<PAGE>

[INSERT FORM 10K]
================================================================================

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                          --------------------------
                                    FORM 10-K
                FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
         SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

(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, 2000
                                       OR
   |_|            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                         OF THE SECURITIES EXCHANGE ACT OF 1934
                         COMMISSION FILE NUMBER 0-50464

                           ------------------------
                              NX NETWORKS, INC.
              (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 April 9, 2001: $33,090,377.

      The number of shares of Registrant's Common Stock (par value $.05 per
      share) outstanding as of April 9, 2001: 44,390,267.

      Documents incorporated by reference:  None.
================================================================================



<PAGE>



SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

      Some of the information set forth in this annual report includes "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. In addition, from time to time, we may publish
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act or make oral statements that constitute
forward-looking statements. These forward-looking statements may relate to
matters such as anticipated financial performance, future revenues or earnings,
business prospectus, projected ventures, new products, anticipated market
performance and similar matters. The words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements are
intended to be among the statements that are forward looking statements. Because
these statements reflect the reality of risk and uncertainty that is inherent in
our business, actual results may differ materially from those expressed or
implied by the forward-looking statements. You are cautioned not to place undue
reliance on these forward-looking statements, which are made as of the date of
this annual report.

      The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, we caution you that a variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These risks and uncertainties, many
of which are beyond our control, include, but are not limited to those set forth
under the caption "Certain Factors Which May Affect Future Results" on page 23
of this Annual Report and in our filings with the SEC.

ITEM 1.  BUSINESS

      We are a leading provider of voice and internet protocol ("IP")
convergence telecommunications solutions to carriers, Tier 1 internet service
providers ("ISPs") and wireless telephony service providers. A pioneer in next
generation Internet telephony and data network solutions, we own original
intellectual property rights in the area of Voice over Packet technology. Our
integrated media gateways and managed router platforms are designed to deliver
Voice over IP (`VoIP"), IP Centrex and Quality of Service management solutions.
We develop, manufacture, market and support feature-rich, cost-effective,
flexible and secure IP solutions that offer seamless, end-to-end
interoperability to over 6,000 customers in more than 83 countries worldwide.

      We have engineered our products directly to the specifications of next
generation packet network technologies. While legacy switch manufacturers are
currently attempting to retrofit their time division multiplexing ("TDM")
switches to accommodate these emerging infrastructures, and traditional Remote
Access Server vendors are attempting to upgrade their products to provide
telephony capabilities, we are poised to immediately deliver leading solutions
to these carriers and vendors. Complementing our strength in Voice over Packet
solutions, our technology position in Managed Router Services was solidified
through the strategic merger in December 1999 with OpenROUTE Networks Inc.,
formerly called Proteon, a pioneer in Internet routing, author of multiple
Internet standards, and creator of the first multi-protocol router. This
combination positions us at the forefront of Voice and IP convergence.

CORPORATE OBJECTIVES

      Our main growth strategy involves becoming the leading IP Centrex
solutions provider to the incumbent local exchange carriers (ILECs) by
leveraging our proprietary technology in VoIP and our reseller relationship with
Lucent's majority-owned AG Communications (AGCS). As the only digital IP Centrex
solution compatible with AGCS' product set, we believe we will gain a dominant
market share of the IP Centrex market, and this market is projected to grow to
$1.8 billion on an annual basis by 2004. Concurrently, we possess one of the
only full featured router intellectual property bases in the Customer Premise
Equipment (CPE) sectors (with superlative performance characteristics to Cisco's
CPE routers) and have responded to the emerging market trends by providing
routers and integrated access devices with the capabilities needed by carriers,
Tier 1 and next generation ISPs, to deploy value added managed services to their
enterprise customers. We have developed a portfolio of products intended to
optimize networking solutions.



                                       2
<PAGE>

OVERVIEW OF MATERIAL DEVELOPMENTS IN 2000

      We went through a number of organizational changes from January 1, 2000
through the date of this Annual Report. Among the most significant changes were:

FINANCING

      In February 2000, we filed a registration statement on Form S-3 relating
to a public offering by us of 1.0 million shares of our common stock. We
received net proceeds of $25.1 million from this offering. We used $8.0 million
of the proceeds to pay an obligation of AetherWorks Corporation ("AetherWorks"),
which was a condition to our acquiring AetherWorks. The remaining proceeds were
used for general corporate and working capital purposes.

      During February 2000, we terminated our line of credit agreement with
Coast Business Credit. From time to time we have held discussions with various
financial institutions regarding a new line of credit, however, we do not expect
to obtain a new line of credit until our revenues have improved substantially.

      On December 29, 2000 we raised $2.5 million through a private placement of
preferred stock and warrants. The preferred stock bears a dividend of 8% per
annum, which we can elect to pay in cash or shares of common stock, and the
preferred stock has a liquidation preference equal to the purchase price per
share plus the amount of any accrued but unpaid dividends. The preferred stock
is convertible into 3,333,330 shares of common stock at a conversion price of
$0.75 per share. The warrants are exercisable for 666,667 shares of common stock
at an exercise price of $0.90 per share.

      On January 17, 2001 we raised $2.5 million through a private placement of
preferred stock. The preferred stock bears a dividend of 8% per annum, which we
can elect to pay in cash or shares of common stock, and the preferred stock has
a liquidation preference equal to the purchase price per share plus the amount
of any accrued but unpaid dividends. The preferred stock is convertible into
1,540,000 shares of common stock at a conversion price of $1.625 per share.

      On March 6, 2001 we raised $1.65 million through a private placement of
preferred stock and warrants. The preferred stock bears a dividend of 8% per
annum, which we can elect to pay in cash or shares of common stock, and the
preferred stock has a liquidation preference equal to the purchase price per
share plus the amount of any accrued but unpaid dividends. The preferred stock
is convertible into 1,173,373 shares of common stock at a conversion price of
$1.41 per share. The warrants are exercisable for 234,676 shares of common stock
at an exercise price of $2.11 per share.

      On March 28, 2001 we raised $2.0 million through a private placement of
common stock. We sold 2,207,018 shares of common stock at $0.9062 per share, the
last reported sales price on the day the financing closed.

NEW CHIEF EXECUTIVE OFFICER

      On November 10, 2000, Steven Francesco resigned as our chief executive
officer. Mr. Francesco had been chief executive officer since April 1999, and
was responsible for the merger with OpenROUTE and the acquisition of
AetherWorks. Mr. Francesco continued to serve as Chairman of the Board of
Directors until February, 2001, when John DuBois succeeded him in that position.

      On December 28, 2000, John DuBois entered into an employment to become our
Chief Executive Officer effective in January 2001. In connection with accepting
the position, Mr. DuBois entered into a three-year employment agreement with us
and he also became a member of our Board of Directors. In February 2001, he
succeeded Mr. Francesco as our Chairman of the Board.

AETHERWORKS ACQUISITION

      On March 16, 2000 we consummated the acquisition of AetherWorks
Corporation, a provider of softswitch technology for the telecommunications
industry. At the time we acquired AetherWorks, we issued 2,301,436 shares of our


                                       3
<PAGE>

common stock to the former AetherWorks stockholders, as well as options and
warrants to acquire an additional 867,687 shares. We also agreed that we would
issue additional shares to the AetherWorks stockholders, and the option and
warrant holders, if the closing price of our common stock did not equal at least
$22.50 per share during the 15 trading day period ended October 31, 2000.

      On December 29, 2000, we entered into a settlement agreement with the
former owners of AetherWorks Corporation related to the obligation to issue them
additional shares of common stock if the closing price of our common stock did
not equal at least $22.50 per share during the 15 trading day period ended
October 31, 2000. We agreed with the former AetherWorks owners that our stock
price did not meet the $22.50 threshold, but we disagreed with them regarding
the calculation of the adjustment shares. Pursuant to the settlement agreement,
we issued an additional 4,777,973 shares of common stock and an additional
654,000 options and warrants (excluding stock options related to employee
compensation) to acquire our common stock. In addition, we issued options to
acquire 1,192,551 shares of common stock to our employees who had previously
been AetherWorks employees. We also adjusted the exercise price for all of the
options and warrants issued in the AetherWorks transaction to $1.60 per share,
except for warrants to acquire 70,000 shares which were re-priced to $1.33 per
share.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

      The Securities and Exchange Commission has commenced an investigation into
the matters surrounding our restatement of revenues for the quarter ended June
30, 2000. For the quarter ended June 30, 2000, we restated revenues from $10.4
million to $8.4 million for sales made to two of its value added resellers
("VARs"). These sales were made to VARs whose payment to Nx Networks was
dependent upon payment from their customers.

OTHER EVENTS

      At our June 22, 2000 annual meeting of stockholders, the change of our
name from Netrix Corporation to Nx Networks, Inc. was approved. We then filed an
amendment to our certificate of incorporation to make the name change official.
At the annual meeting, stockholders also approved an increase in the number of
shares authorized for issuance under our 1999 Long Term Incentive Plan from
4.325 million shares to 7.325 million shares.

      On December 23, 2000, we re-priced the options for substantially all of
our employees and directors to $0.75 per share, the market price at the time of
re-pricing. This was done in order to retain our employees in light of the low
share price relative to the exercise price of almost all outstanding options.

      At a special meeting of stockholders held on March 6, 2001, stockholders:

   o  approved an increase in our authorized number of common shares from 55
      million to 85 million;
   o  approved an amendment to our 1999 Long Term Incentive Plan to increase the
      number of shares authorized for issuance from 7.325 million to 11.325
      million;
   o  authorized us to issue shares of common stock exceeding 20% of our
      outstanding shares in private offerings to raise capital; and
   o  authorized us to issue the full number of shares we agreed to issue to the
      former owners of AetherWorks under our December 29, 2000 settlement
      agreement.

      In March 2001, we reduced our workforce by approximately 40 employees,
representing approximately 22% of our workforce. A portion of the positions were
eliminated for the purpose of reducing expenses and the remainder were
eliminated because they related to products and initiatives that are not part of
our business plans on a going-forward basis.

MARKET OVERVIEW

      Next generation technologies continue to reduce the cost of network
infrastructures while providing an enhanced level of services. Both incumbent
and new telecom carriers alike are facing unprecedented demand for
telecommunications services, and service offerings must be flexible to respond
to these dynamic market trends. Data, voice, and wireless networks are merging


                                       4
<PAGE>

into packet-based infrastructures, which offer a wider range of services today,
and are best positioned to deliver additional future services. Existing networks
with fixed-bandwidth TDM circuits must be migrated towards the packet-based
networks of the future.

VOICE OVER IP EQUIPMENT

      Despite current economic pressures, the worldwide VoIP equipment market is
expected to grow exponentially over the next several years as service providers
begin the migration to IP based transport for converged voice, video, and data.
The market is estimated at $1.7 billion in 2000, $2.6 billion in 2001, and is
projected to eventually reach $37 billion in 2006. In the current evolution of
this market, media gateways, or equipment that converts legacy TDM circuits into
voice over IP, account for most of the expected revenue. Software that performs
centralized call control, or soft-switches, accounts for less that 10% of this
revenue.

IP CENTREX

      Small to medium enterprises often choose Centrex services over the
maintenance of their own customer premise switch ("PBX"). However, Centrex is
not available in all areas due to carrier loop limitations. Furthermore,
regulations limit the area within which services can be deployed by a given
service provider. IP Centrex technologies allow for the extension of traditional
Centrex switches, via a Voice over IP infrastructure, to any point within the
worldwide packet network. This solution allows the ILECs to both generate
incremental revenue from existing customers, and to gain new market share by
converting PBX users. Furthermore, this is a defensive move for the ILECs, who
would like to prevent full VoIP solutions from competitive local exchange
carriers (CLECs) from gaining hold. ILECs are projected to spend $102 million in
2001, growing to $1.8 billion in 2004, on IP Centrex equipment.

      We believe that IP Centrex will increase the market size of Centrex from
26 million lines in the U.S. today to probably over 300 million lines, most of
which will come from use of Centrex within the U.S. Existing small/medium size
businesses can now include the telecommuter and small office/home office
employees as part of a Centrex group. Medium/large size businesses can now
outsource their phone switching (PBX) business to the LECs because of the global
reach of Centrex. This is desirable for both the customer and the local exchange
carrier, as the average age of PBXs in the market is 10-15 years old and the
cost for the enterprise to support them is far greater than the incremental cost
of IP Centrex service from the LEC.

      IP Centrex will represent the first opportunity local exchange carriers
have to migrate customers off a traditional voice transmission infrastructure
onto a data transmission infrastructure without the risk of losing the voice
traffic and revenue to an alternative provider. Initially, the data transmission
infrastructure is being built only on the access side from Consumer Premises to
Central Office (packet access with circuit transport); however, the local
exchange carriers use our gateway solutions to incrementally evolve to a "packet
access with packet transport" without impacting the customer premise
environment. The customers are locked in to the local exchange carriers' service
because the Centrex is overlaid on top of the packet access infrastructure.
Additionally, these IP Centrex solutions provides RBOCs with an initial
opportunity to reach out of their footprint (long distance) with a voice access
service without violating long distance regulations. IP Centrex takes advantage
of all the existing back office systems (billing, provisioning, and OA&M) used
today for the Class 5 infrastructure, because it is essentially a virtual PBX
service that has proxy Class 5 functionality.

QOS MANAGED ROUTER SERVICES

      ISPs are continuing the deployment of broadband services to enterprises
and residences. Voice and data are beginning to converge, and the strongest
application of broadband deployments will become enhanced voice services.
Therefore, ISPs must choose equipment to deploy that will be compatible with
converged voice services. In order to provide viable solutions, equipment must
be designed with quality of service and flexible management features. CPE
equipment managed by service providers will grow to 25% of all such equipment by
2005, which makes advanced management features important to the ISP's. It is
reported that service providers spent approximately $440 million on such
equipment in 2000, and this amount is expected to grow to $2.4 billion in 2002.



                                       5
<PAGE>



INTERNET OFFLOAD AND TANDEM BYPASS

      Internet Offload is an application for media gateways that relieves
congestion in all switches located upstream of the Class 5 switch, including
tandem and toll switches, caused by the glut of dial-up modem traffic that is
swamping the existing circuit-switching equipment in today's public switched
telephone network ("PSTN"). The gateway identifies modem traffic and directs it
to the packet-switched network, bypassing traditional voice switches. Internet
Offload and Tandem Bypass solutions will serve as the near-term catalyst for
carriers who need to upgrade the reportedly $350 billion worth of equipment
housed in the existing public switched network.

3G WIRELESS MIGRATION

      Current 2G wireless solutions are mainly circuit based, with limited
packet data capabilities. 3G UMTS infrastructures will replace this with packet
transport of both voice and data directly to the endpoint wireless device. Voice
over packet solutions can begin to migrate the existing networks towards new
infrastructures. These solutions are expected to bring together multiple
protocols including IP, ATM, and X.25, with voice transport. Wireless providers
will be spending $111 million just on VoIP solutions in 2001, with the market
size growing to $6.5 billion by 2006.

PRODUCTS

      We currently offer four types of networking products:

   o  Quality of Service Management Routers - GT and GTX
   o  IP Centrex Voice Gateways - 2200 Network Exchange Series
   o  Bulk Voice Gateways - 3000 Series and 6000 Series
   o  3G Migration Backbone Switches - 2500 Network Exchange Series

QUALITY OF SERVICE MANAGEMENT ROUTERS

      Internet Service Providers that only provide the most basic level of
connectivity will lose market share to competitors who are beginning to deploy
converged, managed, equipment to the customer premises. As the market has become
mature, and routers a low cost commodity, the market has begun to re-segment
itself along lines of value-added capabilities. The near monopoly position held
by Cisco does not lend itself well to innovation of their bread-and-butter,
simple routers. The deployment of such services requires a new generation of
routers and integrated access devices. Fortunately, Nx Networks, through the
strategic merger with Proteon/OpenROUTE, possesses one of the only full-featured
router intellectual property bases in the industry. Nx Networks has decided to
respond to the new market trends by providing routers and integrated access
devices with the capabilities needed by Tier 1 and next generation ISPs, to
deploy value added managed services to their enterprise customers.

      The GT 60 and GT 70 series routers include the rich array of security
options, pure performance, simple installation and ease of use. Nx Networks has
combined multi-protocol routing, an integrated firewall, Virtual Private Network
(VPN) tunnel server and software encryption capabilities into a cost-effective,
easily managed solution backed by a lifetime warranty. The GT 60 offers one
Ethernet connection and one Serial WAN connection. The GT 70 offers the
performance, routing capabilities and security features of the GT 60 with one
Ethernet connection and one ISDN connection.

      Our solutions make the Internet a more cost-effective, secure and
efficient place to do business. The GT 90 and GT 900 series routers do just that
with Internet Service Providers (ISPs) and mid-size companies. Our
standards-based design assures interoperability in any network. This
interoperability is combined with a rich array of VPN security features,
dual-Ethernet connections, a built-in power supply and the proven reliability
and performance.

IP CENTREX VOICE GATEWAYS AND BULK VOICE GATEWAYS

      Our solutions allow the extension of Centrex services from traditional
Class 5 switches across geographical boundaries to generate new revenue, protect
current market share, and increase customer satisfaction. ILECs, having spent


                                       6
<PAGE>

billions on the Class 5 switch infrastructure, can now utilize our next
generation solutions to provide Centrex services over an IP packet
infrastructure.

