the Company relies on reseller channels which are not
under its control for a significant portion of its revenues, particularly in its
international regions.  Also, while the Company has generally been able to
obtain adequate supplies of components to date, the interruption or termination
of the Company's current manufacturing relationships could have an adverse
effect on the Company's operating results.

     CASH EQUIVALENTS

     Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities with original maturities of three months or less.
These investments are carried at cost which approximates market value.

     SHORT-TERM INVESTMENTS

     Short-term investments consist primarily of commercial paper with
maturities of more than three months and less than twelve months and longer-term
investments held as available-for-sale, primarily US government obligations with
maturities between twelve and eighteen months.  Short-term investments are
reported at fair value.

     Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," debt securities that are
classified as available-for-sale are reported at fair value, with unrealized
gains and losses reported as a component of stockholders' equity.  For the year
ended December 31, 1997 there was no unrealized holding gain/loss on short-term
investments.  For the year ended December 31, 1996 there was a loss of
approximately $7,000, which is reported as an adjustment to stockholders'
equity.

                                       16
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value.  SFAS No.
107 excludes certain financial instruments and all nonfinancial instruments from
these disclosure requirements.  Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.  The carrying
amounts reported in the balance sheet approximate the fair value for cash and
cash equivalents, accounts receivable, accounts payable, borrowings under the
line of credit agreement and long-term debt.

     INVENTORIES

     Inventories are valued at the lower of cost or market, using the first-in,
first-out ("FIFO") method.  Work in process and finished goods include direct
labor and manufacturing overhead.

     PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost and depreciated on a straight-
line basis over the following estimated useful lives:

     Manufacturing and test equipment... 3-5 years
     Office furniture and equipment.....   5 years
     Purchased software.................   3 years
     Leasehold improvements............. Shorter of useful life or remaining
                                         lease term

     GOODWILL

     Goodwill represents the excess purchase price of subsidiary assets acquired
and is amortized over a seven-year period.

     REVENUE RECOGNITION

     The Company receives revenue both from sales of products and from service
contracts.  In most cases, revenue from product sales is recognized upon
shipment.  Revenue from service contracts is recognized ratably over the period
covered by the contract.  Product sales accounted for 68% of total revenues in
1997, 74% of total revenues in 1996, and 79% of total revenues in 1995.

     WARRANTY

     The Company generally warrants its products for periods ranging from 90
days to one year and sells an optional, annually renewable, maintenance contract
with most networks.  Estimated future warranty obligations related to certain
products are provided by charges to operations in the period in which the
related revenue is recognized.

                                       17
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     FOREIGN EXCHANGE GAIN/LOSS

     Generally, assets and liabilities denominated in foreign currencies are
translated into US dollars at current exchange rates.  Operating results are
translated into US dollars using the average rates of exchange prevailing during
the period.  Gains or losses resulting from the translation of assets and
liabilities are included in the cumulative translation adjustment account in
stockholders' equity, except for the translation effect of intercompany balances
that are anticipated to be settled in the foreseeable future.  Included in
Interest and other, net, for the years ended December 31, 1997, 1996 and 1995 is
a foreign exchange gain of approximately $54,000, loss of approximately $86,000,
and gain of approximately $106,000, respectively.

     EARNINGS PER SHARE

     The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," at December 31, 1997.  SFAS No. 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to fully diluted earnings per share.
The 1997, 1996 and 1995 earnings per share amounts have been restated in
accordance with SFAS No. 128; however, the implementation of SFAS No. 128 did
not have a material impact.  The effect of options were not considered in the
calculation of diluted earnings per share as it would have been anti-dilutive;
as such, the numerator and denominator of basic earnings per share is the same
as for diluted earnings per share.  Stock options outstanding at December 31,
1997 (see Note 4) could potentially have a dilutive effect on basic earnings per
share in the future.  Earnings per share have been computed using the weighted-
average number of common shares outstanding.

     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.  Actual results could differ from those estimates.

     RECLASSIFICATIONS

     Certain amounts have been reclassified in the prior year financial
statements to conform with current year presentation of these amounts.

     LONG-LIVED ASSETS

     The Company reviews its long-lived assets, including property and
equipment, identifiable intangibles and goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable.  To determine recoverability of its long-lived assets,
the Company evaluates the future, undiscounted, net cash flows compared to the
carrying amount of the assets.

     YEAR 2000

     The Company is currently in the process of conducting a review of the
impact of Year 2000 on its information systems, as well as reviewing its impact
on relationships with key customers and vendors.  Based on this preliminary
review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors.  Currently, the aggregate
costs associated with these upgrades have not been estimated.

                                       18
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information."  SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of a statement of financial position.  The Company
plans to adopt SFAS No. 130 in the first quarter of 1998.  The Company does not
expect SFAS No. 130 to have a significant impact on its financial statements.
SFAS No. 131 requires the Company to report financial and descriptive
information about its reportable operating segments.  The Company will adopt
SFAS No. 131 at its year-end December 31, 1998.  The Company is currently
evaluating the impact of SFAS No. 131 on its financial statements.


2.  ACQUISITIONS:

     On January 1, 1995, the Company acquired the equipment, inventory, and
contract rights of InterData Systems GmbH ("IDS"), relating to its corporate
network business.  Prior to this acquisition, IDS was a distributor of the
Company and provided sales and service of the Company's products in Germany.
The purchase price for the assets acquired in this transaction was $545,000, of
which $185,000 was classified as goodwill.  All of the assets acquired were
transferred to Netrix GmbH, a wholly-owned subsidiary of the Company, which was
established concurrently with the acquisition of the assets of IDS.