      Traditionally, Centrex has been available only in a limited distance from
Class 5 switch, making it less attractive than traditional PBX installations.
With IP Centrex, Small and Medium Enterprises (SME) will be able to convert from
PBX utilization to Centrex capabilities at lower installation and maintenance
cost, and thus allow the ILEC to provide enhanced features and world-class
service and support. SMEs will no longer need in-house support of PBX systems.

      NX2201 MEDIA GATEWAY. The Nx2201 media gateways provide extremely high
efficient voice and fax telephony with low latency over Frame Relay and IP
backbone networks. The compact 2U high platform delivers up to 30 digital or 4
analog voice channels per gateway with award winning toll quality at low channel
prices. This platform is used in small to medium sized customer premises to
enable the convergence of the legacy circuit switched voice world with the data
world.

      NX2210 AND NX2214 MEDIA GATEWAY. Similar to Nx2201 Media Gateway, these
compact platforms deliver up to 180 digital or 32 analog voice channels per
gateway with award winning toll quality at low channel prices. The platform also
provides high resiliency through the use of dual hot swap supplies and a
solid-state flash disk.

      NX6000 MEDIA GATEWAY. The Nx6000 media gateways provide highly efficient
voice, fax, and modem IP telephony with low latency over IP and ATM backbone
networks. The compact 2U high platform delivers up to 480 digital voice channels
per gateway with award winning toll quality and the lowest per channel prices
(as low as $160 list per channel) to date. This platform is used in small
Central Offices and large customer premises to enable the convergence of the
legacy circuit switched voice world with the new age IP data world.

      NX3000 MEDIA GATEWAY. The Nx3000D media gateways provide highly efficient
voice, fax, and modem IP telephony with low latency over IP and ATM backbone
networks. T he compact 1U high platform delivers up to 60 digital voice channels
per gateway with award winning toll quality and the lowest per channel prices
(as low as $250 list per channel) to date. This platform is used in small to
medium sized customer premises where PBXs are present to enable the convergence
of the legacy circuit switched voice world with the new age IP data world.

3G MIGRATION BACKBONE SWITCHES

      NX NETWORK EXCHANGE 2500. With our end-to-end wide area networking
technologies we are offering and building solutions for wireless network
infrastructure providers like GSM. As of today more than 30 operators are using
our Multi-Service switching platforms for OMN infrastructures. Our products have
been in place for over five years on networks used to carry highly
mission-critical `Billing and Maintenance' information. As the only wide area
device supporting X.25, Frame Relay and ATM switching on the same unit, the
Network Exchange 2500 provides unique benefits for the successful operation of
OMN's.

      For GSM networks, the Network Exchange 2500 offers operators an easy
migration path to GPRS, by supporting interfaces to Frame Relay. Operators do
not have to consider the technical challenges of building a Frame Relay network
infrastructure. For the backbone, the Network Exchange 2500 supports ATM, giving
a core up-link within the network to the higher speed ATM networks. Since both
X.25 and frame relay can ride across the ATM backbone, operators can integrate
all three protocols into one platform, providing them an advantage over
competitors.

      NETWORK EXCHANGE SERIES 2500. Nx Networks' Network Exchange 2500 series is
a family of high-performance, multi-service switching platforms that combines
ATM, Frame Relay, X.25, TDM and ISDN for data, voice and image applications.
Functioning as either an enterprise backbone or a carrier edge switch, the 2500
series provides cost-effective bandwidth management of public, private and
hybrid networks, with extensive network management and diagnostic capabilities.

   o  Multi-service-ATM, Frame Relay, X.25, TDM and ISDN
   o  Dynamic bandwidth allocation for highest efficiency


                                       7
<PAGE>

   o  Exceptional scalability to 2,400 software-defined ports
   o  Broad range of port speeds - from 600 bps to 45 Mbps
   o  Fully redundant processors, interfaces and power for maximum network
      availability
   o  Superior distributed management and diagnostics over public, private or
      hybrid networks

NX NETWORKS NETWORK MANAGEMENT SYSTEM (NMS)

      Each of the products listed above is managed by our 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 simple network management protocol ("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. We
supply network management software for operation with Windows 95 and Sun Sparc
platforms.

MARKETING AND SALES

      Our marketing and sales strategy includes:

   o  Leveraging our expertise in the Voice over Packet industry to gain a
      leading market share in IP Centrex solutions for RBOCs looking to migrate
      customers off a traditional voice transmission infrastructure onto a data
      transmission infrastructure without the risk of them losing the voice
      traffic and revenue to an alternative provider

   o  Leveraging our position in the Managed Router Services sector by providing
      an attractive alternative solution to the Cisco's CPE Routers (or become a
      second source vendor to enterprises who have an existing deployment of
      Cisco Routers)

   o  Realigning our sales organization from a geographic focus to a
      carrier-centered sales effort and increase marketing focus on Carriers
      (E.G,. Verizon) and Tier 1 ISPs (E.G., UUNet)

CUSTOMER SUPPORT AND SERVICE

      A significant element of our strategy has been to provide service, repair
and technical support for our customers throughout the world. A substantial
portion of its service and support activity relates to software and network
configuration and is provided by 24-hours per day, 7-days per week telephone
support through the Nx Networks Technical Assistance Center ("TAC"). We design
our products to allow the TAC to be online with any Nx Networks' network in the
world to diagnose problems and to respond with solutions. In addition, our
hardware systems are designed to facilitate replacement of failed boards. In
many cases, our customers 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 its international distributors.

      Our personnel and third party providers perform most domestic hardware
maintenance and installation. For customers outside the United States, these
services are generally provided by our international Value Added Resellers
("VARs"). We typically offer our customers a hardware warranty ranging from 90
days to one year and offer an optional annually renewable hardware maintenance
and software support contract with the network.

      We offer support contracts to our customers with optional levels of
support. Each level of support is individually priced. In addition, we provide
technical consulting, professional services and training both to end-users and
to distributors. Many of our customers currently have support and maintenance
contracts with us. Customer service as a percent of revenue was 28% in 2000, 22%
in 1999 and 31% in 1998.



                                       8
<PAGE>

RESEARCH AND DEVELOPMENT

      We believe our future success depends on our ability to continue to
enhance our products to improve performance and functionality and to develop new
products that address emerging networking market niches. Research and
development as a percent of revenue was 61%, 23% and 22% for the years ended
December 31, 2000, 1999 and 1998, respectively.

MANUFACTURING

      Our manufacturing operations are a combination of system level integration
and testing, and full turnkey. We have strategic relationships with The SMT
Centre located in Charlotte, North Carolina ("SMTC"), and U.S. Assemblies, New
England, located in Taunton, Massachusetts ("USANE").

      Effective October 1, 1999, we entered into an agreement with SMTC to
outsource all assembly, customer configuration and testing for our network
exchange products. SMTC is a contract manufacturer with headquarters in Ontario,
Canada, and multiple manufacturing and engineering facilities in the United
States, Mexico, Canada and Europe. SMTC offers a full range of valued-added
services, including product design, procurement, prototyping, assembly,
interconnect, test, final system build comprehensive web-based supply chain
management, packaging, global distribution, and after-sales support. Prior to
2000, SMTC only produced sub-assemblies for us, but under the new agreement they
provide full turnkey services to manufacture, test and ship final products to
our customers.

      USANE manufactures printed board assemblies for certain of our router
products as well as providing a higher level of product assembly for others.
Final configuration and testing of all router products is conducted at our
manufacturing location in Westborough, Massachusetts.

      Both SMTC and USANE maintain a number of manufacturing facilities
worldwide. Accordingly, we believe that in the event of an interruption in
manufacturing at any of their facilities that we use, we will be able to shift
our production needs to an unaffected facility and continue to meet expected
demand. Also, we believe that if circumstances arose that resulted in the
inability of either SMTC or USANE to provide products to us, then other
manufacturers could be retained promptly to meet our expected demand.

      During early 2000, we authorized SMTC to purchase a substantial amount of
parts, materials and long lead-time items in anticipation of a significant
increase in product sales during the year. Our sales did not reach the levels we
expected, and we have not utilized a substantial amount of the raw materials.
Accordingly, we have a payment obligation of approximately $6.4 million to SMTC
to pay for the cost of these materials. In January 2001, we negotiated a payment
schedule with SMTC and delivered an unsecured promissory note to them evidencing
our payment obligation. Until we have repaid SMTC the amount due to them, they
are requiring us to pay in advance for all fabrication costs. If we do not
adhere to the payment schedule or if we do not pay fabrication costs in advance,
SMTC has informed us they will not ship any products on our behalf. We must
raise additional capital to maintain this payment schedule and pay the
fabrication costs. If we are unable to raise sufficient capital to adhere to the
schedule and the manufacturer ceases to ship products on our behalf, then a
material and adverse result to our revenues could occur.

COMPETITION

      We encounter substantial competition in the marketing of our products and
many of our competitors have greater financial, marketing and technical
resources than we do. Important competitive factors in our markets are
established customer base, product performance and features, service and
support, as well as price. We believe that we compete favorably with respect to
these factors. However, there can be no assurance that our products will compete
successfully with competitors' current or future products, or that aggressive
pricing will not adversely impact our profitability.



                                       9
<PAGE>

PROPRIETARY RIGHTS

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

      We believe that due to the rapid pace of technological change in the
networking industry, patent and copyright protection, while important, are less
significant to our competitive position than factors such as the knowledge,
ability and experience of our personnel, new product development, market
recognition, and ongoing product maintenance and support.

      We believe that our 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. In June 2000
Cabletron Systems, Inc. asserted various of our products infringe upon their
patents. This matter is discussed below under the caption "Litigation." To
protect our intellectual property rights in the "voice over" market space, the
prime patents held by us in packetized compressed voice networking have been
brought to the attention of both the voice over Internet protocol and frame
relay forum organizations. We also use various licensed products of other
companies in certain products.

EMPLOYEES

      We had 181 employees at December 31, 2000. None of our employees are
represented by collective bargaining agreements. We have never experienced any
work stoppage. We believe that our employee relations are satisfactory.

ITEM 2.  PROPERTIES

      Our headquarters facility consists of approximately 56,000 square feet
located in Herndon, Virginia. This facility is also utilized for engineering,
customer service, testing and sales functions. The Herndon premises are occupied
under a lease agreement expiring April 30, 2009. The lease contains a financial
covenant requiring us to make timely rental payments with no forbearance period
if our net tangible assets are less than $7 million. We currently do not have
net tangible assets of $7.0 million, therefore we are subject to immediate
eviction if a monthly rental payment is late. In connection with cost savings
initiatives, we subleased approximately 27,500 square feet of the Herndon
facility.

      Our Westborough, Massachusetts facility is approximately 44,000 square
feet. We use this facility for engineering, sales and final assemble of router
products. The Westborough premises are occupied under a lease expiring in April
2002.

      We lease approximately 11,977 square feet in St. Paul, Minnesota, which
was the former headquarters of AetherWorks. This facility primarily houses our
software engineers. This lease expires in March 31, 2002.

      During 2000, we entered into a lease for approximately 8,536 square feet
in Campbell, California. This office replaces a smaller facility that we
obtained in the AetherWorks acquisition. We use this facility primarily for
sales and engineering purposes. The lease for the Campbell office has a
seven-year term. In connection with our March 2001 reduction in personnel, we no
longer require the full amount of space provided by the Campbell, California
facility. We have initiated discussions with the landlord to return to them all
or a portion of the space, and we are also evaluating potential sublease
opportunities for the space.

      In addition to our primary United States facilities, we maintain a number
of smaller sales and support offices in the United States and abroad. We believe
our facilities are adequate for our current needs.



                                       10
<PAGE>

ITEM 3.  LITIGATION

      We became engaged in a number of legal matters during 2000.

      Cabletron Systems, Inc. filed a civil complaint against us on June 5,
2000, in the United States District Court for the District of Massachusetts.
Docket # 00-CV-11105 RWZ is assigned to this matter. In its complaint, Cabletron
alleges that our products infringe various Cabletron patents, and Cabletron is
seeking monetary damages from us. We have filed an answer denying the claims as
specifying certain counter claims. We believe we have meritorious defenses in
this litigation and we intend to vigorously defend ourselves.

      In November 2000 we were served with complaints in purported class action
proceedings captioned TRACY REESE AND CHRISTINE JOYCE V. BRYAN HOLLEY, STEVEN T.
FRANCESCO AND NX NETWORKS, INC., Civil Action No. 00-CV-11850-JLT and MARC
JACOBSEN V. BRYAN HOLLEY, STEVEN T. FRANCESCO AND NX NETWORKS, INC., Civil
Action No. 00-CV-11999-JLT. Each complaint was originally filed September 2000
in the United States District Court for the District of Massachusetts. The
complaints allege violation of the federal securities laws in connection with
statements and disclosures made between December 8, 1999 and April 24, 2000. The
complaints seek unspecified damages. We believe the allegations in the
complaints are without merit, and we intend to vigorously defend ourselves in
this litigation. We have notified our insurance carrier regarding the claims.

      In November 2000, we were served with a complaint in a purported class
action proceeding captioned ROY WERBOWSKI V. NX NETWORKS, INC., STEVEN FRANCESCO
AND PETER KENDRICK, Civil Case No. 00-1967-A. The complaint was originally filed
in November 2000 in the United States District Court, Eastern District of
Virginia. The complaint alleges that between July 27 and November 2, 2000 we
breached securities laws in connection with the circumstances that led us to
restate our financial statements for the quarter ended June 30, 2000. The
complaint seeks unspecified damages. We believe we have meritorious defenses in
this litigation, and we intend to vigorously defend ourselves. We have notified
our insurance carrier regarding the claims.

      In January, 2001 we were served with a complaint captioned MANAGEMENT
INFORMATION CONSULTING, INC. ("MIC") V. NX NETWORKS, INC. This action was filed
in the Alexandria Division Court for the Commonwealth of Virginia, and the case
is assigned No. CL01-45. In the complaint, MIC claims entitlement to
approximately $150,000 in payment for web site development services performed by
it. We dispute that this amount is due, based upon the quality and quantity of
services provided by MIC. We have filed an answer denying the claims and we
intend to vigorously defend ourselves in this litigation.

      An action captioned K.S. TELECOM, INC. ("K.S. TELECOM") V. NX NETWORKS,
INC. was commenced in July, 2000 in the Southern District of New York, and it is
assigned case number 00 Civ. 3375 (KMW). In this action, we are named as a third
party defendant by K.S. Telecom under a number of legal theories in an action
brought against K.S. Telecom by Netrix Leasing, LLC, an unrelated entity. Netrix
Leasing LLC had purchased equipment from us and leased it to K.S. Telecom.
Netrix Leasing alleges that K.S. Telecom subsequently defaulted on the lease
payment obligations. In its third-party complaint, K.S. Telecom alleges that it
breached its lease because of our failure to properly prepare, install and
repair the equipment. In its complaint, K.S. Telecom seeks damages against us
equal to approximately $177,000 plus any amounts they are found to owe to Netrix
Leasing. Netrix Leasing is seeking approximately $550,000 pursuant to its
original complaint against K.S. Telecom, representing lease amounts past due of
approximately $78,000 and acceleration of future payments under the lease of
approximately $472,000. We responded to the third-party complaint of K.S.
Telecom by denying all of their allegations and we sought dismissal of the
claims in a summary judgment motion. On March 7, 2001, the court ruled that
certain of the claims against us must be dismissed, but that other claims may
proceed. Specifically, the court ruled that K.S. Telecom could proceed to try to
prove its allegation that it is a third party beneficiary of our agreements with
Netrix Leasing and that we breached obligations to K.S. Telecom under those
agreements. We believe we have meritorious defenses to the claims of K.S.
Telecom, and we intend to vigorously defend this action.

      In November 2000 we were served with a complaint captioned SIGNAL
COMMUNICATIONS, INC. V. NX NETWORKS, INC., Civil Case No. 00-1867-1. The case
was filed in the United States District Court for the Eastern District of


                                       11
<PAGE>

Virginia. The complaint demanded payment of approximately $600,000 of
advertising fees Signal advanced on our behalf between July 2000, and October
2000. We did incur these fees, and we agreed to a payment schedule. We missed
the final payment, and we were notified by Signal that they will seek a judgment
against us for the remaining amount due. We expect to pay this amount in the
near future.

      In January 2001, we were informed that a former employee in France has
obtained a trial court ruling in France related to his termination in 1997. The
amount of the award to him is approximately 800,000 French Francs, and using an
exchange rate into U.S. dollars of 7:1, this is approximately $100,000.
Approximately $25,000 of the amount represents payment of a disputed bonus, and
approximately $75,000 represents an award of punitive damages. We are appealing
this ruling because we believe the award of punitive damages is unjustified.

      In addition to the above matters, we are periodically involved in disputes
arising from normal business activities. In our opinion, resolution of these
matters will not have a material adverse effect upon our financial condition or
future operating results, and adequate provision for any potential losses have
been made in our financial statements.

      During the three months ended December 31, 2000 we also resolved certain
legal claims asserted against us.

      On May 11, 2000, Advent Fund L.L.C. filed a civil complaint against us in
the United States District Court for the Eastern District of Virginia,
Alexandria Division. Docket # 00-781-A was assigned to this matter. In its
complaint, Advent Fund alleged that we breached a contractual obligation to
issue shares to Advent Fund, and Advent Fund sought specific performance and
monetary damages. We answered the complaint by denying the allegations contained
therein. Subsequently, we filed a motion for summary judgment, which was granted
on November 13, 2000. Advent Fund L.L.C. did not appeal the ruling, and the
action was dismissed.

      In January 2001, we were served with a complaint captioned CARLTON
FINANCIAL CORPORATION V. NX NETWORKS, INC AND CABLETRON SYSTEMS, INC. The case
was filed in the State of Minnesota, County of Hennepin, Fourth Judicial
District. The complaint alleges that we breached an equipment lease, and that
Carlton was entitled to approximately $490,000, representing acceleration of all
amounts that will be payable during the approximately one-year period remaining
under the lease. We paid the amounts claimed to be due by Carlton Financial, and
the lease was reinstated. Accordingly, the lawsuit was dismissed.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

      We did not submit any matters to a vote of security holders during the
fourth quarter of 2000.



                                       12
<PAGE>




PART II

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

MARKET INFORMATION FOR COMMON STOCK

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

                                             HIGH        LOW

           1999

           First Quarter...............   $ 3.1875     $ 1.75
           Second Quarter..............   $ 3.9687     $ 2.3125
           Third Quarter...............   $ 4.1875     $ 2.50
           Fourth Quarter..............   $17.0625     $ 2.50

           2000


           First Quarter...............   $32.00       $14.375
           Second Quarter..............   $20.00       $ 6.3125
           Third Quarter...............   $11.9375     $ 4.6875
           Fourth Quarter..............   $ 6.75       $ 0.50


HOLDERS

      At March 31, 2001, there were approximately 586 holders of record of our
common stock and an estimated 22,500 total holders.

DIVIDENDS

      We have never paid any cash dividends on our common stock and we do not
anticipate paying any cash dividends in the foreseeable future on our common
stock.




                                       13
<PAGE>






ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated financial data presented have been derived from our
consolidated financial statements.

<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31,
                                                      --------------------------------------------------------
                                                        2000        1999        1998        1997        1996
                                                      -------      ------      -------     -------     -------
                                                                 (in thousands, except per share data)
<S>                                                 <C>          <C>         <C>         <C>        <C>
   Statement of operations data:
   Total revenues................................    $   27,215   $ 31,245    $ 31,482    $ 33,087    $ 43,635
   Gross profit .................................         4,615     14,710      15,388      14,647      21,572
   Operating expenses:
         Sales and marketing ....................      (13,382)     (6,468)     (9,292)    (10,120)    (11,632)
         Research and development ...............      (16,696)     (7,043)     (6,771)     (8,323)    (11,079)
         General and administrative..............      (10,705)     (4,937)     (4,059)     (3,384)     (3,862)
         In-process research and
             development.........................      (30,800)          --          --          --          --
         Impairment of acquired
             intangibles and goodwill............      (64,500)          --          --          --          --
         Amortization of acquired
             intangibles and goodwill............      (27,890)        (636)       (265)       (618)       (404)
         Stock compensation .....................      (18,631)     (18,778)          --          --       (900)
         Bad debt expense........................       (3,239)        (540)      (1,489)       (100)         --
         Restructuring charge ...................           --         (900)          --       (875)          --
   Loss from operations..........................      (181,228)    (24,592)     (6,488)     (8,773)     (6,305)
   Net loss attributable to common
        shareholders.............................      (180,669)    (26,169)     (6,517)     (8,577)     (5,968)
   Basic and diluted net loss per share..........         (5.31)      (2.17)      (0.60)     (0. 90)     (0. 63)


   Balance sheet data (end of period):
      Working capital (deficit) ....................     (7,598)      8,020       7,600      10,271      17,782
      Total assets .................................     45,255      95,253      20,241      24,024      34,493
      Total long-term liabilities ..................        735         352        --            97         614
      Stockholders' equity..........................     21,955      82,459      12,117      16,480      24,847
</TABLE>



                                       14
<PAGE>




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

RECENT DEVELOPMENTS

FINANCING

      In February 2000, we filed a registration statement on Form S-3 relating
to a public offering by us of 1.0 million shares of our common stock. We
received net proceeds of $25.1 million from this offering. We used $8.0 million
of the proceeds to pay an obligation of AetherWorks Corporation ("AetherWorks"),
which was a condition to our acquiring AetherWorks. The remaining proceeds were
used for general corporate and working capital purposes.

      In February 2000, we terminated our line of credit agreement with Coast
Business Credit. From time to time we have held discussions with various
financial institutions regarding a new line of credit, however, we do not expect
to obtain a new line of credit until our revenues have improved substantially.

      On December 29, 2000 we raised $2.5 million through a private placement of
preferred stock and warrants. The preferred stock bears a dividend of 8% per
annum, which we can elect to pay in cash or shares of common stock, and the
preferred stock has a liquidation preference equal to the purchase price per
share plus the amount of any accrued but unpaid dividends. The preferred stock
is convertible into 3,333,330 shares of common stock at a conversion price of
$0.75 per share. The warrants are exercisable for 666,667 shares of common stock
at an exercise price of $0.90 per share.

      On January 17, 2001 we raised $2.5 million through a private placement of
preferred stock. The preferred stock bears a dividend of 8% per annum, which we
can elect to pay in cash or shares of common stock, and the preferred stock has
a liquidation preference equal to the purchase price per share plus the amount
of any accrued but unpaid dividends. The preferred stock is convertible into
1,540,000 shares of common stock at a conversion price of $1.625 per share.

      On March 6, 2001 we raised $1.65 million through a private placement of
preferred stock and warrants. The preferred stock is convertible into 1,173,373
shares of common stock at a conversion price of $1.41 per share. The warrants
are exercisable for 234,676 shares of common stock at an exercise price of $2.11
per share.

      On March 28, 2001 we raised $2.0 million through a private placement of
common stock. We sold 2,207,018 shares of common stock at $0.9062 per share, the
last reported sales price on the day before the financing closed.

NEW CHIEF EXECUTIVE OFFICER

      On November 10, 2000, Steven Francesco resigned as our chief executive
officer. Mr. Francesco had been chief executive officer since April 1999, and
was responsible for the merger with OpenROUTE and the acquisition of
AetherWorks. Mr. Francesco continued to serve as Chairman of the Board of
Directors until February, 2001, when John DuBois succeeded him in that position.

      On December 28, 2000, John DuBois entered into an employment to become our
Chief Executive Officer effective in January 2001. In connection with accepting
the position, Mr. DuBois entered into a three-year employment agreement with us
and he also became a member of our Board of Directors.

AETHERWORKS ACQUISITION

      On March 16, 2000 we consummated the acquisition of AetherWorks
Corporation, a provider of softswitch technology for the telecommunications
industry. At the time we acquired AetherWorks, we issued 2,301,436 shares of our
common stock to the former AetherWorks stockholders, as well as options and
warrants to acquire an additional 867,687 shares. We also agreed that we would
issue additional shares to the AetherWorks stockholders, and the option and
warrant holders, if the closing price of our common stock did not equal at least
$22.50 per share during the 15 trading day period ended October 31, 2000.



                                       15
<PAGE>

      On December 29, 2000, we entered into a settlement agreement with the
former owners of AetherWorks Corporation related to the obligation to issue them
additional shares of common stock if the closing price of our common stock did
not equal at least $22.50 per share during the 15 trading day period ended
October 31, 2000. We agreed with the former AetherWorks owners that our stock
price did not meet the $22.50 threshold, but we disagreed with them regarding
the calculation of the adjustment shares. Pursuant to the settlement agreement,
we issued an additional 4,777,973 shares of common stock and an additional
1,192,551 options and warrants to acquire our common stock. We also adjusted the
exercise price for all of the options and warrants issued in the AetherWorks
transaction to $1.60 per share, except for 70,000 warrants which were re-priced
to $1.33 per share.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

      The Securities and Exchange Commission has commenced an investigation into
the matters surrounding our restatement of revenues for the quarter ended June
30, 2000. For the quarter ended June 30, 2000, we restated revenues from $10.4
million to $8.4 million for sales made to two of its value added resellers
(VARs). These sales were made to value added resellers ("VARs") whose payment to
Nx Networks was dependent upon payment from their customers.

OTHER EVENTS

      At our June 22, 2000 annual meeting of stockholders, the change of our
name from Netrix Corporation to Nx Networks was approved. We then filed an
amendment to our certificate of incorporation to make the name change official.
At the annual meeting, stockholders also approved an increase in the number of
shares authorized for issuance under our 1999 Long Term Incentive Plan from
4.325 million shares to 7.325 million shares.

      On December 23, 2000, we re-priced the options for substantially all of
our employees and directors to $0.75 per share, the market price at the time of
re-pricing. This was done in order to retain our employees in light of the low
share price relative to the exercise price of almost all outstanding options.
Under applicable accounting rules, we will have to account for future variations
in the price of our common stock above $0.75 per share as compensation expense
until the re-priced options are either exercised, cancelled or expire.

At a special meeting of stockholders held on March 6, 2001, stockholders:

   o  approved an increase in our authorized number of common shares from 55
      million to 85 million;
   o  approved an amendment to our 1999 Long Term Incentive Plan to increase the
      number of shares authorized for issuance from 7.25 million to 11.25
      million;
   o  authorized us to issue shares of common stock exceeding 20% of our
      outstanding shares in private offerings to raise capital; and
   o  authorized us to issue the full number of shares we agreed to issue to the
      former owners of AetherWorks under our December 29, 2000 settlement
      agreement.

      In March 2001, we reduced our workforce by approximately 40 employees,
representing approximately 22% of our workforce. A portion of the positions were
eliminated for the purpose of reducing expenses and the remainder were
eliminated because they related to products and initiatives that are not part of
our business plans on a going-forward basis.

RESULTS OF OPERATIONS

      The results of operations for the year ended December 31, 2000, reflect a
12.9% decrease in revenues, a 36.7% increase in cost of revenues and a 636.9%
increase in the loss from operations over the results for the year ended
December 31, 1999. Our actual revenues and gross profit decreased in 2000. Our
2000 performance was adversely impacted by a number of factors including:

   o  A downturn in the capital market and the telecommunications industry that
      adversely impacted the demand for our products.



                                       16
<PAGE>

   o  Deployment of a substantially new sales force in 2000 that was ultimately
      not successful in maintaining historical customer relationships or
      penetrating new customer accounts.

   o  Delays in bringing our 3000 and 6000 series products to market.

   o  Integration problems associated with the OpenROUTE and AetherWorks
      acquisitions.

   o  Inventory purchases in excess of sales demand resulting in excess
      quantities and higher charges to cost of sales.

      Additionally, our operating loss was adversely impacted by the payroll and
overhead costs accruing to us as a result of the acquisitions that were not
offset by a corresponding increase in revenue. AetherWorks was a development
stage company when acquired with no historical revenue. Accordingly, this
acquisition resulted in additional general and administrative as well as
research and development expenses. We also recorded substantial charges related
to amortization and impairment of long-lived assets, in-process research and
development and stock compensation charges for the year ended December 31, 2000.

      We do not expect revenues to increase prior to the second quarter of 2001.
Improvements in future performance is dependent upon our ability to raise
financing to fund our revised business strategy. Our marketing and sales
strategy will focus upon:

   o  Leveraging our expertise in the Voice over Packet industry to gain a
      leading market share in IP Centrex solutions for RBOCs looking to migrate
      customers off a traditional voice transmission infrastructure onto a data
      transmission infrastructure without the risk of them losing the voice
      traffic and revenue to an alternative provider.

   o  Leveraging our position in the Managed Router Services sector by providing
      an attractive alternative solution to the Cisco's CPE Routers (or become a
      second source vendor to enterprises who have an existing deployment of
      Cisco Routers).

   o  Realigning our sales organization from a geographic focus to a
      carrier-centered sales effort and increase marketing focus on Carriers
      (E.G, Verizon) and Tier 1 ISPs (E.G., UUNet).

REVENUES

      Total revenues decreased $4.0 million or 12.9% to $27.2 million for the
year ended December 31, 2000 from $31.2 million for the year ended December 31,
1999. The decrease in total revenues for the year ended December 31, 2000 was
primarily a result of the decrease in product revenues, which were partially
offset by an increase in service revenues and sales of product acquired in the
OpenROUTE merger. Product revenues decreased $4.8 million or 19.5% to $19.7
million for the year ended December 31, 2000 from $24.5 million for the year
ended December 31, 1999. The decrease in product revenues for 2000 resulted from
decreased sales of the S10, S1000, and 2201 legacy product lines of $8.5 million
and decrease in sales of 2500 series product line of $0.9 million offset by an
increase in sales of $4.6 million of router product line.

      Pro forma revenues for the year ended December 31, 1999 were $43.6 million
assuming the OpenROUTE merger had occurred on January 1, 1999. The decrease in
revenues in 2000 from pro forma revenues is approximately $16.4 million or
37.6%.

      Total revenues decreased $0.2 million or 0.75% to $31.2 million for the
year ended December 31, 1999 from $31.5 million for the year ended December 31,
1998. Product revenues increased $2.7 million or 12.2% to $24.5 million for the
year ended December 31, 1999 from $21.8 million for the year ended December 31,
1998. The increase in product revenues was a result of the increase in sales of
the new 2200 series product line. The trend of declining sales of older telcom
products and increasing sales of Nx Networks Exchange products is the result of
technological advances that offer improved performance and greater functionality
than the current generation of products.



                                       17
<PAGE>

      Service revenues increased $0.7 million or 11.0% to $7.5 million for the
year ended December 31, 2000 from $6.7 million for the year ended December 31,
1999. For the year ended December 31, 1999 service revenue decreased $2.9
million or 30.1% to $6.7 million from $9.6 million for the year ended December
31, 1998. For the year ended December 31, 1999, $0.7 million of the service
revenue decline can be accounted for by the loss of two major customers through
mergers, $1.0 million through the loss of non-renewal of legacy telcom product
service and $0.4 million through networks that were decommissioned. Service
revenues are primarily the result of the renewal of existing maintenance
contracts as well as the negotiation of new equipment service contracts.

COST OF REVENUES

      Total cost of revenues increased $6.1 million or 36.7% to $22.6 million
for the year ended December 31, 2000 from $16.5 million for the year ended
December 31, 1999. Product cost of revenues increased $5.9 million or 50.6% to
$17.7 million for the year ended December 31, 2000 from $11.8 million for the
year ended December 31, 1999. The increase in cost of revenue is substantially a
result of increased reserves for excess and obsolete inventory of $3.3 million
primarily related to the S1000, 2201 and 2500 series product lines.

      Total cost of revenues increased $0.4 million or 2.7% to $16.5 million for
the year ended December 31, 1999 from $16.1 million for the year ended December
31, 1998. Product cost of revenues increased $0.8 million or 7% to $11.8 million
for the year ended December 31, 1999 from $10.9 million for the year ended
December 31, 1998. The increase in cost of revenues for the year ended December
31, 1999 was a result of increased product revenues.

      Service cost of revenues increased $0.1 million or 2.4% to $4.9 million
for the year ended December 31, 2000 from $4.8 million for the year ended
December 31, 1999 and decreased $0.4 million or 7.3% to $4.8 million for the
year ended December 31, 1999 from $5.2 million for the year ended December 31,
1998.

GROSS PROFIT

      Total gross profit decreased $10.1 million or 68.6% to $4.6 million for
the year ended December 31, 2000 from $14.7 million for the year ended December
31, 1999. Total gross profit as a percentage of total revenue decreased to 17%
for the year ended December 31, 2000 compared to 47.1% for the year ended
December 31, 1999. Product gross profit decreased $10.7 million or 84.1% to $2.0
for the year ended December 31, 2000 from $12.7 million for the year ended
December 31, 1999. Product gross profit as a percentage of product sales
decreased by 41.8% to 10.2% for the year ended December 31, 2000 compared to
52.0% for the year ended December 31, 1999. The decrease in both total and
product gross profit for the year ended December 31, 2000 is a result of lower
selling prices, and increases in reserves for excess and obsolete inventory.

      Total gross profit decreased $0.7 million or 4.4% to $14.7 million for the
year ended December 31, 1999 from $15.4 million for the year ended December 31,
1998. Total gross profit as a percentage of total revenue decreased to 47.1% for
the year ended December 31, 1999 compared to 48.9% for the year ended December
31, 1998. Product gross profit increased $1.8 million or 16.9% to $12.7 for the
year ended December 31, 1999 from $10.9 million for the year ended December 31,
1998. The product gross profit increase is a result of outsourcing the
manufacturing process. Product gross profit as a percentage of product sales
increased by 2.0% to 52.0% for the year ended December 31, 1999 compared to
50.0% for the year ended December 31, 1998. The increase in product gross profit
for the year ended December 31, 1999 is a result of higher margin product mix.