3.  BALANCE SHEET DETAILS:

 INVENTORIES

<TABLE>
<CAPTION>
                                                          December 31,
                                                   ----------------------
                                                      1997       1996
                                                      ----       ----
<S>                                               <C>          <C>
    Raw materials...............................   $    462    $    326
    Work in process.............................        772         869
    Finished goods..............................      6,801       6,922
                                                   --------    --------

     Total inventories..........................   $  8,035    $  8,117
                                                   ========    ========
</TABLE>

 PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                          December 31,
                                                   ----------------------
                                                      1997       1996
                                                      ----       ----
<S>                                               <C>          <C>
    Manufacturing and test equipment............   $ 13,512    $ 12,310
    Office furniture and equipment..............      6,708       6,367
    Purchased software..........................      2,765       2,643
                                                   --------    --------
     Total property and equipment...............     22,985      21,320
    Accumulated depreciation and amortization...    (18,016)    (15,297
                                                   --------    --------
     Net........................................   $  4,969    $  6,023
                                                   ========    ========
</TABLE>

                                       19
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                   December 31,
                                               -------------------
                                                   1997      1996
                                                 ------    ------
<S>                                              <C>       <C>

          Deferred revenue...................    $  699    $  870
          Payroll and related compensation...     1,207       929
          Other..............................     1,392     3,020
                                                 ------    ------
                                                 $3,298    $4,819
                                                 ======    ======
</TABLE>
4.  COMMON STOCK AND STOCK PLANS:

     The Company maintains three plans which are described below, whereby
employees and directors of the Company are granted the opportunity to acquire an
equity interest in the Company.  A total of 2,925,000 shares of Common Stock
have been reserved for issuance in aggregate under these plans.  SFAS No. 123,
"Accounting for Stock-Based Compensation" defines a "fair value based method" of
accounting for an employee stock option or similar equity instrument.  Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period.  The
Company has historically accounted for employee stock options or similar equity
instruments under the "intrinsic value method" as defined by APB Opinion No. 25,
"Accounting for Stock Issued to Employees."  Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock.

     SFAS No. 123 allows an entity to continue to use the intrinsic value
method.  However, entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting had been applied.  The Company has
elected to apply APB Opinion No. 25 and the related interpretations in
accounting for its stock-based compensation.  Had compensation cost for the
Company's three stock-based compensation plans been determined based upon the
fair value method at the grant dates for award under those plans, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below.

<TABLE>
<CAPTION>
                                                             TWELVE MONTHS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                            ----------   ---------   ---------

<S>                             <C>                         <C>          <C>         <C>
Net loss                        As reported                  $ (8,577)    $(5,968)    $(3,795)
                                Pro forma                    $(10,377)    $(6,807)    $(4,031)

Net loss per share              As reported                  $  (0.90)    $ (0.63)    $ (0.40)
                                Pro forma                    $  (1.08)    $ (0.72)    $ (0.43)
</TABLE>

     Because the fair value method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs may
not be representative of the cost to be expected in future years.

     The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1997, 1996 and 1995, respectively:  no dividend yield; expected
volatility of 98 percent, 70 percent, and 70 percent; risk free interest rates
approximating 5.5 percent, 5 percent, and 5 percent; and an average expected
life of approximately 5 years.  The per share weighted average fair value of the
options on the date of grant for shares issued in 1997, 1996 and 1995 was
approximately $2.30, $5.89 and $5.61, respectively.  The weighted average
remaining contractual life for options outstanding as of December 31, 1997 is
8.1 years.

                                       20
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     1996 STOCK OPTION PLAN

     Under the terms of the Company's 1996 Stock Option Plan, either incentive
stock options or nonstatutory options may be granted.  Generally, the purchase
price of shares subject to any incentive option granted will not be less than
the fair market value at the date of grant.  Stock options granted expire five
to ten years from the grant date and typically vest 20% to 25% per year.
Compensation expense recorded for options granted at less than the fair market
value at the date of the grant is recognized on a straight-line basis over the
performance period.  The expense approximated $172,000 in 1996 and $58,000 in
1995, with no expense in 1997.  At December 31, 1997 there is no remaining
deferred compensation expense related to these grants.

     The following table summarizes the option activity under this plan:
<TABLE>
<CAPTION>
                                                                            WEIGHTED AVERAGE
                                              NUMBER          OPTION PRICE    OPTION PRICE
                                             OF SHARES         PER SHARE       PER SHARE
                                         -----------------   --------------   ------------
<S>                                      <C>                 <C>              <C>
     Outstanding, January 1, 1995.....            599,900    $1.080-$17.250          $6.04
         1995:
          Granted.....................            475,000    $ 2.563-$8.690          $5.12
          Exercised...................            (94,101)   $ 1.080-$6.250          $2.14
          Canceled....................           (131,093)   $ 1.680-$8.690          $6.40
                                                ---------
     Outstanding, December 31, 1995...            849,706    $1.680-$17.250          $5.90
         1996:
          Granted.....................            820,055    $ 4.250-$9.625          $5.89
          Exercised...................            (43,113)   $ 1.680-$6.250          $5.12
          Canceled....................           (140,500)   $ 1.680-$7.875          $5.88
                                                ---------
     Outstanding, December 31, 1996...          1,486,148    $1.680-$17.250          $5.92
         1997:
          Granted.....................            396,940    $ 1.250-$3.250          $2.30
          Exercised...................            (63,077)   $ 1.680-$6.250          $2.18
          Canceled....................           (594,786)   $ 1.680-$7.875          $5.57
                                                ---------
     Outstanding, December 31, 1997...          1,225,225    $ 1.250-$8.690          $2.93
                                                =========

     Exercisable, December 31, 1995...            187,774    $1.680-$17.250          $6.74
                                                =========
     Exercisable, December 31, 1996...            488,187    $1.680-$17.250          $5.74
                                                =========
     Exercisable, December 31, 1997...            479,177    $ 1.250-$8.690          $3.21
                                                =========
</TABLE>
     EMPLOYEE STOCK PURCHASE PLAN

     Under the 1992 Employee Stock Purchase Plan (the "Plan"), the Company is
authorized to issue semi-annual offerings of up to 50,000 shares.  The number of
shares available for an offering may be increased at the election of the Board
of Directors by the number of shares of Common Stock, if any, which were made
available but not purchased during an earlier offering.  Each offering is six
months in length and commences on each July 1 and January 1.  Under the terms of
the Plan, employees can choose prior to each offering to have up to 10 percent
of their annual base earnings withheld to purchase the Company's common stock.
The purchase price of the stock is 85 percent of the lower of its beginning-of-
offering or end-of-offering market price.  Under the Plan, the Company sold
20,067 shares, 36,556 shares, and 43,848 shares to employees in 1997, 1996, and
1995, respectively.

                                       21
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     DIRECTOR OPTION PLAN

     Under the terms of the Director Option Plan, directors of the Company who
are not officers or employees of the Company each receive nonstatutory options
to purchase 9,000 shares of Common Stock of the Company.  In 1997, 1996, and
1995, independent members of the Board of Directors were granted options to
purchase a total of 9,000, 27,000, and 9,000 shares, respectively, of common
stock at $2.19, $4.69, and $7.13 per share, respectively, under the Director
Option Plan.  At December 31, 1997 a total of 54,000 shares were outstanding
under the Director Option Plan.


5.  COMMITMENTS AND CONTINGENCIES:

     LINE OF CREDIT

     In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital.  This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%.  The line of credit agreement includes a covenant that requires
the Company to maintain tangible net worth of at least $13.5 million.  At
December 31, 1997, tangible net worth was approximately $15.7 million.  The
facility, which matures on November 30, 1999, is collateralized by the Company's
assets.  Borrowings under the line are based on qualified accounts receivable.
At December 31, 1997, the Company had $2.0 million available under the line of
credit.  At December 31, 1997 and 1996, the Company had approximately $1,147,000
and $754,000, respectively, outstanding under its working capital line of credit
arrangements.

     LONG-TERM DEBT

     In conjunction with the working capital line of credit obtained in November
1997, the Company repaid its equipment note payable in full.  At December 31,
1996, the Company had approximately $481,000 outstanding under the equipment
note payable.

     Interest expense related to the above borrowings was approximately $117,000
and $125,000 for the years ended December 31, 1997 and 1996, respectively.

     RESTRUCTURING CHARGE

     In 1997, the Company recorded restructuring expense of approximately
$875,000, representing anticipated costs associated with an overall reduction in
work force and the discontinuance of its micro.pop product.  At December 31,
1997, approximately $158,000 of the accrual remains.  In 1996, the Company
implemented a restructuring plan and recorded a related charge of approximately
$900,000, representing anticipated costs associated with the consolidation and
relocation of facilities and a 15% reduction in personnel levels.  These costs
included severance and related expenses for the reduction in work force and
amounts for unrecoverable lease obligations associated with the consolidation of
the Longmont, Colorado, and Herndon, Virginia, operations facilities into one
facility leased in Charlotte, North Carolina.  At December 31, 1997,
approximately $101,000 of the accrual remains to cover anticipated losses from
the Herndon and Longmont lease commitments.

                                       22
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     LEASES

     The Company has existing lease agreements for office space and equipment
expiring through April 2003.  The lease for the Company's headquarters facility
in Herndon, Virginia, includes annual escalations of a fixed amount during each
year of the lease.  Additionally, the Company leases approximately 8,600 square
feet in Longmont, Colorado, for the purpose of continuing certain product
development activities and approximately 8,000 square feet of space from its
main outsourcing manufacturer in Charlotte, North Carolina, for its operations
facilities.  The Company was relieved of its lease commitment for 48,000 square
feet of space in Boulder, Colorado, in August 1997.  The Company also leases
space for sales offices in the US, the UK, Germany, Italy and Hong Kong.  The
Company recognizes rent expense, net of any sublease revenue, on a straight-line
basis.  Net rent expense in 1997, 1996, and 1995 was approximately $1,643,000,
$2,475,000 and $2,501,000, respectively.

     The Company subleases approximately 28,000 square feet in Herndon,
Virginia.  Sublease revenue for 1997 and 1996 was approximately $223,000 and
$380,000, respectively, and is presented as a reduction of rent expense in the
accompanying consolidated statements of operations.

     Future minimum lease payments for office space and equipment under
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>

       FOR THE YEARS ENDING          NET
          DECEMBER 31,             PAYMENTS
--------------------------------   --------
<S>                                <C>

          1998..................     $1,688
          1999..................        544
          2000..................         76
          2001..................         74
          2002 and thereafter...         85
                                     ------
                                     $2,467
                                     ======
</TABLE>

     These payments are net of future sublease revenue of approximately $371,000
in 1998.

     EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) savings plan ("401(k) plan") covering all eligible
employees.  The Company began contributing to the 401(k) plan effective July 1,
1996.  The Company matches employee contributions up to the first 6% of eligible
income at a rate of 25%.  The matching funds are subject to 20% vesting per year
beginning with the employee's first day with the Company; therefore, certain
employees were 100% vested in the Company matching contributions on July 1,
1996.  In 1997 and 1996, the company contributed approximately $86,000 and
$44,000, respectively, to the 401(k) plan.