      Service gross profit increased $0.6 million or 32.1% to $2.6 million for
the year ended December 31, 2000 from $2.0 million for the year ended December
31, 1999. The net increase in service gross profit for the year ended December
31, 2000 was the result of an increase in personnel due to the OpenROUTE merger
in December 1999. Service gross profit decreased $2.5 million or 56.2% to $2.0
million for the year ended December 31, 1999 from $4.5 million for the year
ended December 31, 1998. Service gross profit as a percentage of service revenue
was 29.1% for the year ended December 31, 1999 compared to 46.5% for the year
ended December 31, 1998, the decrease of 17.4% was primarily the result of a
decrease in service revenue of $2.9 million while costs decreased by only $0.4
million or 7.3%.



                                       18
<PAGE>

SALES AND MARKETING

      Sales and marketing expenses increased $6.9 million or 106.9% to $13.4
million for the year ended December 31, 2000 from $6.5 million for the year
ended December 31, 1999. The increase was a combined result of increased
advertising expense of $1.0 million, increased trade show and other promotion
expense $1.6 million, increased salaries and associated payroll tax expense of
$4.0 million, and increased travel and entertainment and other expenses of $0.3
million. The overall increases represent aggressive participation in trade shows
and the production of marketing materials associated with the new Nx Networks
logo, name and products.

      Sales and marketing expenses decreased $2.8 million or 30.4% to $6.5
million for the year ended December 31, 1999 from $9.3 million for the year
ended December 31, 1998. The decrease in sales and marketing expense during the
year ended December 31, 1999 is a combined result of a decreased marketing
materials expense of $0.3 million, decreased salaries and associated payroll tax
expense of $1.0 million, decreased travel and entertainment expenses of $0.5
million, decreased rent expense of $0.2 million and decreased general office
expense of $0.7 million.

RESEARCH AND DEVELOPMENT

      Research and development expenses increased $9.7 million or 137.1% to
$16.7 million for the year ended December 31, 2000 from $7.0 million for the
year ended December 31, 1999. The increase was primarily a result of the
acquisitions of OpenROUTE and AetherWorks which resulted in increased salaries
and associated payroll tax expense of $3.6 million and $0.5 million of rent
expense. During the year, the Company also increased its purchases of materials
for new product development by $3.0 million and consulting services by $1.0
million. All of the Company's research and development costs are expensed to
operations as incurred during the year.

      Research and development expenses increased $0.2 million or 4.0% to $7.0
million for the year ended December 31, 1999 from $6.8 million for the year
ended December 31, 1998. The increase in research and development cost of $0.2
million for the year ended December 31, 1999 is primarily a result of increased
engineering consulting services costs related to product enhancement and new
product development.

GENERAL AND ADMINISTRATIVE

      General and administrative expenses increased $5.8 million or 116.8% to
$10.7 million for the year ended December 31, 2000 from $4.9 million for the
year ended December 31, 1999. The increase is a result of an increased salaries
and related payroll tax expense of $0.9 million, accounting and legal expenses
of $2.2 million, executive recruiting expense of $0.3 million, travel and
entertainment expense of $0.3 million, depreciation expense of $0.2 million,
insurance expense of $0.3 million and other office expense of $0.4 million. The
majority of the increases are directly associated with a period of duplication
of functions of the newly merged companies. We have reorganized our general and
administrative functions to eliminate these duplicated functions. In addition,
as of December 31, 2000, we accrued $1.1 million of severance and termination
costs for a former executive.

      General and administrative expenses increased $0.8 million or 21.6% to
$4.9 million for the year ended December 31, 1999 from $4.1 million for the year
ended December 31, 1998. The increase is a result of an additional accounting
and legal expenses of $0.4 million associated with the repositioning of
operations and the re-negotiation of the line of credit and consulting fees and
software upgrade costs of $0.4 million associated with Y2K compliance of our
accounting system.

IN-PROCESS RESEARCH AND DEVELOPMENT

       For the year ended December 31, 2000, we incurred a one-time charge of
$30.8 million associated with the acquisition of AetherWorks. We valued the
in-process research and development (IPR&D) acquired in the acquisition at $30.8
million based upon an independent appraisal of the development project for which
technological feasibility had not been established and no alternative future
uses exist. This product is being developed specifically for and is intended to

                                       19
<PAGE>


have substantial incremental functionality, greatly improved speed and wider
range of interfaces than our then current technology.

      The value of the IPR&D project identified was determined by estimating the
future cash flows from the project, once commercially feasible, discounting the
net cash flows back to their present value and then applying a percentage of
completion to the calculated value. The percentage of completion for the project
was determined using milestones representing management's estimate of effort,
value added and degree of difficulty of the portion of the project completed as
of March 16, 2000, as compared to the remaining research and development to be
completed to bring the project to technical feasibility. The development process
was grouped into three phases with each phase containing between one and five
milestones. The three phases were: (i) researching the market requirements and
the engineering architecture and feasibility studies; (ii) design and
verification; and (iii) prototyping and testing the product (both internal and
customer testing). The AetherWorks project started in 1998. As of March 16,
2000, we estimated that the project was 75% complete.

      Subsequent to the acquisition of AetherWorks, unanticipated technological
and design changes caused delays in bringing the project to technological
feasibility. As of March 31, 2001, this project is approximately 95% complete
and we expect to achieve technological feasibility during the third quarter of
2001. During the second and third quarters of 2001, we anticipate an additional
$1 million in research and development costs related to this project.
Development of the technology is a substantial risk to us due to factors
including the remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other companies.

IMPAIRMENT OF LONG-LIVED ASSETS

      In the fourth quarter of 2000, after considering developments in the
capital markets and telecommunications industry, the downturn in our market
capitalization, our liquidity problems and the decrease in 2000 product sales,
we reviewed the carrying value of our long-lived assets. Our long-lived assets
are primarily goodwill and intangibles resulting from the acquisitions of
OpenROUTE in 1999 and AetherWorks in the first quarter of 2000. We determined
that these assets were impaired due to uncertainties in our sales forecasts
resulting from past performance, liquidity and current industry conditions. We
reviewed future undiscounted cash flows from OpenROUTE and AetherWorks acquired
product lines and technologies and determined the related long-lived assets to
be impaired. These assets with a combined carrying value of $92.8 million were
written down in the fourth quarter to $28.3 million, their estimated fair value
based upon discounted cash flows. As a result, we expect that our amortization
of goodwill and acquired intangible assets in 2001 will be approximately $2.3
million per quarter.

AMORTIZATION OF ACQUIRED INTANGIBLES

      For the year ended December 31, 2000 amortization expense increased $27.3
million to $27.9 million from $0.6 million for the year ended December 31, 1999.
The increase in amortization expense is associated with the goodwill generated
from the OpenROUTE acquisition in December 1999 and the AetherWorks acquisition
in March 2000.

STOCK COMPENSATION

      For the years ended December 31, 2000 and 1999, we incurred non-cash stock
compensation expenses of $18.6 million and $18.8 million, respectively. These
charges resulted from key employees employment contract provisions, stock option
grants, accelerated options upon a change in control, accelerated vesting of
terminated employees options, and options granted below fair market value.

      Based on the termination agreement with the former chief executive officer
of OpenROUTE, we issued the former executive 100,000 shares of common stock and
100,000 options to acquire common stock at $6.00 per share, resulting in stock
compensation expense of $4.7 million.

      In connection with the termination of certain employees during the years
ended December 31, 2000 and 1999, we vested stock options that would have
otherwise been forfeited, resulting in stock compensation expense in those years
of $1.5 million and $1.0 million, respectively.



                                       20
<PAGE>

      In connection with the termination of certain employees during the year
ended December 31, 2000, we extended the life of the stock options that would
have otherwise been forfeited, resulting in stock compensation expense of $0.2
million. For the year ended December 31, 1999, we did not extend any stock
options that would have otherwise been forfeited.

      In conjunction with the acquisition of AetherWorks, we issued 1.0 million
options with an exercise price of $6.81 to the former AetherWorks employees. We
recorded deferred compensation of $16.1 million for the difference between the
option exercise price and the fair market value of the common stock on the date
of grant. Compensation expense of $7.9 million was recorded for the year ended
December 31, 2000.

      During the years ended December 31, 2000 and 1999, the stock compensation
expense for options granted to employees and board members at below market value
(excluding the 1.0 million options at the former AetherWorks employees discussed
above), was $2.6 million and $1.4 million, respectively. At December 31, 2000,
the remaining deferred compensation expense related to these grants is $0.3
million.

      In connection with the termination of an executive during the year ended
December 31, 2000, we granted 500,000 stock options at an exercise price of
$3.00 per share, which vest over a two-year period and expire five years from
date of grant. The exercise price of 500,000 stock options was re-priced to
$1.00 per share. We recorded stock compensation of $0.2 million for the year
ended December 31, 2000.

      During the year ended December 31, 2000, in connection with general
consulting services provided by non-employees during the year, we issued options
to acquire 145,440 shares of common stock at an average exercise price of $3.51
per share. The fair value of the stock options was valued at $0.4 million, using
the Black-Scholes pricing model and is reflected in stock compensation expense
in the accompanying financial statements.

      During the year ended December 31, 2000, we established an advisory board
and upon joining the advisory board and attending meetings, the advisory board
members were granted a total of 135,000 stock options at an average exercise
price of $15.18 per share. These options vest over a six to twelve month period
and expire ten years from date of grant. The fair value of the stock options
recorded as stock compensation for the year ended December 31, 2000 was value at
$0.2 million, using the Black-Scholes pricing model.

      During the year ended December 31, 2000, in connection with legal services
provided during the year, we issued warrants to purchase 65,000 shares of common
stock at an exercise price of $12.43 per share. The fair market value of the
warrants was valued at $0.4 million, using the Black-Scholes pricing model and
were accounted for as stock compensation expense in the accompanying
consolidated statements of operations.

      During the year ended December 31, 2000, in connection with general
consulting services provided during the year, we issued warrants to purchase
510,000 shares of common stock at an average exercise price of $0.96 per share.
The warrants vested upon the completion of the consulting services, which
occurred in 2000. For the year ended December 31, 2000, the Company recorded
compensation expense of $0.6 million.

RESTRUCTURING CHARGE

      For the year ended December 31, 1999, we incurred a restructuring charge
of $0.9 million which included $0.8 million of accrued severance and benefit
costs associated with a reduction-in-force of 36 employees across all functional
areas of the company, and $0.1 million of accrued facility costs resulting from
consolidation of facilities and premature termination of various office leases.
We implemented the restructuring of operations to reduce and economize our work
force as part of an overall plan to return to profitability. All of these
accrued expenses were paid by December 31, 1999.

BAD DEBT EXPENSE



                                       21
<PAGE>

      Bad debt expense was $3.2 million for the year ended December 31, 2000,
compared to $0.5 million for the year ended December 31, 1999, and $1.5 million
for the year ended December 31, 1998. As a percentage of revenues, the provision
for bad debt were approximately 11.9% for the year ended December 31, 2000, 1.7%
for the year ended December 31, 1999, and 4.7% for the year ended December 31,
1998. The increase of $2.7 million in the 2000 bad debt expense was the result
of writing off aged accounts receivable that were previously deemed collectible
but which had continued to age beyond a period deemed reasonable for realization
and $1.4 million resulting from one customer filing bankruptcy.

INTEREST EXPENSE AND INTEREST INCOME

      Interest expense for the year ended December 31, 2000 decreased $147,000
or 37.7% to $243,000 as compared to interest expense of $390,000 for the year
ended December 31, 1999. Interest income for the year ended December 31, 2000
increased to $365,000 or 172.2% to $577,000 compared to interest expense of
$212,000 for the year ended December 31, 1999.

ACCOUNTS RECEIVABLE, NET

      Net receivable for the year ended December 31, 2000 decreased $8.1 million
or 83.5% to $1.6 million from $9.7 million for the year ended December 31, 1999.
The decrease in accounts receivable is a result of decreased sales and increased
bad debt reserve during 2000. For the year ended December 31, 1999 net accounts
receivable increased $2.2 million or 29.3% to $9.7 million from $7.5 million for
the year ended December 31, 1998. The increase in accounts receivable is
primarily a result of increased sales of $1.8 million during the fourth quarter
of 1999. As a percentage of total revenues, net accounts receivable for the year
ended December 31, 2000 was 5.9% compared to 31.0% for the year ended December
31, 1999 and 24% for the year ended December 31, 1998.




                                       22
<PAGE>





LIQUIDITY AND CAPITAL RESOURCES

      As of December 31, 2000, we had approximately $4.7 million in cash and
cash equivalents. Total current liabilities as of December 31, 2000 were
approximately $20.4 million and exceeded current assets by approximately $7.6
million. Since year-end, we have raised approximately $6.2 million in equity
financing. We will require additional financing by May 2001 to continue
operations. If financing are insufficient or unavailable or if we experience
shortfalls in anticipated revenues or increases in anticipated expenses, we
would further reduce headcount, defer vendor payments, sell operating assets
and/or seek protection under the bankruptcy code.

      We have a payment obligation of approximately $6.4 million to SMTC a
contract manufacturer of substantially of all our products. A majority of our
inventory is at SMTC's premises. In 2001, we negotiated a payment schedule with
SMTC and delivered an unsecured promissory note to them. The note requires
principal payments through December 2001 together with interest at an annual
rate of 12%. Until SMTC has been repaid, we are required to pay in advance for
all fabrication costs. If we do not adhere to the payment schedule, SMTC has
informed us that they will not ship any products on our behalf. If we are unable
to raise sufficient capital to adhere to the payment schedule and the
manufacturer ceases to ship products on our behalf, then a material and adverse
result to our revenues could occur.

      To meet our operating requirements for 2001, we will have to generate
additional equity or cash through other means, which may include the sale of
assets, including intellectual property and proprietary technology, the sale of
equity, additional borrowings, the sale of selected operations, or one or more
strategic partnerships. Although we believe we have the ability to generate
additional equity and 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. If we are unable to generate
additional equity and adequate cash, there will be a material and adverse effect
on our business and financial condition, to the extent that a sale, liquidation
or restructuring will be required, in whole or in part. We have implemented cost
control measures and we are continually evaluating expense levels to mitigate
our liquidity risk. Our return to profitability is also dependent on our ability
to improve our customer service, operational, financial and management
information systems, including our contract management, inventory management and
other systems.

      The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. In their report on our December 31, 2000 financial
statements, our independent public accountants expressed substantial doubt as to
our ability to continue as a going concern.

      For the year ended December 31, 2000, we used $21.2 million of cash in
operations compared to generating cash from operations of $1.0 million for the
year ended December 31, 1999. This decrease in cash from operations was due to
the Company's operating losses. Non-cash items consisting of depreciation and
amortization of $31.4 million, stock compensation expense of $18.6 million,
in-process research and development expense of $30.8 million and an impairment
charge of $64.5 million contributed to the loss of $180.7 million. Inventory
levels at December 31, 2000 increased $0.6 million to $4.9 million compared to
$4.3 million at December 31, 1999. This increase is the result of lower than
expected sales during the year ended December 31, 2000 offset by additional
inventory reserves.

      Capital expenditures for the years ended December 31, 2000 and 1999 were
$1.1 million and $1.3 million for the year ended December 31, 1998.

CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS

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



                                       23
<PAGE>

TO DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES, AND IF THIS CONTINUES, WE MAY
BE UNABLE TO MEET OUR WORKING CAPITAL REQUIREMENTS

      For the years ended December 31, 2000 and 1999, respectively, we incurred
net losses of approximately $180.7 million and $26.2 million and, on a pro forma
basis, after giving effect to our December 1999 merger with OpenROUTE Networks,
Inc. and our March 2000 acquisition of AetherWorks Corporation, we would have
had a net loss of approximately $89.8 million and $88.3 million for the years
ended December 31, 2000 and 1999, respectively. These losses present a
significant risk to our stockholders. If we cannot achieve profitability or
positive cash flows from operating activities, we may be unable to meet our
working capital and other payment obligations, which would have a material
adverse effect on our business, financial condition and results of operation and
the price of our common stock. In addition, if we cannot return to sustained
profitability we will be forced to sell all or part of our business, liquidate
or seek to reorganize.

WE REQUIRE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS, AND WE CANNOT BE
CERTAIN THAT THE NECESSARY FUNDS WILL BE AVAILABLE

      Our ability to return to and maintain profitability is largely dependent
upon our ability to introduce new products and technologies and expand our sales
efforts in new geographic and product markets. These activities require
substantial capital, and if we do not have access to sufficient funds, either
from our own operations or through third party financing, our ability to make
these necessary expenditures will be limited. Our current available cash and our
anticipated cash from operations are insufficient to fund our operations until
we are able to attain profitability, and the audit report of our independent
public accountants reflects this contingency. Accordingly, we will require third
party financing in order to continue our operations. We cannot assure you that
we will be able to obtain financing on terms favorable to us, or at all. If we
obtain additional funds by selling any of our equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution, or the equity securities may have rights, preferences or
privileges senior to the common stock. If we obtain additional funds by selling
assets, there can be no assurance that we will be able to negotiate a favorable
price for those assets or that the loss of those assets will not affect our
future business prospects. If adequate funds are not available to us or
available to us on satisfactory terms, we may be required to limit our marketing
and product development activities or other operations, or otherwise modify our
business strategy. These actions, if taken, could increase the difficulties we
face in returning to sustained profitability.