                                       23
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     LITIGATION

     In December 1991, Gandalf Systems Corporation ("Gandalf") filed an action
in the Superior Court of New Jersey against Graphnet, Inc. ("Graphnet") for
approximately $2,000,000 allegedly owed to Gandalf's predecessor under a 1990
lease of equipment, which included equipment manufactured by Netrix.  Graphnet
counterclaimed, alleging that the equipment was inadequate and/or defective.
Subsequently, Graphnet demanded approximately $2,000,000 in damages from
Gandalf.  In October 1993, Gandalf filed a third-party claim against the Company
for indemnification against any judgment obtained by Graphnet.  In March 1994,
the Company filed a third-party claim against Graphnet for monies owed to it for
equipment purchased directly from the Company subsequent to Graphnet's lease
transaction with Gandalf's predecessor.  The Company and Graphnet stipulated to
a dismissal of that claim in May 1994, having resolved the matter within the
context of their ongoing business relationship.  Management believes Graphnet's
counterclaim and Gandalf's third-party claim are without merit.  The Company is
defending the suit vigorously.

     Other than the matters described above, the Company is involved in other
minor litigation and is not party to any litigation the adverse outcome of which
it believes would have a material adverse effect on the Company's financial
position or future results of operations and is not aware that any such
litigation is threatened.


6.  REVENUES:

     SIGNIFICANT CUSTOMERS

     Customers that accounted for greater than 10% of total revenues in 1997,
1996, and 1995 are described below (in thousands).
<TABLE>
<CAPTION>
                    YEARS ENDED DECEMBER 31,
                   ---------------------------
                    1997      1996      1995
                   ------   --------   -------
<S>                <C>      <C>        <C>
Distributor 1...   $3,640    $5,837       *
End User 1......      *         *      $5,592
</TABLE>
* Revenue accounted for less than 10% of total revenues for the period.

     PRODUCT REVENUES

     The Company's product revenues for 1997, 1996 and 1995 were generated in
the following geographic regions (in thousands):
<TABLE>
<CAPTION>
                                     YEARS ENDED DECEMBER 31,
                                    ---------------------------
                                     1997      1996      1995
                                    -------   -------   -------
<S>                                 <C>       <C>       <C>

Domestic.........................   $ 7,884   $11,554   $19,822
Europe, Middle East and Africa...     9,308    11,531    10,002
Pacific Rim, Latin America and
     South America...............     5,282     9,349     8,988
                                    -------   -------   -------

Total............................   $22,474   $32,434   $38,812
                                    =======   =======   =======
</TABLE>

     Included in domestic product revenues are sales through systems integrators
and distributors to the Federal Government of approximately $627,000,
$2,164,000, and $5,873,000 in 1997, 1996 and 1995 respectively.

                                       24
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7.  INCOME TAXES:

     The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                      ---------------------------------------------
                                          1997             1996            1995
                                      -------------   --------------   ------------
<S>                                   <C>             <C>              <C>
       Current provision:
          Federal..................        $(2,105)        $(1, 534)       $(1,251)
          State....................           (256)            (185)          (135)
          Increase in valuation
           allowance...............          2,361            1,719          1,416
          Foreign                               --               66             85
       Deferred (benefit)
        provision:
          Federal..................             --               --             --
          State....................             --               --             --
                                           -------         --------        -------
                                           $    --         $     66        $   115
                                           =======         ========        =======

     The provision for income taxes results in effective rates that differ from the Federal
statutory rate as follows:


                                                 YEARS ENDED DECEMBER 31,
                                           ---------------------------------------
                                            1997             1996           1995
                                           -------         --------        -------
          Statutory Federal income
           tax rate................         (35.0)%          (35.0)%        (35.0)%
          Effect of graduated rates           1.0              1.0            1.0
          State income taxes, net
           of Federal tax benefit..          (4.3)            (4.3)          (4.3)
          Benefit of net operating
           loss carryforward.......            --               --             --
          Losses without current
           tax benefit.............          38.3             38.3           39.1
          Foreign income taxes.....            --              1.1            2.3
                                          -------         --------        -------
          Effective rate...........            -- %            1.1 %          3.1 %
                                          =======         ========        =======
</TABLE>

     As of December 31, 1997, the Company had net operating losses of
approximately $34.2 million available for carryforward to offset future income
for Federal income tax purposes.  The Company has additional net operating loss
carryforwards of $2.7 million as a result of the 1994 acquisition of Republic.
Due to Internal Revenue Service rules regarding change in ownership, the use of
these net operating losses is limited to $300,000 per year.  These carryforwards
expire in years 1998 through 2012 as follows:
<TABLE>
<CAPTION>

<S>                           <C>
     1998..................   $   229,587
     1999..................       229,587
     2000..................       229,587
     2001..................       229,587
     2002..................     1,798,680
     2003 and thereafter...    31,514,002
                              -----------
                              $34,231,030
                              ===========
</TABLE>

     These carryforwards are subject to limitation of the amount available to be
used in any given year due to significant changes in ownership interests.  In
addition, the Company has research and development tax credit carryforwards of
approximately $2.1 million which are available to offset future Federal income
taxes with certain limitations.  Temporary differences between financial
reporting and income tax reporting result primarily from the treatment of
deferred rent, depreciation expense, and capitalization of certain inventory
costs for tax purposes.

                                       25
<PAGE>

                               NETRIX CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     The components of the net deferred tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>

                                                            YEARS ENDED DECEMBER 31,
                                                           --------------------------
                                                               1997          1996
                                                           ------------   -----------
<S>                                                        <C>            <C>
                     Federal regular tax operating
                       loss carryforwards...............      $ 11,639      $  9,933
                     State regular tax operating
                       loss carryforwards...............         1,472         1,220
                     Research and development tax
                       credit carryforwards.............         2,048         2,029
                     Basis difference attributable to
                        Telcom acquisition..............        (1,067)       (1,182)
                     Other..............................         3,660         2,467
                                                              --------      --------
                                                              $ 17,752      $ 14,467
                     Valuation allowance................       (17,752)      (14,467)
                                                              --------      --------
                     Deferred tax asset.................      $     --      $     --
                                                              ========      ========
</TABLE>


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

         None.

                                       26
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the names, ages, position and business experience of
the executive officers and directors of Netrix.

<TABLE>
<CAPTION>

     NAME AND AGE              OFFICE AND EXPERIENCE
     ------------              ---------------------
<S>                                       <C>
 Lynn C. Chapman, 44...................   President, Chief Executive Officer and Director.  Mr. Chapman joined the
                                          Company in December 1992 and was named Vice President in February 1993.
                                          During 1996 Mr. Chapman assumed additional responsibility as Vice President --
                                          Network Products, and was named President and CEO and a director of the
                                          Company in February 1997.  Prior to joining Netrix, Mr. Chapman served in
                                          various management positions at Data General Corporation from 1989 to November
                                          1992.

 Richard D. Rose, 43...................   Executive Vice President -- Finance and Chief Financial Officer.  Prior to
                                          joining the Company in October 1997, Mr. Rose was with Penril DataComm
                                          Networks, Inc., from 1988 until 1997, where he served in various positions,
                                          lastly as CFO.

 G. Brent Wilson, 41...................   Executive Vice President -- Engineering Services.  Mr. Wilson joined the
                                          Company in December 1990 and was named Vice President -- Customer Service in
                                          January 1996 and Vice President -- Engineering Services in April 1997.  While
                                          at Netrix he has also served as Director of Technical Services.  Prior to
                                          Netrix, Mr. Wilson served as Manager of Communications for the Price Company.

 V. Orville Wright, 77.................   Director.  Mr. Wright has been a Director of the Company since 1991.  From
                                          1975 to 1985, he served as President and Chief Operating Officer of MCI
                                          Communications Corporation ("MCI") and from 1987 to 1991 as Vice Chairman and
                                          Co-Chief Executive Officer of MCI.  From 1985 to 1987, Mr. Wright served as
                                          Vice Chairman of MCI.  Mr. Wright has also held senior executive positions at
                                          IBM Corporation, RCA Corporation, Amdahl Corporation and Xerox Corporation.
                                          Mr. Wright also serves as a director of Calpine Corporation, and independent
                                          power producing company.

 William T. Rooker, Jr., 64............   Director.  Mr. Rooker has been a Director of the Company since July 1994.  Mr.
                                          Rooker retired from IBM Corporation ("IBM") at the end of 1992 after 37 years
                                          of service and has since served as a private consultant.  During his tenure at
                                          IBM he held a variety of marketing and executive management positions.  From
                                          1974 to 1990 he was Vice President and General Manager of Federal Marketing
                                          Programs at IBM, and from 1990 to 1992 he was Corporate Director of Government
                                          Relations at IBM.

 Arthur J. Marks, 52...................   Director.  Mr. Marks has been a Director of the Company since 1987.  He has
                                          been a General Partner of New Enterprise Associates, a venture capital firm,
                                          since 1984.  Mr. Marks serves as director of Progress Software Corporation, an
                                          application development software company, Platinum Software Corporation, a
                                          marketing and development company for LAN-based and client server software,
                                          and AMISYS, a managed care software company.
</TABLE>

                                       27
<PAGE>

<TABLE>
<S>                                       <C>
 John F. Burton, 45....................   Director.  Mr. Burton has been a Director of the Company since 1995.  Since
                                          March 1997, Mr. Burton has been managing director of Updata Group, an
                                          investment banking firm.  From October 1996 to March 1997, Mr. Burton was
                                          managing director of Burton Technology Partners, a technology investment and
                                          consulting company.  From September 1995 to September 1996, Mr. Burton was the
                                          President and Chief Executive Officer of NatSystems Inc., a client server
                                          software company.  From February to August 1995, Mr. Burton was an independent
                                          consultant.  Mr. Burton was employed by Legent Corporation, a systems
                                          management software company, from 1989 through 1995, as President and
                                          Director, and from 1992 through 1995 as Chief Executive Officer.  He is
                                          currently a director of Banyan Systems Corporation, a networking software
                                          company, Mapinfo Corporation, a desktop mapping software company, and Axent
                                          Technologies Inc., a network security company.
</TABLE>


DELINQUENT FILINGS

     The Company notes that one of its officers, Lynn C. Chapman, did not timely
report transactions in the Company's Common Stock that occurred in 1997 as
required by the rules under Section 16 of the Securities Exchange Act of 1934.
Mr. Chapman subsequently reported the transactions.

                                       28
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth information concerning the compensation for
the last three fiscal years of the Company's Chief Executive Officer and the
Company's other most highly compensated executive officers (together, the "Named
Executive Officers") for the year ended December 31, 1997.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                              Long-Term
                                                                             Compensation
                                                   Annual Compensation          Awards
                                            -------------------------------   ----------
          Name/Position              Year   Salary($)   Bonus($)   Other(1)   Options(#)
----------------------------------   ----   ---------   --------   --------   ----------
<S>                                  <C>    <C>         <C>        <C>        <C>
Lynn C. Chapman (2)...............   1995    141,928     11,355       --         25,000
     President and Chief             1996    140,578         --    1,125         75,000
     Executive Officer               1997    156,546     21,750    2,375         29,000

Richard D. Rose (3)...............   1995         --         --       --             --
     Vice President, Finance and     1996         --         --       --             --
     Chief Financial Officer         1997    120,000      4,000       --         45,000

J. Gerard Cregan (4)..............   1995    147,744     11,355       --         25,000
     Vice President, Operations      1996    143,948         --       --         50,000
                                     1997    115,946      9,063       --          9,000

G. Brent Wilson...................   1995     96,796         --       --         20,000
     Vice President, Engineering     1996    109,701         --       --         25,000
     Services                        1997    114,815     14,500       --         12,000

Charles W. Stein (5)..............   1995    203,542     22,710       --         60,000
                                     1996    204,789         --    1,125        150,000
                                     1997    225,592         --      693             --
</TABLE>
------------
(1) Represents matching 401(k) plan contributions by the Company.
(2) Mr. Chapman was made President and Chief Executive Officer of the Company in
    February 1997.
(3) Mr. Rose joined the Company as Chief Financial Officer in October 1997.
    Salary amount represents annualized compensation.
(4) Mr. Cregan resigned as a Vice President of the Company in January 1998.
(5) Mr. Stein resigned as President and Chief Executive Officer of the Company
    and was elected to serve as Chairman of the Board of Directors of the
    Company in January 1997.  He resigned as Chairman of the Board of Directors
    of the Company in March 1997.