WE RELY TO A LARGE EXTENT ON INDEPENDENT DISTRIBUTION CHANNELS AND THE LOSS OF A
SIGNIFICANT NUMBER OF DISTRIBUTORS COULD ADVERSELY EFFECT US

      We rely on reseller channels, including distributors and systems
integrators, for a significant portion of our revenues. In particular, in
foreign markets we often have one distributor designated for an entire country,
and that distributor provides local support and service for our products. The
loss of one or more significant resellers could adversely affect our business in
terms of:

   o  lost revenues;

   o  lost market presence; and

   o  the difficulties we would encounter in servicing customers introduced to
      us by our resellers if we do not have other resellers in that geographic
      area.

WE HAVE A SIGNIFICANT PAYMENT OBLIGATION TO OUR PRIMARY MANUFACTURER, AND IF WE
DO NOT MAINTAIN OUR PAYMENT SCHEDULE THE MANUFACTURER MAY CEASE SHIPPING OUR
PRODUCTS

      We authorized our primary manufacturer to purchase a substantial amount of
parts, materials and long lead-time items during 2000 in anticipation of a
significant increase in product sales during the year. Our sales did not reach
the levels we expected, and we have not utilized a substantial amount of the raw
materials. Accordingly, we have a payment obligation of approximately $6.4
million to the manufacturer to pay for the cost of these materials. We have
agreed upon a payment schedule with the manufacturer, and during the period we


                                       24
<PAGE>

are paying down the obligation the manufacturer is requiring us to pay in
advance for all fabrication costs. If we do not adhere to the payment schedule
or if we do not pay fabrication costs in advance, the manufacturer has expressed
its intent not to ship any products on our behalf. We must raise additional
capital to maintain this payment schedule and pay the fabrication costs. If we
are unable to raise sufficient capital to adhere to the schedule and the
manufacturer ceases to ship products on our behalf, then a material and adverse
result to our revenues could occur. Also, if the manufacturer brings a legal
action to collect the outstanding amount, we do not have sufficient current
financial resources to pay this obligation.

WE ARE EXPOSED TO POTENTIAL DELAYS IN PRODUCT SHIPMENTS BECAUSE WE CONTRACT OUT
PRODUCT MANUFACTURING AND SOME COMPONENTS FOR OUR PRODUCTS ARE AVAILABLE ONLY
FROM A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS

      We rely on others to manufacture our products and product components and
this dependence exposes us to potential interruptions or delays in product
delivery. An interruption could have a short- term effect on our revenues and a
longer-term effect on our ability to market our products. Currently, we rely on
a single contract manufacturer to assemble and test our voice products. Also,
some of the components we use in our products are available from only one source
or a limited number of suppliers. Although we have been able to obtain our
products and these components to date, our 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.

OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY PERSONNEL OR FAIL TO ATTRACT AND
RETAIN OTHER QUALIFIED PERSONNEL

      The success of our business is dependent, to a significant extent, upon
the abilities and continued efforts of our management, sales and engineering
personnel, many of whom would be difficult to replace. We do not have employment
contracts with all of our key employees and we do not have "key man" life
insurance on any of our officers or directors.

      Our success will also depend on our ability to attract, retain and
motivate qualified management, sales and engineering executives and other
personnel who are in high demand and who often have multiple employment options.
In addition, as a result of the changes to technology-based industries, and
particularly telecommunications companies, over the past year, many employees
that we would like to retain may decide to pursue other opportunities or we may
be forced to increase their compensation to retain them. The loss of the
services of key personnel, or the inability to attract, retain and motivate
qualified personnel, could have a material adverse effect on our business,
financial condition, results of operations and the price of our common stock.

OUR INTELLECTUAL PROPERTY RIGHTS ARE AN IMPORTANT PROTECTION FOR OUR PRODUCTS,
AND WE COULD BE ADVERSELY AFFECTED IF OUR RIGHTS ARE CHALLENGED OR CIRCUMVENTED
BY COMPETITORS

      Our ability to compete successfully within our industry is dependent in
part upon:

   o  patents and nondisclosure agreements that we have obtained;

   o  technical measures that we take to protect confidential information; and

   o  trade secret, copyright and trademark laws that we rely on to establish
      and protect our proprietary rights.

      If any of our proprietary rights are successfully challenged or
circumvented by competitors, or if other companies are able to market
functionally similar products, systems or processes without infringing our
proprietary rights, then our results of operations and the value of our common
stock could be materially and adversely affected. In addition, legal proceedings
to enforce intellectual property rights are expensive given the technical nature
of the legal and functional analysis. Given our current financial condition, we
could experience difficulty funding enforcement of our intellectual property
rights.



                                       25
<PAGE>

THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE

      The market price of our common stock has been and can be expected to be
significantly affected by factors such as:

   o  quarterly variations in our results of operations;

   o  the announcement of new services or service enhancements by us or our
      competitors;

   o  technological innovations by us or our competitors;

   o  changes in earnings estimates or buy/sell recommendations by analysts;

   o  the operating and stock price performance of other comparable companies;
      and

   o  general market conditions or market conditions specific to particular
      industries.

      In particular, the stock prices for many companies in the
telecommunications equipment sector have experienced wide fluctuations that have
often been unrelated to their operating performance. We have been, and we are
likely to continue to be, subject to such fluctuations.

OUR STOCK PRICE IS CURRENTLY BELOW THE MINIMUM THRESHOLD REQUIRED BY THE NASDAQ
STOCK MARKET, AND IF OUR STOCK PRICE DOES NOT RISE ABOVE $1 PER SHARE WE MAY BE
DELISTED BY THE NASDAQ STOCK MARKET

      On April 9, 2001, the last reported bid price of our common stock on the
Nasdaq Stock Market was $0.76 per share, and our stock price has been below $1
per share since March 23, 2001. Under the listing requirements of the Nasdaq
Stock Market, on which our common stock is listed for trading, if the bid price
for our common stock remains below $1 per share for 30 consecutive business days
we expect to be put on notice of the listing deficiency. If our bid price per
share does not then equal or exceed $1 per share for 10 consecutive business
days in the 90 calendar day period after we are notified by Nasdaq of the
listing deficiency, then our common stock may be delisted from the Nasdaq Stock
Market.

WE RECENTLY RE-PRICED SUBSTANTIALLY ALL OF OUR STOCK OPTIONS TO A LOWER EXERCISE
PRICE, AND THE RESULTING ACCOUNTING CHARGES MAY CAUSE OUR FUTURE EARNINGS TO
FLUCTUATE WIDELY

      As part of a program to retain our employees, we adopted a program to
re-price the options of our current employees. We also re-priced the options
issued to our board of directors and to our chairman of the board. Under the
program, each of these persons will exchange their current stock options for
newly issued stock options with an exercise price of $0.75 per share. Although
each employee may elect not to participate in the program, we expect that
approximately 10 million options will be exchanged to obtain the lower exercise
price. Under applicable accounting rules, we will have to account for future
variations in the price of our common stock above $0.75 per share as
compensation expense until the re-priced options are either exercised, cancelled
or expire. This calculation will be made each quarter based upon the performance
of our common stock in that quarter. Accordingly, our operating results and
earnings per share will be subject to potentially significant fluctuations based
upon changes in the market price of our common stock.

OUR CERTIFICATE OF INCORPORATION AND BY-LAWS CONTAIN PROVISIONS THAT COULD DELAY
OR PREVENT A CHANGE IN CONTROL

      Provisions of our certificate of incorporation and by-laws may have the
effect of discouraging, delaying or preventing a take-over attempt that could be
in the best interests of our stockholders. These include provisions that:

   o  separate our board of directors into three classes;

   o  limit the ability of our stockholders to call special stockholder
      meetings;

   o  require advance notice of nominations for directors and stockholder
      proposals to be considered at stockholder meetings; and



                                       26
<PAGE>

   o  require a vote greater than two-thirds to remove directors from office or
      amend many of the provisions of our certificate of incorporation and
      by-laws.

      Our board of directors also has the right, without further action of the
stockholders, to issue and fix the terms of preferred stock, which could have
rights senior to the common stock. We are also subject to the "business
combination" provisions of the Delaware General Corporate Law, which impose
procedures impeding business combinations with "interested stockholders" that
are not approved of by our board of directors.

RAPIDLY CHANGING TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR UNMARKETABLE

      We have focused our products on the edge of the Internet and telephony.
This market is characterized by rapid technological change, frequent new product
introduction and evolving industry standards. The introduction of products
embodying new technologies by our competitors and the emergence of new industry
standards could render our existing products obsolete and could cause new
products to be unmarketable. Under these circumstances, our revenue would be
adversely affected.

      Our success will depend on the ability to address the increasingly
sophisticated needs of customers, to enhance existing products and to develop
and introduce, on a timely basis, new competitive products that keep pace with
technological development and emerging industry standards. If we cannot
successfully identify, manage, develop manufacture or market products
enhancements or new products, our business will be materially and adversely
affected.

WE HAVE ADOPTED A NEW MANAGEMENT INFORMATION SYSTEM AND IF WE CANNOT INTEGRATE
THIS SYSTEM WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR BUSINESS AND
PREPARING TIMELY FINANCIAL REPORTS

      We adopted a new comprehensive management information system, and we are
still in the process of implementing the installation and integrating the
operations of OpenROUTE and AetherWorks, the companies we acquired in December
1999 and March 2000. If we are unable to fully implement and integrate this
system, we could have difficulties in preparing and maintaining the systems and
reports we need to effectively manage our business and ensure timely financial
reporting. These difficulties could result in adverse effects on our business.

A PORTION OF OUR REVENUES ARE DERIVED FROM INTERNATIONAL SALES, WHICH ARE
SUBJECT TO FOREIGN REGULATORY STANDARDS AND CURRENCY EXCHANGE RATE FLUCTUATIONS

      International sales accounted for 48% and 47% of our total revenues in
2000 and 1999, respectively, and international sales will continue to be
significant to us. The conduct of international operations subjects us to
certain risks. Foreign regulatory bodies continue to establish standards
different from those in the United States, and our products are designed
generally to meet those standards. Our inability to design products in
compliance with such foreign standards could have an adverse effect on our
operating results. Also, our international business may be affected by changes
in demand resulting from fluctuation in currency exchange rates and tariffs and
difficulties in obtaining export licenses. We do not expect that we will hedge
against fluctuations in currency exchange rates.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      We are not a party to any market risk sensitive instrument that is
material to us, our financial position or results of operations, either for
trading purposes or otherwise.




                                       27
<PAGE>





ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Nx Networks, Inc.:

We have audited the accompanying consolidated balance sheets of Nx Networks,
Inc. (a Delaware corporation, formerly Netrix Corporation) and subsidiaries
(together the "Company"), as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nx Networks, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has liquidity problems. These facts raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

                                                             ARTHUR ANDERSEN LLP



Vienna, Virginia
April 9, 2001




                                       28
<PAGE>





                                NX NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                   YEAR ENDED DECEMBER 31,
                                                  --------------------------
                                                   2000      1999      1998
                                                   ----      ----      ----

  Revenues:
       Product                                    $19,730  $24,505  $21,840
       Service                                      7,485    6,740    9,642
                                                  -------  -------- -------
              Total revenues                       27,215   31,245   31,482
                                                  -------  -------  -------
  Cost of revenues:
       Product                                     17,709   11,758   10,939
       Service                                      4,891    4,777    5,155
                                                  -------  -------  -------
             Total cost of revenues                22,600   16,535   16,094
                                                  -------  -------  -------
                    Gross profit                    4,615   14,710   15,388
                                                  -------  -------  -------
  Operating expenses:
    Sales and marketing (exclusive of stock
      compensation of $2,027, $0 and
        $0 in 2000, 1999 and 1998, respectively)   13,382    6,468    9,292
    Research and development (exclusive of
      stock compensation of $8,146, $11 and $0
       in 2000, 1999 and 1998, respectively)       16,696    7,043    6,771
    General and administrative (exclusive of
       stock compensation of $8,458, $18,767
       and $0 in 2000, 1999 and 1998,
        respectively)                              10,705    4,937    4,059
    In-process research and development            30,800       --       --
    Impairment of acquired intangibles and
       goodwill                                    64,500       --       --
    Amortization of acquired intangibles and
       goodwill                                    27,890      636      265
    Stock compensation                             18,631   18,778       --
    Bad debt expense                                3,239      540    1,489
    Restructuring charge                              --      900       --
                                                 --------  -------   -------
                  Total operating expenses        185,843   39,302   21,876
                                                 --------  -------   -------
                  Loss from operations           (181,228) (24,592)  (6,488)
  Interest expense                                  (243)    (390)    (183)
  Interest income                                     577      212      154
  Other income, net                                   226       --       --
                                                 --------  -------   -------
                 Loss before income taxes        (180,668) (24,770)  (6,517)
  Provision for income taxes                           --       --       --
                                                 --------  -------   -------
                 Net loss                        (180,668) (24,770)  (6,517)
  Dividends and accretion on preferred stock           (1)  (1,399)      --
                                                 --------  -------   -------
                 Net loss attributable to common
                   stockholders                 $(180,669)$(26,169)  (6,517)
                                                ========= ========  =======

  Basic and diluted net loss per share          $ (5.31)   $ (2.17) $ (0.60)
                                                ========= ========  =======
  Basic and diluted weighted average shares
  outstanding                                      34,037   12,074   10,891
                                                =========   ======   ======

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




                                       29
<PAGE>



                                NX NETWORKS, INC.

                           CONSOLIDATED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                AS OF DECEMBER 31,
                                                           --------------------------
                                                               2000           1999
                                                               ----           ----
                                     ASSETS
<S>                                                         <C>          <C>
Current assets:
   Cash and cash equivalents                                 $   4,659    $   5,930
   Accounts receivable, net of allowance of $5,186 and
     $2,902, respectively                                        1,604        9,697
   Stock subscription receivable, subsequently
     collected                                                   1,147         --
   Inventories                                                   4,928        4,304
   Other current assets                                            512          531
                                                              --------     --------
          Total current assets                                  12,850       20,462
                                                              --------     --------

Property and equipment, net                                      3,508        4,560
Deposits and other assets                                          605           78
Goodwill and acquired intangibles, net of accumulated
amortization of $30,238 and $2,348, respectively                28,292       70,153
                                                              --------     --------
Total Assets                                                 $  45,255     $ 95,253
                                                             =========     ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Line of credit                                          $    --      $   1,059
     Accounts payable                                            7,391        6,703
     Accrued liabilities                                         6,704        4,680
     Note payable to vendor                                      6,353         --
                                                              --------     --------
Total current liabilities                                       20,448       12,442
                                                              --------     --------
Long-term liabilities:
     Other                                                         351          352
     Redeemable warrants                                           384         --
                                                              --------     --------
Total long-term liabilities                                        735          352
                                                              --------     --------
     Total liabilities                                          21,183       12,794
Series B redeemable, convertible preferred
  stock, $0.05 par value; 640,000 shares
   authorized; 333,333 shares issued and
    outstanding (aggregate liquidation
    preference of $2,117)                                        2,117         --
                                                              --------     --------
Commitments and contingencies
Stockholders' equity:
     Series A preferred stock, $0.05 par
     value; 1,000,000 shares authorized; none
     issued and outstanding                                       --           --
     Common stock, $0.05 par value; 55,000,000
     and 36,800,000 shares authorized; 40,606,000
     and 29,260,000 shares issued and outstanding,
     respectively                                                2,030        1,463
     Additional paid-in capital                                277,778      151,694
     Deferred compensation                                      (8,460)        --
     Note receivable from stockholder                           (1,000)        --
     Warrants                                                    4,749        2,041
     Accumulated other comprehensive loss                          (30)        (296)
     Accumulated deficit                                      (253,112)     (72,443)
                                                              --------     --------
          Total stockholders' equity                            21,955       82,459
                                                              --------     --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $  45,255    $  95,253
                                                             =========    =========
</TABLE>

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




                                       30
<PAGE>



                                NX NETWORKS, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                     SERIES A              ADDITIONAL
                                     COMPREHENSIVE   PREFERRED   COMMON     PAID-IN      DEFERRED
                                         LOSS         STOCK      STOCK      CAPITAL    COMPENSATION
                                         ----         -----      -----      -------    ------------

<S>                                  <C>             <C>           <C>         <C>         <C>
Balance, December 31, 1997                           $    --     $  480    $  55,774      $    --
Stock options exercised                                   --          2           59           --
Proceeds from private placement,
net                                                       --         88        1,988           --
Warrants issued in connection
private placement                                         --         --         (257)          --
Employee stock purchase plan                              --          5          115           --
Net loss                              $  (6,517)          --         --           --           --
Cumulative translation adjustment          (103)          --         --           --           --
                                      ---------
Comprehensive loss                    $  (6,620)          --         --           --           --
                                      =========      -------     ------    ---------      -------
Balance, December 31, 1998                                --        575       57,679           --