                                       29
<PAGE>

OPTION GRANTS

   The following table summarizes option grants during 1997 to the Named
Executive Officers:

                    STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>


                                        PERCENT                                              POTENTIAL REALIZABLE
                                        OF TOTAL                                               VALUE AT ASSUMED
                                        OPTIONS                                                ANNUAL RATES OF
                                       GRANTED TO                MARKET                    STOCK PRICE APPRECIATION
                         OPTIONS       EMPLOYEES    EXERCISE      PRICE                      FOR OPTION TERM (E)
                         GRANTED       IN FISCAL      PRICE     ($/SHARE)   EXPIRATION   ---------------------------
     NAME                (#)(A)          YEAR       ($/SHARE)     (D)          DATE        0%($)    5%($)    10%($)
-------------------------------------------------------------   ----------------------------------------------------
<S>                      <C>           <C>          <C>         <C>         <C>             <C>    <C>      <C>
Lynn C. Chapman           29,000(B)          7.3%      $2.33       $2.33       3/12/07      -      $42,494   $107,689
Richard D. Rose           45,000(C)         11.3        1.63        1.63      11/20/07      -       46,129    116,901
J. Gerard Cregan           9,000(B)          2.3        2.33        2.33       3/12/07      -       13,188     33,421
G. Brent Wilson           12,000(B)          3.0        2.33        2.33       3/12/07      -       17,584     44,561
Charles W. Stein              --              --          --          --            --      -           --         --
</TABLE>
_____________
(A) Under the terms of the Company's incentive stock option plan, the Board of
    Directors retains descretion, subject to plan limits, to modify the terms of
    the outstanding options and to reprice the options.  The options were
    granted for a term of 10 years, subject to earlier termination in the event
    of termination of employment.  The options were granted with tandem tax
    withholding rights.
(B) Identified options were granted March 11, 1997, and become exercisable in
    equal monthly installments on the 11th day of each calendar month following
    the date of grant, with full vesting occurring on the fourth anniversary
    date.
(C) Identified options were granted November 19, 1997, and become exercisable in
    equal monthly installments on the 19th day of each calendar month following
    the date of grant, with full vesting occurring on the fourth anniversary
    date.
(D) Equals fair market value of Common Stock on the date of grant.
(E) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term.  These gains
    are based on assumed rates of stock price appreciation of 0%, 5% and 10%
    compounded annually from the date of grant to their expiration date.  Actual
    gains, if any, on stock option exercises will depend upon the future
    performance of the Common Stock and the date on which the options are
    exercised.


OPTION EXERCISES AND YEAR-END VALUES

  The following table summarizes option exercises during 1997 by the Named
Executive Officers and the value of the options held by such persons at the end
of 1997:

   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>

                               SHARES                                NUMBER OF                 VALUE OF UNEXERCISED
                              ACQUIRED                           UNEXERCISED OPTIONS        IN-THE-MONEY OPTIONS
                                 ON             VALUE           AT FISCAL YEAR-END (#)        AT FISCAL YEAR-END ($)(A)
                              EXERCISE         REALIZED     -----------------------------   -----------------------------
          NAME                   (#)              ($)        EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
-----------------------------------------------------------------------------------------   -----------------------------
<S>                         <C>             <C>             <C>             <C>             <C>            <C>
Lynn C. Chapman                      --              --         66,996          74,004             --              --
Richard D. Rose                      --              --            750          44,250             --              --
J. Gerard Cregan                     --              --         65,425          42,658             --              --
G. Brent Wilson                      --              --         31,247          36,779             --              --
Charles W. Stein                 44,048        $(13,743)        91,327         101,625             --              --
</TABLE>
_____________
(A) Value is based on the closing sales price of the Company's Common Stock on
    December 31, 1997 ($1.06), the last trading day of 1997, less the applicable
    option exercise price.

                                       30
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of March 13, 1998,
with respect to the beneficial ownership of Common Stock by (I) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each Director of the Company and nominee for Director,
(iii) each executive officer of the Company named in the Summary Compensation
Table set forth under the caption "Executive Compensation" below and (iv) all
Directors and executive officers of the Company as a group:

<TABLE>
<CAPTION>
                                                                          NUMBER OF
                                                                           SHARES       PERCENTAGE OF
                                                                        BENEFICIALLY    COMMON STOCK
                          BENEFICIAL OWNER                                OWNED(1)      OUTSTANDING (2)
---------------------------------------------------------------------   -------------   --------------
<S>                                                                     <C>             <C>
Kopp Investment Advisors(3)..........................................         606,813            6.3
  7701 France Avenue South, Suite 500
  Edina, MN  55435

New Enterprise Associates IV, Limited Partnership(4).................         582,009            6.0
  1119 St. Paul Street
  Baltimore, MD  21202

Dimensional Fund Advisors, Inc.(5)...................................         548,600            5.7
  1299 Ocean Avenue, 11th Floor
  Santa Monica, CA  90401

Lynn C. Chapman(6)...................................................          77,163             *

Richard D. Rose(7)...................................................          13,750             *

J. Gerard Cregan(8)..................................................          37,035             *

G. Brent Wilson(9)...................................................          36,247             *

Charles W. Stein(10).................................................          22,233             *

V. Orville Wright(11)................................................          26,696             *

Arthur J. Marks(12)..................................................         803,039            8.3

William T. Rooker, Jr.(13)...........................................           9,000             *

John F. Burton(14)...................................................           6,030             *

All Directors and executive officers as a group (9 persons)(15)......         982,784           10.2
</TABLE>
_____________
* Less than 1%
(1) The number of shares of Common Stock beneficially owned by each person is
    determined under the rules of the Securities and Exchange Commission, and
    the information is not necessarily indicative of beneficial ownership for
    any other purpose.  Under such rules, beneficial ownership includes any
    shares as to which the individual has sole or shared voting power or
    investment power and also any shares of Common Stock which the individual
    has the right to acquire within 60 days after March 13, 1998 through the
    exercise of any stock option or other right.  The inclusion herein of any
    shares of Common Stock deemed beneficially owned does not constitute an
    admission of beneficial ownership of those shares.  Unless otherwise
    indicated, the persons named in the table have sole voting and investment
    power with respect to all shares of Common Stock shown as beneficially owned
    by them.

                                       31
<PAGE>

(2)  Number of shares deemed outstanding includes 9,643,240 shares outstanding
     as of March 13, 1998, plus any shares subject to options held by the person
     or entity in question that are currently exercisable or exercisable within
     60 days after March 13, 1998.
(3)  This information is based on a Schedule 13G dated February 12, 1998.
(4)  This information is based on a Schedule 13G dated February 10, 1998.
(5)  This information is based on a Schedule 13G dated February 9, 1998.
(6)  Includes 77,163 shares issuable upon exercise of outstanding stock options
     exercisable within 60 days after March 13, 1998.
(7)  Includes 3,750 shares issuable upon exercise of outstanding stock options
     exercisable within 60 days after March 13, 1998.
(8)  Mr. Cregan resigned as a Vice President of the Company in January 1998.
(9)  Includes 36,247 shares issuable upon exercise of outstanding stock options
     exercisable within 60 days after March 13, 1998.
(10) Mr. Stein resigned as President and Chief Executive Officer of the Company
     and was elected to serve as Chairman of the Board of Directors of the
     Company in January 1997.  He resigned as Chairman of the Board of Directors
     of the Company in March 1997.
(11) Includes 1,000 shares held by Mr. Wright's wife, as to which Mr. Wright
     disclaims beneficial ownership.  Also includes 6,030 shares issuable upon
     exercise of outstanding stock options exercisable within 60 days after
     March 13, 1998.
(12) Includes 582,009 shares held by New Enterprise Associates IV, Limited
     Partnership and 200,000 shares held by New Enterprise Associates V, Limited
     Partnership.  Mr. Marks is a general partner of the general partners of New
     Enterprise Associates IV, LP and New Enterprise Associates V, LAP,
     respectively.  Mr. Marks disclaims beneficial ownership of such shares.
     Also includes 6,030 shares issuable upon exercise of outstanding stock
     options exercisable within 60 days after March 13, 1998.
(13) Includes 9,000 shares issuable upon exercise of outstanding stock options
     exercisable within 60 days after March 13, 1998.
(14) Includes 6,030 shares issuable upon exercise of outstanding stock options
     exercisable within 60 days after March 13, 1998.
(15) Includes shares as indicated in footnotes (6) through (14) above.

                                       32
<PAGE>

COMPARATIVE STOCK PERFORMANCE

     The graph below compares cumulative total stockholder return on the
Company's Common Stock during the period from September 21, 1992 (the date on
which the Company's Common Stock was first registered under the Exchange Act)
through December 31, 1997 with the cumulative total return over the same period
of (I) the Russell 2000 Index and (ii) a peer group of publicly-traded
companies* selected by the Company for purposes of this comparison (the "Peer
Group").  This graph assumes the investment of $100 at the close of trading on
September 21, 1992 in the Company's common Stock, the Russell 2000 Index and the
Peer Group and assumes reinvestment of dividends.  Measurement points are at
September 21, 1992 and December 31, 1993, 1994, 1995, 1996 and 1997.

                      COMPARATIVE FIVE-YEAR TOTAL RETURNS*
                 NETRIX CORPORATION, RUSSELL 2000, PEER GROUP
                    (PERFORMANCE RESULTS THROUGH 12/31/97

                        PERFORMANCE GRAPH APPEARS HERE

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          None.

                                       33
<PAGE>

                                    PART IV


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

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

     (1)  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

     Index to Consolidated Financial Statements                             Page
     ------------------------------------------                             ----
<S>                                                                         <C>
          Report of Independent Public Accountants                           11
          Consolidated Statements of Operations                              12
          Consolidated Balance Sheets                                        13
          Consolidated Statements of Stockholders' Equity                    14
          Consolidated Statements of Cash Flows                              15
          Notes to Consolidated Financial Statements                         16

     (2)  FINANCIAL STATEMENT SCHEDULES

<CAPTION>

     Index to Consolidated Financial Statement Supplemental Schedule        PAGE
     ---------------------------------------------------------------        ----
<S>                                                                         <C>
     Report of Independent Public Accountants on Supplemental Schedule...    37
     For the three years in the period ended December 31, 1997:
          Schedule II - Consolidated Valuation and Qualifying Accounts...    38
</TABLE>
          All other Schedules have been omitted because the required information
is shown in the consolidated financial statements or notes thereto or they are
not applicable.