Issuance of preferred stock and
warrants, net                                          3,713         --           --           --
Dividends and accretion on
preferred stock                                        1,399         --           --           --
Dividends paid on preferred stock                       (108)        --           --           --
Conversion of preferred stock to
common stock                                          (5,004)        74        4,930           --
Stock options exercised                                   --         14          865           --
Employee stock purchase plan                              --          1           47           --
Compensation expense recorded on
stock options to employees and
board members                                             --         --        2,403           --
Stock compensation expense
pursuant to employment agreement                          --         --       16,375           --
Warrants issued for services
provided                                                  --         --           --           --
Stock, warrants and options issued
for acquisition of OpenROUTE                              --        799       69,395           --
Net loss                              $ (24,770)          --         --           --           --
Cumulative translation adjustment          (176)          --         --           --           --
                                      ---------
Comprehensive loss                    $ (24,946)          --         --           --           --
                                      =========      -------     ------    ---------      -------
Balance, December 31, 1999                                --      1,463      151,694           --

Stock, warrants and options issued
for acquisition of AetherWorks                            --        278       69,447           --
Note receivable from stockholder                          --         --           --           --
Issuance of common stock                                  --        100       24,986           --
Stock issuance to executive                               --          5        2,670           --
Compensation expense recorded
on stock options to employees and
board members                                             --         --       23,446       (8,460)
Warrants issued for services
provided                                                  --         --           --           --
Exercise of options and warrants                          --        181        5,447           --
Employee stock purchase plan                              --          3           88           --
Dividends on preferred stock                              --         --           --           --
Net loss                              $(180,668)          --         --           --           --
Cumulative translation adjustment           266           --         --           --           --
                                      ---------
Comprehensive loss                    $(180,402)          --         --           --           --
                                      =========      -------     ------    ---------      -------

Balance, December 31, 2000                           $    --     $2,030    $ 277,778      $(8,460)
                                                     =======     ======    =========      =======

</TABLE>

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


<PAGE>





                                NX NETWORKS, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                        NOTE                    ACCUMULATED
                                     RECEIVABLE                    OTHER
                                        FROM                   COMPREHENSIVE  ACCUMULATED
                                    STOCKHOLDER     WARRANTS       LOSS         DEFICIT     TOTAL
                                    -----------     --------   -------------  ----------    -----
<S>                                  <C>             <C>           <C>         <C>         <C>

Balance, December 31, 1997            $    --         $  --         $ (17)      $(39,757)   16,480
Stock options exercised                    --            --            --             --        61
Proceeds from private placement,
net                                        --            --            --             --     2,076
Warrants issued in connection
private placement                          --           257             --            --        --
Employee stock purchase plan               --            --             --            --       120
Net loss                                   --            --             --       (6,517)    (6,517)
Cumulative translation adjustment          --            --           (103)           --      (103)
Comprehensive loss                         --            --             --            --        --
Balance, December 31, 1998                 --           257           (120)      46,274)    12,117


Issuance of preferred stock and
warrants, net                              --           251             --            --     3,964
Dividends and accretion on
preferred stock                            --            --             --       (1,399)        --
Dividends paid on preferred stock          --            --             --            --      (108)
Conversion of preferred stock to
common stock                               --            --             --            --        --
Stock options exercised                    --            --             --            --       879
Employee stock purchase plan               --            --             --            --        48
Compensation expense recorded on
stock options to employees and
board members                              --            --             --            --      2,403
Stock compensation expense
pursuant to employment agreement           --            --             --            --     16,375
Warrants issued for services
provided                                   --           179             --            --        179
Stock, warrants and options issued
for acquisition of OpenROUTE               --         1,354             --            --     71,548
Net loss                                   --            --             --      (24,770)    (24,770)
Cumulative translation adjustment          --            --           (176)           --       (176)
Comprehensive loss                         --            --             --            --         --
                                    ---------        ------         ------      --------    -------
Balance, December 31, 1999                 --         2,041           (296)     (72,443)     82,459

Stock, warrants and options issued
for acquisition of AetherWorks             --         1,066             --            --     70,791
Note receivable from stockholder       (1,000)           --             --            --     (1,000)
Issuance of common stock                   --            --             --            --     25,086
Stock issuance to executive                --            --             --            --      2,675
Compensation expense recorded
on stock options to employees and
board members                              --            --             --            --     14,986
Warrants issued for services
provided                                   --           970             --            --        970
Exercise of options and warrants           --           672             --            --      6,300
Employee stock purchase plan               --            --             --            --         91
Dividends on preferred stock               --            --             --           (1)        (1)
Net loss                                   --            --             --     (180,668)  (180,668)
Cumulative translation adjustment          --            --            266            --       266
Comprehensive loss                         --            --             --            --        --
                                    ---------        ------         ------     ---------  ---------
Balance, December 31, 2000            $(1,000)       $4,749         $  (30)    $(253,112)  21,955
                                    =========        ======         ======     =========  =========
</TABLE>

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



                                       31
<PAGE>





                                 NX NETWORKS, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                          --------------------------------------
                                                             2000           1999            1998
                                                             ----           ----            ----
<S>                                                        <C>           <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                $(180,668)     $ (24,770)        $(6,517)
   Adjustments to reconcile net loss to net cash
     (used in) provided by operating activities:
   Depreciation and amortization of property and equipment      3,550          1,963           2,457
   Amortization of acquired intangibles and goodwill           27,890            636             265
   Impairment of acquired intangibles and  goodwill            64,500           --              --
   In-process research and development                         30,800           --              --
   Non-cash interest expense pursuant to
     issuance of warrants                                          --            179            --
   Stock compensation expense                                  18,631         18,778            --
   Changes in assets and liabilities, net of
     effect of acquisitions:
      Accounts receivable                                       8,093           (443)         (1,287)
      Inventories                                                (624)         2,821           2,770
      Other current assets                                       (485)           180             619
      Accounts payable                                          6,243          1,845               9
      Accrued liabilities                                       1,113           (522)           (352)
      Other long-term liabilities                                (202)           352             (97)
                                                             ---------        -------        --------
   Net cash (used in) provided by operating
      activities                                              (21,159)         1,019          (2,133)
                                                             ---------        -------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                         (1,061)        (1,107)         (1,311)
   Cash paid for acquisitions, net of cash
     acquired                                                  (9,584)            32            --
   Payments on capital leases                                    (504)          --              --
   Note receivable from stockholder                            (1,000)          --              --
                                                             ---------        -------        --------
      Net cash used in investing activities                   (12,149)        (1,075)         (1,311)
                                                             ---------        -------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Borrowing under line of credit, net                         (1,059)        (1,109)          1,020
   Proceeds from issuance of common stock                      25,086           --              --
   Proceeds from private placement, net                          --             --             2,076
   Proceeds from issuance of preferred stock, net               2,000          3,964            --
   Cash dividends paid on preferred stock                        --             (108)           --
   Proceeds from exercise of stock options and warrants         5,653            879              61
   Proceeds from employee stock purchase plan                      91             48             120
                                                             ---------        -------        --------
      Net cash provided by financing activities                31,771          3,674           3,277
                                                             ---------        -------        --------
Effect of foreign currency exchange rate changes
  on cash and cash equivalents                                    266           (176)           (103)
                                                             ---------        -------        --------
Net (decrease) increase in cash and cash
  equivalents                                                  (1,271)         3,442            (270)
Cash and cash equivalents, beginning of period
                                                                5,930          2,488           2,758
                                                             ---------        -------        --------
Cash and cash equivalents, end of period                     $  4,659          5,930         $ 2,488
                                                             =========        =======        ========
Supplemental disclosure of cash flow information:
   Cash paid during the year for interest                    $    243       $    390        $    183
                                                             ========       ========        ========
   Stock subscription receivable from exercise
     of options and warrants                                 $    647       $   --          $   --
                                                             ========       ========        ========

   Stock subscription receivable from issuance
    of series B preferred stock                              $    500       $   --          $   --
                                                             ========       ========        ========
   Note payable to vendor                                    $  6,353       $   --          $   --
                                                             ========       ========        ========

</TABLE>
                 The accompanying notes are an integral part of
                    these consolidated financial statements.




                                       32
<PAGE>





                                NX NETWORKS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   THE COMPANY:

BUSINESS DESCRIPTION

Nx Networks, Inc. ("Nx Networks" or the "Company") a Delaware Corporation
(formerly Netrix Corporation), is a provider of internet telephony and data
networking solutions. The Company combines patented, switched, compressed voice
and data technology with advanced packet data networking capabilities to provide
networking solutions that improve network performance and deliver an array of
tangible network services. The Company is headquartered in Herndon, Virginia and
conducts operations out of its locations in the United States and the United
Kingdom. The Company's customers include service providers, multinational
corporations and government agencies.

GOING CONCERN AND OTHER IMPORTANT FACTORS

The Company has reported a net loss in each of the last six years. The Company's
ability to generate operating income is in large part dependent on its success
at increasing sales of its products and/or controlling costs. The Company's plan
to increase revenue through sales of its products continues to evolve; however,
due to market conditions, competitive pressures and other factors beyond its
control there can be no assurance that the Company will be able to adequately
increase product sales in the future. The success of the Company is also
dependent on its ability to generate adequate cash for operations and capital
needs. For the year ended December 31, 2000, the Company's operating activities
used cash of approximately $21.2 million primarily due to continued losses from
operations. As of December 31, 2000, the Company had approximately $4.7 million
in cash and cash equivalents. Total current liabilities as of December 31, 2000,
were approximately $20.4 million and exceeded current assets by approximately
$7.6 million. Since year-end, the Company has raised approximately $6.2 million
in equity financing. The Company will require additional funding by May 2001 to
continue operations. If such sources of financing are insufficient or
unavailable, or if the Company experiences shortfalls in anticipated revenues or
increases in anticipated expenses, the Company would further reduce headcount,
defer vendor payments, sell operating assets and/or seek protection under the
bankruptcy code.

As of December 31, 2000, the Company has a payment obligation of approximately
$6.4 million to SMTC, its third party contract manufacturer of substantially all
of its products. A majority of the Company's inventory is at SMTC's premises. In
2001, the Company negotiated a payment schedule with SMTC and delivered an
unsecured promissory note to SMTC (see Note 5). Until SMTC has been repaid, the
Company is required to pay in advance for all fabrication costs. If the Company
does not adhere to the payment schedule, SMTC has informed the Company that they
will not ship any products on its behalf. If the Company is unable to raise
sufficient capital to adhere to the payment schedule and the manufacturer ceases
to ship products on the Company's behalf, then a material and adverse result to
the Company's operations could occur.

To meet its operating requirements for the remainder of 2001, the Company will
have to generate additional equity or cash through other means, which may
include the sale of assets, including intellectual property and proprietary
technology, the sale of equity, additional borrowings, the sale of selected
operations, or establishing one or more strategic partnerships. Although the
Company believes it has the ability to generate additional equity and cash
through such sales and borrowings, 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 additional equity and adequate cash, there will be a material and
adverse effect on the business and financial condition of the Company, to the
extent that a sale, liquidation or restructuring of the Company will be
required, in whole, or in part. The Company's return to profitability also
depends upon the Company's ability to improve its customer service, operational,
financial and management information systems, including its contract management,
inventory management and other systems.



                                       33
<PAGE>

The above factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

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. 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, introduction and evolution of
the competitive products may require a significant investment of financial
resources. While the Company has generally been able to obtain adequate supplies
of components to date, the interruptions or termination of the Company's current
manufacturing relationship could have an adverse effect on the Company's
operating results.

MERGERS AND ACQUISITIONS

ACQUISITION OF OPENROUTE

On December 22, 1999, the Company completed the merger of OpenROUTE Networks
("OpenROUTE") with and into the Company, pursuant to the terms of the Agreement
and Plan of Merger dated September 30, 1999. Under the terms of the transaction,
the holders of OpenROUTE common stock and stock options received one share of
Netrix common stock for each OpenROUTE share converted. This resulted in the
issuance of 15,989,566 shares of common stock to the former OpenROUTE
stockholders. The issued shares were valued at $3.90 per share, which is the
average of the closing prices for the three days before and after the public
announcement of the merger. Options to acquire 2,387,175 shares of common stock
were issued to OpenROUTE employees for options to acquire OpenROUTE common
stock. These options were valued at approximately $7.9 million using the
Black-Scholes model assuming 130 percent volatility, a risk free interest rate
of 6.30 percent and an exercise period of three years and have been included in
the purchase price of OpenROUTE. The transaction has been accounted for under
the purchase method of accounting and the operating results of OpenROUTE have
been included in the accompanying consolidated statements of operations from the
date of acquisition.

The purchase price of OpenROUTE was $72.2 million, including transaction costs
of $1.9 million. The acquisition cost exceeded the estimated fair market value
of tangible net assets acquired by $70.2 million and is considered goodwill and
acquired intangibles. The net purchase price was allocated as follows (in
thousands):

      Current assets                             $ 4,558
      Property and equipment                       1,482
      Goodwill and acquired intangibles           70,222
      Current liabilities                         (4,103)
                                                ---------
            Total                                $72,159
                                                =========

The value assigned to acquired intangible assets and goodwill consisted of the
following (in thousands):

      Assembled workforce                        $ 1,000
      Service contracts                            1,000
      Software license                             5,300
      Goodwill                                    62,922
                                                --------
            Total                                $70,222
                                                ========



                                       34
<PAGE>

The amount allocated to acquired intangibles and goodwill is being amortized
over their estimated useful lives of 4 years using the straight-line method (see
Note 2).

ACQUISITION OF AETHERWORKS

On March 16, 2000, the Company completed the merger of AetherWorks Corporation
("AetherWorks"), a development stage company with no revenue since its inception
in 1993, with and into a wholly-owned subsidiary of the Company, pursuant to the
terms of the Agreement and Plan of Acquisition ("Agreement") dated December 31,
1999. The acquisition was accounted for under the purchase method of accounting.

Under the terms of the AetherWorks transaction, the holders of AetherWorks
common stock, warrants and stock options converted at a rate of 1.38 shares of
Nx Networks common stock, warrants, and stock options. The Company issued
2,301,436 shares of common stock and 867,687 warrants and options to acquire the
outstanding AetherWorks common stock. The Company's shares were valued at
$22.94, the average of closing prices for three days before and after March 16,
2000. The warrants and options issued were valued at approximately $18.0 million
using the Black-Scholes model assuming 130 percent volatility, a risk free
interest rate of 6.3 percent and an expected life of three years. Pursuant to
the Agreement, the Company settled an $8.0 million obligation of AetherWorks
upon the closing of the acquisition.

At closing, the Company also issued to AetherWorks' employees options to acquire
a total of 1.0 million shares of its common stock. The options have an exercise
price of $6.81 per share and vest quarterly until January 1, 2002. The Company
recorded deferred compensation expense of $16.1 million for the difference
between the exercise price and the fair market value of the stock on the date of
grant. This expense will be amortized over the options vesting period of which
approximately $7.9 million was expensed in the year ended December 31, 2000.

Pursuant to the Agreement, the Company was required to issue additional shares
of common stock if the average closing price of the Company's common stock for
the fifteen-day trading period ending October 31, 2000, did not equal or exceed
$22.50 per share, provided that the total number of shares of common stock
issued would not exceed 19.9% of the total of the Company's outstanding common
stock on March 16, 2000. Under the Agreement, the Company was also required to
make an equivalent adjustment to the warrants and options to proportionately
increase the number of shares and reduce the per share exercise price. The
Company's common stock had an average closing price of $2.93 during the
fifteen-day trading period ended October 31, 2000.

On December 29, 2000, the Company entered into a settlement agreement (the
"Settlement") with the former owners of AetherWorks, to issue 4,777,973
additional shares of the Company's common stock, as well as additional options
and warrants to acquire 1,846,551 shares of the Company's common stock. Pursuant
to the Agreement and the Settlement, the exercise price of the majority of the
options and warrants was reduced to $1.60 per share. The listing requirements of
the NASDAQ Stock Market prohibit the Company from issuing more than 19.9% of its
common stock in a merger transaction without obtaining the consent of the
Company's stockholders. As of December 31, 2000, 3,262,160 of the additional
4,777,973 common shares were issued and outstanding. The remaining 1,515,813
shares were issued upon stockholder approval on March 6, 2001.

The purchase price of AetherWorks, including transaction costs of $0.4 million
was $79.1 million. A summary of assets and liabilities acquired, at estimated
fair market value was as follows (in thousands):

      Current assets                              $  99
      Property and equipment                      1,403
      Assembled workforce                           300
      In-process research and development        30,800
      Goodwill                                   50,229
      Current liabilities                        (3,700)
                                               ---------
            Total                               $79,131
                                               =========



                                       35
<PAGE>

The amount allocated to acquired intangibles and goodwill is being amortized
over their estimated useful lives of 4 years using the straight-line method (see
Note 2).

The Company valued in-process research and development ("IPR&D") acquired in the
acquisition at $30.8 million based upon an independent appraisal of the
development project for which technological feasibility had not been established
and no alternative future uses exist. The Company's acquired IPR&D project is
targeted at the telecommunications market. This product is being developed
specifically for and is intended to have substantial incremental functionality,
greatly improved speed and wider range of interfaces than the Company's then
current technology.

The value of the IPR&D project identified was determined by estimating the
future cash flows from the project, once commercially feasible, discounting the
net cash flows back to their present value and then applying a percentage of
completion to the calculated value. The percentage of completion for the project
was determined using milestones representing management's estimate of effort,
value added and degree of difficulty of the portion of the project completed as
of March 16, 2000, as compared to the remaining research and development to be
completed to bring the project to technological feasibility. The development
process was grouped into three phases with each phase containing between one and
five milestones. The three phases were: (i) researching the market requirements
and the engineering architecture and feasibility studies; (ii) design and
verification; and (iii) prototyping and testing the product (both internal and
customer testing). The AetherWorks project started in 1998. As of March 16,
2000, the Company estimated that the project was 75% complete. Development of
the technology was a substantial risk to the Company due to factors including
the remaining  effort  to  achieve  technological  feasibility, rapidly changing
customer needs and competitive threats from other companies.

The unaudited pro forma information presented for the years ended  December  31,
2000, 1999, and 1998, reflects the acquisitions of AetherWorks and  OpenROUTE as
if  the  acquisitions  had  occurred  on January 1, 1999 and 1998, respectively,
excluding  the  one time $30.8 million IPR&D  charge  in  connection  with   the
AetherWorks acquisition and the $64.5 million impairment of acquired intangibles
and goodwill (see Note 2).  The results are not necessarily indicative of future
operating  results  or `of what would have occurred had the acquisition actually
been consummated on that date (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                             2000        1999        1998
                                                             ----        ----        ----
                                                                  (unaudited)
<S>                                                        <C>          <C>         <C>
Revenues                                                   $  27,215    $  43,624   $  45,808
Net loss attributable to common stockholders               $(154,294)   $ (88,334)  $ (35,932)
Net loss per share attributable to common stockholders     $   (3.93)   $   (2.92)  $   (1.34)
</TABLE>


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Nx
Networks, Inc., and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated upon consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.




                                       36
<PAGE>





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 non-financial instruments from
these disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. Due to their
short-term nature, the carrying amounts reported in the balance sheet
approximate the fair value for cash and cash equivalents, accounts receivable,
accounts payable and notes payable.

RECLASSIFICATIONS

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.

INVENTORIES

Inventories are valued at the lower of cost or market, using the first-in,
first-out ("FIFO") method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost or fair value at the date of
acquisition 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


ACQUIRED INTANGIBLE ASSETS AND GOODWILL

Acquired intangible assets including assembled workforce, service contracts and
software licenses together with goodwill are amortized over their expected
useful lives of four years.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets, including property and equipment,
acquired 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 probability that future, undiscounted, net cash flows will be less
than the carrying amount of the assets. If future estimated undiscounted cash
flows are less than the carrying amount of long-lived assets, then such assets
are written down to their fair value.

In the fourth quarter of 2000, after considering developments in the capital
markets and telecommunications industry, the downturn in the Company's market
capitalization, the Company's liquidity problems and the decrease in 2000
product sales, the Company reviewed the carrying value of its long-lived assets.
The Company's long-lived assets are primarily goodwill and acquired intangibles


                                       37
<PAGE>

resulting from the acquisitions of OpenROUTE in 1999 and AetherWorks in the
first quarter of 2000. Specifically, the Company's original estimates for timing
and volume of product sales for AetherWorks' products have not materialized.
Additionally, actual sales of OpenROUTE's products were lower in 2000 then they
were in 1999. While management remains optimistic about its products, the
Company determined that these acquired intangible assets and goodwill were
impaired due to uncertainties in the Company's sales forecasts resulting from
past performance, liquidity and current industry conditions. The Company
reviewed future undiscounted cash flows from the acquired product lines of
AetherWorks and OpenROUTE, and determined the related long-lived assets,
primarily goodwill, to be impaired. These assets with a combined carrying value
of $92.8 million were written down in the fourth quarter to $28.3 million, their
estimated fair value based upon discounted cash flows. As a result, the Company
expects that amortization of goodwill and acquired intangible assets in 2001
will be approximately $2.3 million per quarter.

The Company's estimates of anticipated net revenues, the remaining estimated
lives of intangible assets, or both, could be reduced significantly in the
future due to changes in technologies, regulation, available financing or
intense competition. As a result the carrying amount of long-lived assets could
be further reduced in the future.

REVENUE RECOGNITION

The Company recognizes revenue both from sales of products and from service
contracts. Revenue from product sales that contain embedded software is
recognized in accordance with the provisions of the American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition."

Revenue from product sales is recognized based on the type of sales transaction
as follows:

SHIPMENTS TO CREDIT-WORTHY CUSTOMERS WITH NO PORTION OF THE COLLECTION DEPENDENT
ON ANY FUTURE EVENT: Revenues are recorded at the time of shipment.

SHIPMENTS TO A CUSTOMER WITHOUT ESTABLISHED CREDIT: These transactions are
primarily shipments to customers who are in the process of obtaining financing
and to whom the Company has granted extended payment terms. Revenues are
deferred (not recognized) and no receivable is recorded until a significant
portion of the sales price is received in cash.

SHIPMENTS WHERE A PORTION OF THE REVENUE IS DEPENDENT UPON SOME FUTURE EVENT:
These consist primarily of transactions involving value-added resellers ("VAR")
to an end user. Under these agreements, revenues are deferred and no receivable
is recorded until a significant portion of the sales prices is received in cash.
On certain transactions a portion of the payment is contingent upon installation
or customer acceptance. The Company does not recognize revenue on these
transactions until these contingencies have lapsed.

Certain of the Company's product sales are sold with maintenance/service
contracts. The Company allocates revenues to such maintenance/service contracts
based on vendor-specific objective evidence of fair value as determined by the
Company's renewal rates. Revenue from maintenance/service contracts is deferred
and recognized ratably over the period covered by the contract.

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. Certain router products have a seven year limited warranty.
Estimated future warranty obligations related to certain products are provided
for by charges to operations in the period in which the related revenue is
recognized.

FOREIGN EXCHANGE GAIN/LOSS

Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at current exchange rates. Operating results are translated into
U.S. 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.



                                       38
<PAGE>

COMPREHENSIVE LOSS

Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income (loss) refers to revenue,
expenses, gains and losses that under accounting principles generally accepted
in the United States are included in comprehensive income (loss), but excluded
from net income (loss). For the years ended December 31, 2000, 1999 and 1998,
the elements within other comprehensive loss, net of tax, consisted solely of
foreign currency translation adjustments.

EARNINGS (LOSS) PER SHARE

The Company follows Statement of Financial Accounting Standards No. 128
"Earnings Per Share," ("SFAS No. 128"). Under SFAS No. 128, basic earnings per
share ("EPS") excludes the effect of any dilutive options, warrants, or
convertible securities and is computed by dividing the net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised. Options and warrants to purchase approximately 11.2 million, 6.9
million and 1.4 million shares of common stock were excluded from the
computation of diluted loss per share in 2000, 1999 and 1998, respectively. In
addition, the computation of diluted EPS excludes the effects of preferred
stock, if converted. Inclusion of these options, warrants and preferred shares
would have an anti-dilutive effect on loss per share.

BUSINESS CONCENTRATION AND CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company does not, as
a matter of policy, require collateral on credit granted to customers. The
Company performs periodic evaluations of its customer base and establishes
allowances for estimated credit losses. In addition, the Company purchases
significantly all inventory from two suppliers, on which the Company is
dependent for its future source of supply. Significant fluctuations in price
could adversely affect the margins of the Company.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements."  SAB
No. 101 provides guidance on the application of generally accepted accounting
principles to revenue recognition issues in financial statements.  SAB No.
101 clarifies the appropriate timing of revenue recognition when products are
shipped to customers.  The impact of SAB No. 101 did not have a material
effect on the financial statements at December 31, 2000.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company determined that adoption of SFAS No. 133 will not have a material
effect on its financial statements.




                                       39
<PAGE>





3.    BALANCE SHEET DETAILS (IN THOUSANDS):

INVENTORIES

                                                 AS OF DECEMBER 31,
                                                 ------------------
                                                  2000       1999
                                                  ----       ----
Raw materials                                 $    1,164   $     546
Work-in-process                                       40         353
Finished goods                                     3,724       3,405
                                               ----------   --------
      Total inventories                       $    4,928   $   4,304
                                              ==========   =========

The Company's products are subject to technological change and changes in the
Company's respective competitive markets. Management has provided reserves for
excess and obsolete inventories. It is possible that new product launches or
changes in customer demand could result in unforeseen changes in inventory
requirements for which no reserve has been provided.

PROPERTY AND EQUIPMENT
                                                    AS OF DECEMBER 31,
                                                    ------------------
                                                     2000       1999
                                                     ----       ----
Manufacturing and test equipment                   $ 7,866   $  9,000
Office furniture and equipment                       2,284      4,872
Purchased software                                   1,109        647
                                                   -------    --------
  Total property and equipment                     11,259      14,519
Accumulated depreciation and amortization          (7,751)     (9,959)
                                                   -------    --------
  Net property and equipment                      $  3,508   $  4,560
                                                  =========  ========

ACCRUED LIABILITIES
                                                    AS OF DECEMBER 31,
                                                    ------------------
                                                     2000       1999
                                                     ----       ----

Payroll and related compensation                  $  2,390   $ 1,360
Sales and state taxes                                  368       803
Professional fees                                    1,652       658
Other                                                2,294     1,859
                                                  --------  ---------
   Total accrued liabilities                     $    6,704 $   4,680
                                                 ========== =========

4.        STOCKHOLDERS' EQUITY:

ACCOUNTING FOR STOCK BASED COMPENSATION

The Company maintains five stock option plans, which are described below,
whereby employees, non-employees and directors of the Company are granted the
opportunity to acquire an equity interest in the Company. The Company accounts
for employee stock options or similar equity instruments to employees under the
"intrinsic value method" prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). 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, "Accounting for
Stock-Based Compensation" defines a "fair value method" of accounting for
employee stock options or similar equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period.

SFAS No. 123 allows an entity to continue to use the intrinsic value method.
However, entities electing to account for employee stock options for similar
instruments pursuant to APB Opinion No. 25 must make pro forma disclosures of
net income (loss) and earnings per share, as if the fair value method of
accounting had been applied. Had compensation cost for the Company's five


                                       40
<PAGE>

stock-based compensation plans been determined based upon the fair value method
at the grant dates for awards under those plans, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                         -----------------------
                                                                       2000          1999        1998
                                                                       ----          ----        ----
<S>                                                                   <C>         <C>          <C>
Net loss attributable to common stockholders - as reported            $ 180,669)  $ (26,169)    $ (6,517)
Net loss attributable to common stockholders - pro forma              $(200,985)  $ (30,324)    $ (7,203)
Net loss per share attributable to common stockholders - as reported  $   (5.31)  $   (2.17)    $  (0.60)
Net loss per share attributable to common - stockholders - pro forma  $   (5.90)  $   (2.51)    $  (0.66)
</TABLE>

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 2000, 1999 and 1998, respectively: no dividend yield; expected
volatility of 160 percent, 130 percent and 98 percent; risk free interest rates
approximating 6.0 percent, 6.3 percent and 5.5 percent; and an average expected
life of approximately 4 years. The per share weighted average fair value of the
options granted during the year ended December 31, 2000, 1999 and 1998 was
$4.89, $2.89, and $2.26, respectively.

DIRECTOR OPTION PLAN

Under the terms of the Director Option Plan, directors of the Company who are
not officers or employees each receive nonstatutory options to purchase 9,000
shares of common stock of the Company. During the year ended December 31, 1998,
independent members of the Board of Directors were granted options to purchase a
total of 9,000 shares of common stock, at a weighted average price per share of
$2.19. No options were granted under this plan in the years ended December 31,
2000 and 1999.

1996 STOCK OPTION PLAN

Under the terms of the Company's 1996 Stock Option Plan (the "1996 Plan"),
either incentive stock options or nonstatutory options may be granted. 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
generally expire five to ten years from the grant date and typically vest 20% to
25% per year. Compensation expense recorded for options granted to employees at
less than fair value on the date of the grant is recognized on a straight-line
basis over the performance period.

1999 STOCK OPTION PLAN

Under the terms of the Company's 1999 Stock Option Plan (the "1999 Plan"),
either incentive stock options or nonstatutory stock options may be granted. The
purchase price of shares subject to any incentive stock option granted will not
be less than the fair value at the date of grant. Stock options granted
generally expire ten years from the grant date and typically vest 50% per year.
Compensation expense recorded for options granted to employees at less than the
fair value on the date of grant is recognized on a straight-line basis over the
performance period, unless accelerated based upon certain events.

1991 REVISED OPENROUTE STOCK OPTION PLAN

In connection with the acquisition of OpenROUTE, the Company adopted the 1991
Revised OpenROUTE Stock Option Plan (the "OpenROUTE Plan") and assumed 2.4
million options held by former OpenROUTE option holders with identical terms to
the original OpenROUTE options. In accordance with the Emerging Issues Task
Force Issue No. 90-9, "Changes to Fixed Employee Stock Option Plans as a Result
of Equity Restructuring" ("EITF 90-9") the fair value of options in the Company
issued in exchange for options in OpenROUTE are included as part of the purchase
price of OpenROUTE.

The OpenROUTE Plan generally provides for the granting to employees of incentive
stock options to purchase shares of common stock at the fair market value as
defined by the plan on the date of grant and of non-qualified stock options at


                                       41
<PAGE>

no less than 50% of the fair market value as defined by the plan on the date of
the grant. Generally, options become exercisable at the rate of 25% at the end
of each of the first four anniversaries of the grant. Options generally expire
ten years from the date of grant, or ninety days from the date of termination of
employment.

AMENDED AND RESTATED 1997 AETHERWORKS STOCK OPTION PLAN

In connection with the acquisition of AetherWorks on March 16, 2000, the Company
adopted the Amended and Restated 1997 AetherWorks Stock Option Plan (the
"AetherWorks Plan") and assumed AetherWorks stock options exercisable for 0.8
million shares held by former AetherWorks option holders on the terms provided
in the AetherWorks Plan. In accordance with EITF Issue No. 90-9, the fair value
of options in the Company issued in exchange for options in AetherWorks are
included as part of the purchase price of AetherWorks.

The AetherWorks Plan generally provides for the granting to employees of
incentive stock options to purchase shares of common stock at the fair market
value as defined by the plan on the date of grant and of non-qualified stock
options at no less than 85% of the fair market value as defined by the plan on
the date of the grant. Generally, options become exercisable during a period of
not more than five years from the date of grant. Options generally expire ten
years from the date of grant, or ninety days from the date of termination of
employment.

Under the terms of the AetherWorks acquisition agreement, an adjustment was made
to the merger consideration, which resulted in an additional 1.8 million stock
options in the Company being issued under the AetherWorks Plan and included as a
part of the purchase price of AetherWorks.

On March 16, 2000, in addition to the stock options included as a part of the
purchase price of AetherWorks, the Company issued former AetherWorks' employees
1.0 million stock options under the AetherWorks Plan. The stock options have an
exercise price of $6.81 per share and vest quarterly until January 1, 2002. The
Company recorded deferred compensation of $16.1 million for the difference
between the exercise price and the fair market value of the common stock on the
date of grant. Compensation expense of $7.9 million was recorded by the Company
for the year ended December 31, 2000.

RE-PRICING OF STOCK OPTIONS

On September 30, 1999, the Company reduced the exercise price of 200,000 options
issued to members of the Board of Directors to $2.50 per share from an exercise
price of $3.31 on the date of grant in July 1999. In accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation (an Interpretation of APB Opinion No. 25)", through December 31,
2000, the Company recorded no compensation expense for the change in the
intrinsic value of the re-priced options prospectively from July 1, 2000 because
the common stock price at December 31, 2000 was below $2.50 per share. The
Company will have to account for future variations in the price of the common
stock above $2.50 per share as compensation expense until the re-priced options
are either exercised, cancelled or expire.

On December 23, 2000, the Company gave employees the right to elect to
participate in a re-pricing of the exercise price of all of an employee's
outstanding stock options to $0.75 per share. Any re-priced options are subject
to vesting through September 30, 2001 or the stock options original vesting
provisions, whichever is greater. The Company also reduced the exercise price of
all outstanding stock options issued to current members of the Board of
Directors to $0.75 per share. Approximately 5.3 million stock options were
re-priced to $0.75 per share. In accordance with FASB Interpretation No. 44, the
Company recorded no compensation expense for the year ended December 31, 2000
because the common stock price at December 31, 2000 was below $0.75 per share.
The Company will have to account for future variations in the price of the
common stock above $0.75 per share as compensation expense until the re-priced
options are either exercised, cancelled or expire.

On December 23, 2000, the Company re-priced the exercise price of 2,000,000
stock options issued to a former executive to $0.75 per share from exercise
prices of $1.50 - $16.75 per share. In accordance with EITF No. 00-23, "Issues


                                       42
<PAGE>

Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44", the Company recorded no compensation expense for
the year ended December 31, 2000 because the common stock price at December 31,
2000 was below $0.75 per share. The Company will have to account for future
variations in the price of the common stock above $0.75 per share as
compensation expense until the re-priced options are either exercised, cancelled
or expire.