                                       34
<PAGE>

     (3)  EXHIBITS
<TABLE>
<CAPTION>

    Exhibit
    Number                                                 Description
---------------   ----------------------------------------------------------------------------------------------
<C>               <S>
       3.1        --Amended and Restated Certificate of Incorporation of the Registrant, as amended
                  (incorporated by reference to Exhibit 3.1 to the Registrant's registration statement on Form
                  S-1 filed September 18, 1992, as amended (File No. 33-50464) (the "1992 S-1").
       3.2        --Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of
                  the 1992 S-1).
       4.1        --Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the 1992 S-1).
      10.1*       --Amended and Restated Incentive Stock Option Plan of the Registrant, as amended
                  (incorporated by reference to Exhibit 10.1 of the Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1995 (the "1995 10-K").
      10.2*       --1992 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit
                  10.2 of the 1995 10-K).
      10.3*       --1992 Directors Stock Option Plan of the Registrant (incorporated by reference to exhibit
                  10.3 of the 1995 10-K).
      10.4*       --1996 Stock Option Plan of the Registrant (incorporated by reference to exhibit 10.4 of the
                  1995 10-K).
      10.5        --Office Lease, dated December 9, 1988, as amended, between the Registrant and Dulles
                  Technology Center Venture, for the Registrant's principal executive offices at 13595 Dulles
                  Technology Drive, Herndon, Virginia (incorporated by reference to Exhibit 10.6 of the 1992
                  S-1).
      10.6        --Office Lease, dated September 15, 1992, between the Registrant and Brit Limited
                  Partnership, for the Registrant's administrative offices at The Hallmark Building,
                  Renaissance Centre in the Renaissance Park at Dulles, Herndon, Virginia (incorporated by
                  reference to Exhibit 10.6 of the Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1992 (the "1992 10-K")).
      10.7        --Agreement and Plan of Merger dated December 23, 1993, among Registrant, NAC Corp., and
                  Republic Telcom Systems Corporation, as amended (incorporated by reference to the
                  Registrant's Current Report on Form 8-K filed on February 3, 1994, as amended by Amendment
                  No. 1 on Form 8-K/A filed on March 30, 1994 (the "8-K").
     #10.8        --Loan Agreement dated,  November 18, 1997 between the Registrant and Coast Business Credit.
     #21          --Subsidiaries of the Registrant.
     #23.1        --Consent of Arthur Andersen LLP
</TABLE>
--------------
#   Filed herewith
*   This exhibit is a compensatory plan or arrangement in which executive
    officers or directors of the Registrant participate.

(b) REPORTS ON FORM 8-K

          None

                                       35
<PAGE>

                                   SIGNATURES
                                   ----------

          PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                              NETRIX CORPORATION


Date:   March 26, 1998        By:  /s/ Lynn C. Chapman
                                 --------------------------------------
                                         LYNN C. CHAPMAN
                                 PRESIDENT AND CHIEF EXECUTIVE OFFICER

<TABLE>
<CAPTION>
             Signature                                Title                                   Date
-----------------------------------   -------------------------------------   -------------------------------------
<S>                                   <C>                                     <C>
        /s/ Lynn C. Chapman                President, Chief Executive                    March 26, 1997
   ---------------------------                Officer and Director
          LYNN C. CHAPMAN                 (Principal Executive Officer)


        /s/ Richard D. Rose                Vice President-Finance and                    March 26, 1997
   ---------------------------               Chief Financial Officer
          RICHARD D. ROSE                 (Principal Financial Officer)


        /s/ Arthur J. Marks                         Director                             March 26, 1997
   ---------------------------
          ARTHUR J. MARKS

        /s/ William T. Rooker                       Director                             March 26, 1997
   ---------------------------
          WILLIAM T. ROOKER

        /s/ V. Orville Wright                       Director                             March 26, 1997
   ---------------------------
          V. ORVILLE WRIGHT

        /s/ John Burton                             Director                             March 26, 1997
   ---------------------------
          JOHN BURTON
</TABLE>

                                       36
<PAGE>

       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE



To the Board of Directors and
Shareholders of Netrix Corporation:

          We have audited in accordance with generally accepted auditing
standards, the financial statements of Netrix Corporation (a Delaware
corporation) and subsidiaries included in this Form 10-K and have issued our
report thereon dated February 27, 1998.  Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole.  The
schedule included on page 38 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements.  This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



                                                          ARTHUR ANDERSEN LLP

Washington, DC,
February 27, 1998

                                       37
<PAGE>

                                                                     SCHEDULE II


                               NETRIX CORPORATION

                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                    BALANCE AT   CHARGED TO                          BALANCE AT
                                    BEGINNING    COSTS AND                             END OF
DESCRIPTION                         OF PERIOD     EXPENSES    OTHER    DEDUCTIONS      PERIOD
-----------                         ----------   ----------   -----   ------------   ----------
                                                          (IN THOUSANDS)
<S>                                 <C>          <C>          <C>     <C>            <C>
Year Ended December 31, 1995:
     Allowance for doubtful
       accounts (deducted from
       accounts receivable)......      $ 1,795       --          --        265          $1,530
Year Ended December 31, 1996:
     Allowance for doubtful
       accounts (deducted from
       accounts receivable)......      $ 1,530      156        (200)*      106          $1,380
Year Ended December 31, 1997:
     Allowance for doubtful
       accounts (deducted from
       accounts receivable)......      $ 1,380      150          --         25          $1,505

</TABLE>
 ------------
*Amounts related to Republic Telcom purchase accounting.

                                       38
<PAGE>

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                         DESCRIPTION
---------------   ---------------------------------------------------------------

<S>               <C>
     10.8         --Loan Agreement between Registrant and Coast Business Credit.
     21           --Subsidiaries of the Registrant.
     23.1         --Consent of Arthur Andersen LLP
</TABLE>

                                       39