The following table summarizes the activity under the common stock option plans
described above:

                                      Number       Exercise        Weighted
                                       of          Price Per        Average
                                      Shares        Share        Exercise Price
                                    ----------    ----------     --------------
Outstanding, December 31, 1997      1,225,225   $ 1.25 - $  8.69     $  2.93
   Granted at market value            659,200   $ 1.09 - $  3.13     $  2.96
   Exercised                           (3,441)  $ 3.00 - $  3.13     $  2.85
   Canceled                          (508,937)  $ 1.68 - $  7.88     $  3.65
                                    ----------
Outstanding, December 31, 1998      1,372,047   $ 1.25 - $  8.69     $  2.92
   Granted at market value          2,056,140   $ 2.50 - $ 12.44     $  3.52
   Granted below market value       1,619,700   $ 1.50 - $  2.75     $  2.43
   Granted in connection with the
       OpenROUTE acquisition        2,387,175   $ 0.81 - $  7.50     $  1.79
   Exercised                         (292,270)  $ 0.91 - $  4.13     $  2.57
   Canceled                          (470,539)  $ 1.09 - $  7.13     $  3.01
                                    ----------
Outstanding, December 31, 1999      6,672,253   $ 0.81 - $12.44      $  2.10
   Granted at market value          2,828,785   $ 0.59 - $29.56      $  8.45
   Granted above market value       1,984,844   $ 0.75 - $14.65      $  1.86
   Granted below market value         535,494   $ 6.00 - $14.65      $  6.26

   Granted in connection with the
        AetherWorks acquisition     2,558,613            $ 1.60      $  1.60
   Exercised                       (2,951,627)  $ 0.59 - $14.94      $  1.87
   Canceled                        (1,449,811)  $ 0.91 - $29.56      $  6.58
   Exchange of options in
     re-pricing                    (7,331,333)  $ 0.75 - $29.56      $  5.35
   Re-priced options                7,331,333           $  0.75      $  0.75
                                    ---------   ---------------   ----------
Outstanding, December 31, 2000     10,178,551   $ 0.75 - $29.56      $  1.41
                                   ==========   ===============   ===========
Exercisable, December 31, 2000      4,201,419   $ 0.75 - $29.56      $  4.02
                                   ===========  ===============   ===========


Exercise prices for employee stock options outstanding at December 31, 2000, are
as follows:

<TABLE>
<CAPTION>
                        Outstanding                      Exercisable
                        -----------                      -----------
                               Weighted                Weighted    Weighted Average
                                Average                 Average        Remaining
    Range of        Stock      Exercise     Stock      Exercise    Contractual Life
 Exercise Prices    Options      Price      Options      Price          (years)
 ---------------    -------      -----      -------      -----          -------
<S> <C>               <C>         <C>          <C>         <C>                <C>
$  0.75           7,451,333   $   0.75     2,473,125   $   0.75           8.84
$  0.81 - $ 1.50    533,094       1.21        82,988       0.97           5.14
$  1.53 - $ 1.60  1,244,275   $   1.60     1,139,667   $   1.60           9.25
$  1.69 - $ 5.23    493,804   $   2.88       355,781   $   2.88           8.41
$  5.75 - $ 8.00    237,462   $   7.02        61,087   $   6.77           9.40
$  8.06 - $16.75    200,208   $  13.04        73,583   $  12.74           9.22
$ 19.06 - $29.56     18,375   $  25.42        15,188   $  25.16           9.16
                 ----------   ---------    ---------   --------        --------
        Total    10,178,551   $   1.41     4,201,419   $   4.02           8.83
                 ==========   ========     =========   ========        ========
</TABLE>



                                       43
<PAGE>



STOCK COMPENSATION TO EMPLOYEES

Based on provisions of the chief executive officer's employment contract, the
acquisition of OpenROUTE constituted a change in control. As a result of the
change in control, the Company was obligated to issue 1.0 million shares of
common stock. In 1999, the Company recognized $16.4 million of compensation
expense, which was the fair value of the shares to be issued. The Company issued
the 1.0 million shares of common stock in 2000.

During the years ended December 31, 2000 and 1999, the stock compensation
expense for options granted to employees at below market value, including the
1.0 million options issued in 2000 to former AetherWorks employees discussed
above, was $10.5 million and $1.4 million, respectively. At December 31, 2000,
the remaining deferred compensation expense related to these grants is $8.5
million. In 1998, no stock options were granted to employees at below market
value.

In connection with the termination of certain employees during the years ended
December 31, 2000 and 1999, the Company vested stock options that would have
otherwise been forfeited. In accordance with APB Opinion No. 25 and the related
interpretations, the Company recorded stock compensation expense of $1.5 million
and $1.0 million, respectively. In 1998, the Company did not vest any stock
options that would have otherwise been forfeited.

In connection with the termination of certain employees during the year ended
December 31, 2000, the Company extended the life of stock options that would
have otherwise been forfeited. In accordance with APB Opinion No. 25 and the
related interpretations, the Company recorded stock compensation expense of $0.2
million. In 1999 and 1998, the Company did not extend any stock options that
would have otherwise been forfeited.

In connection with the termination of an employee during the year ended December
31, 2000, the Company granted 100,000 shares of common stock and 100,000 stock
options with an exercise price of $6.00 per share, which vest over a six-month
period and expire ten years from date of grant. In accordance with APB Opinion
No. 25 and the related interpretations, the Company recorded stock compensation
expense of $4.7 million for the year ended December 31, 2000.

In connection with the termination of an executive during the year ended
December 31, 2000, the Company granted 500,000 stock options at an exercise
price of $3.00 per share, which vest over a two-year period and expire five
years from date of grant. The exercise price of the 500,000 stock options was
re-priced to $1.00 per share. In accordance with APB Opinion No. 25 and the
related interpretations, the Company recorded stock compensation of $0.2 million
for the year ended December 31, 2000.

STOCK COMPENSATION TO NON-EMPLOYEES

During the year ended December 31, 2000, in connection with general consulting
services provided during the year, the Company issued options to acquire 145,440
shares of common stock at an average exercise price of $3.51 per share. The fair
value of the stock options was valued at $0.4 million, using the Black-Scholes
pricing model and is reflected in stock compensation expense in the accompanying
financial statements.

During the year ended December 31, 2000, the Company established an advisory
board and upon joining the advisory board and attending meetings, the advisory
board members were granted a total of 135,000 stock options at an average
exercise price of $15.18 per share. These options vest over a six to twelve
month period and expire ten years from date of grant. The fair value of the
stock options recorded as stock compensation for the year ended December 31,
2000 was valued at $0.2 million, using the Black-Scholes pricing model.

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


                                       44
<PAGE>

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 60,587 shares, 68,101 shares and 90,932 shares to employees in
2000, 1999 and 1998, respectively.

PRIVATE PLACEMENT

In April 1998, the Company completed a private placement by issuing and selling
1,750,000 shares of common stock at a price of $1.25 per share. In connection
with the private placement, the Company received net proceeds of approximately
$2.1 million. The shares issued in the private placement were registered for
resale pursuant to a registration statement declared effective by the Securities
and Exchange Commission on June 12, 1998. The offering costs were accounted for
as a reduction to additional paid-in capital in the accompanying consolidated
statements of changes in stockholders' equity.

On March 28, 2001, the Company completed a private placement by issuing and
selling 2,207,018 shares of common stock at $0.9062 per share.

PREFERRED STOCK

In May 1999, the Company completed a private placement by selling and issuing
297,187 shares of Series A 8% Convertible Preferred Stock (the "Series A
Preferred Stock"), par value $0.05 per share, at a price of $13.75 per share,
and by issuing warrants to purchase an additional 50,000 shares of common stock
at an exercise price of $2.75 per share. Each share of Series A Preferred Stock
had a liquidation preference equal to its purchase price, plus accrued and
unpaid dividends. Dividends were cumulative from May 14, 1999 and payable
semi-annually, in arrears on April 30 and October 31, commencing October 31,
1999. Dividends were payable in cash or shares of common stock at the Company's
election. Cash dividends of $108,000 were paid on October 31, 1999. No
additional dividends are due.

The Series A Preferred Stock was convertible at any time prior to redemption, at
the option of the holder into common stock at a conversion rate equal to five
shares of common stock for each share of Series A Preferred Stock, subject to
adjustment in certain circumstances. The fair value of the Series A Preferred
Stock's beneficial conversion feature, reflective of the difference between the
conversion price of the Series A Preferred Stock and the market value of the
underlying common stock on the date of issue, constitutes for accounting
purposes, a dividend by the Company. The beneficial conversion feature is
required to be reflected as a non-cash charge to earnings in the consolidated
statement of operations as the transfer restrictions on the underlying common
stock lapse. The transfer restrictions lapse when the average closing price for
the common stock over a period of 10 consecutive trading days is at least 125
percent, 156 percent, 195 percent and 244 percent of the initial conversion
price of the Series A Preferred Stock, $2.75 per share. All transfer
restrictions lapsed in 1999, which resulted in non-cash dividend charges to
earning of approximately $1.2 million, for the year ended December 31, 1999.

The Series A Preferred Stock was redeemable or convertible to common stock at
the option of the Company at any time after the closing bid price for the common
stock on the NASDAQ Stock Market had equaled or exceeded $6.00 for 10
consecutive trading days, with a redemption price of $17.50 per share. In
December 1999, the shares were converted into common stock under this provision.

On December 29, 2000, the Company completed a private placement by selling and
issuing 333,333 shares of Series B 8% redeemable, convertible preferred stock
(the "Series B Preferred Stock"), par value $0.05 per share, at a price of $7.50
per share, and by issuing warrants to purchase 666,667 shares of common stock at
an exercise price of $0.90 per share. Each share of Series B Preferred Stock has
a liquidation preference equal to its purchase price, plus accrued and unpaid
dividends. Dividends are cumulative and compound quarterly. Dividends will be
paid semi-annually on May 31 and November 30 of each year, and are payable in
cash or shares of common stock at the option of the Company.



                                       45
<PAGE>

On January 17, 2001, the Company completed a private placement by selling and
issuing 15,400 shares of Series C 8% redeemable, convertible preferred stock
(the "Series C Preferred Stock"), par value $0.05 per share, at a price of
$162.50 per share. Each share of Series C Preferred Stock has a liquidation
preference equal to its purchase price, plus accrued and unpaid dividends.
Dividends are cumulative and compound quarterly. Dividends will be paid
semi-annually on May 31 and November 30 of each year, and are payable in cash or
shares of common stock at the option of the Company.

The Series B and C Preferred Stock are convertible at any time after stockholder
approval to increase the Company's authorized common shares by at least 10
million (the "Conversion Date"). After the Conversion Date and prior to
redemption, the Series B Preferred Stock is convertible into common stock at a
conversion rate equal to ten shares of common stock for each share of Series B
Preferred Stock. The shares are redeemable at the option of the holder for cash
equal to $7.50 per share of Series B Preferred Stock plus an amount equal to
110% of the difference between the conversion price and the current market price
per share of the Company's common stock if the Conversion Date does not occur
before September 30, 2001. After the Conversion Date and prior to redemption,
the Series C Preferred Stock is convertible into common stock at a conversion
rate equal to 100 shares of common stock for each share of Series C Preferred
Stock. The shares are redeemable at the option of the holder for cash equal to
$162.50 per share of Series C Preferred Stock plus an amount equal to 110% of
the difference between the conversion price and the current market price per
share of the Company's common stock if the Conversion Date does not occur before
September 30, 2001.

On March 6, 2001, the Company's stockholders approved an increase in the
Company's authorized common shares from 55 million to 85 million, and as of
March 6, 2001, the Conversion Date, the Series B and C Preferred Stock are no
longer redeemable at the option of the holder. The market value of the Company's
common stock on the date of issuance of the Series C Preferred Stock was $2.25
per share. The fair value of the Series C Preferred Stock's beneficial
conversion feature, reflective of the difference between the conversion price of
the Series C Preferred Stock and the market value of the underlying common stock
on the date of issuance, will constitute for accounting purposes, a dividend by
the Company. A beneficial conversion feature will be reflected as a non-cash
dividend charge to earnings in the consolidated statement of operations in the
first quarter of 2001.

On March 6, 2001, the Company completed a private placement by selling and
issuing 11,734 shares of Series D 8% convertible preferred stock (the "Series D
Preferred Stock"), par value $0.05 per share, at a price of $140.62 per share,
and by issuing warrants to purchase 234,676 shares of common stock at an
exercise price of $2.11 per share. Each share of Series D Preferred Stock has a
liquidation preference equal to its purchase price, plus accrued and unpaid
dividends. Dividends are cumulative and compound quarterly. Dividends will be
paid semi-annually on June 30 and December 31 of each year, and are payable in
cash or shares of common stock at the option of the Company. Prior to
redemption, the Series D Preferred Stock is convertible into common stock at a
conversion rate equal to 100 shares of common stock for each share of Series D
Preferred Stock.

WARRANTS

In April 1998, in connection with the Private Placement, the Company issued
warrants to their underwriters to purchase 140,000 shares of common stock at an
exercise price of $1.75 per share. The warrants were valued at $0.3 million,
using the Black-Scholes pricing model. The offering costs were accounted for as
a reduction of the net proceeds of the private placement in the accompanying
consolidated statements of changes in stockholders' equity.

In April 1999, in connection with the Company's lending institution's
forgiveness of past debt covenant defaults, the Company issued warrants to
purchase 50,000 shares of common stock at an exercise price of $2.00 per share.
The warrants were valued at $0.1 million, using the Black-Scholes pricing model.
The financing costs were accounted for as interest expense in the accompanying
consolidated statements of operations.

In July 1999, in connection with the offering of the Series A Preferred Stock,
the Company issued warrants to professional services and corporate finance

                                       46
<PAGE>

consultants to purchase 124,818 shares of common stock at an average exercise
price of $2.98 per share. The fair value of the warrants was valued at $0.3
million, using the Black-Scholes pricing model. The offering costs were
accounted for as a reduction of the net proceeds of the preferred stock in the
accompanying consolidated statements of changes in stockholders' equity.

In August 1999, in connection with the acquisition of OpenROUTE, the Company
issued warrants to professional service providers to purchase 100,000 shares of
common stock at an exercise price of $3.00 per share. The fair value of the
warrants was valued using the Black-Scholes pricing model at the end of each
reporting period through the acquisition of OpenROUTE. The value of the warrants
became fixed on the date of the OpenROUTE acquisition, resulting in acquisition
costs of $1.4 million. The acquisition costs were accounted for as additional
purchase price for the OpenROUTE acquisition.

During the year ended December 31, 1999, in connection with general consulting
services provided during the year, the Company issued warrants to purchase
52,500 shares of common stock at an average exercise price of $4.76 per share.
The fair value of the warrants was valued at $0.1 million, using the
Black-Scholes pricing model, and were accounted for as stock compensation
expense in the accompanying consolidated statements of operations.

During the year ended December 31, 2000, in connection with legal services
provided during the year, the Company issued warrants to purchase 65,000 shares
of common stock at an exercise price of $12.43 per share. The fair market value
of the warrants was valued at $0.4 million, using the Black-Scholes pricing
model and were accounted for as stock compensation expense in the accompanying
consolidated statements of operations.

During the year ended December 31, 2000, in connection with general consulting
services provided during the year, the Company issued warrants to purchase
510,000 shares of common stock at an average exercise price of $0.96 per share.
The warrants vested in 2000 and for the year ended December 31, 2000, the
Company recorded compensation expense of $0.6 million.

On December 29, 2000, in connection with the sale of the Series B Preferred
Stock, the Company issued redeemable warrants to purchase 666,667 shares of
common stock at an exercise price of $0.90 per share. The warrants were valued
at $0.4 million, using the Black-Scholes pricing model. The warrants are
redeemable at the option of the holder for cash equal to 110% of the difference
between the exercise price and the current market price per share of the
Company's common stock if the Conversion Date, as previously defined, does not
occur before September 30, 2001. As a result of the redemption provision, as of
December 31, 2000, the warrants are classified as a long-term liability in the
accompanying balance sheet. On March 6, 2001, the Company's stockholders
approved an increase in the Company's authorized common shares from 55 million
to 85 million, and as of March 6, 2001, the Conversion Date, the warrants are no
longer redeemable at the option of the holder.

Exercise prices for warrants outstanding as of December 31, 2000 are as follows:

                                    Number
                                 Outstanding   Weighted Average
                                    as of         Remaining          Weighted
                                 December 31,  Contractual Life      Average
Range of Exercise Prices             2000           (years)       Exercise Price
------------------------        ------------    ---------------   --------------
$  0.90 - $  0.90                    666,667            5.00         $    0.90
$  1.75 - $  1.75                    110,000            2.33         $    1.75
$  2.50 - $  3.75                    144,818            3.58         $    3.02
$  5.00 - $  7.00                     32,500            3.42         $    6.08
$ 12.43 - $12.43                      75,000            4.25         $   12.64
                                  ----------       ---------         ---------
        Total                      1,028,985            4.41         $    2.31
                                  ==========       =========         =========



                                       47
<PAGE>





PROMISSORY NOTE WITH AN EMPLOYEE

On April 7, 2000, the Company entered into a full-recourse promissory note (the
"Note") and stock pledge agreement (the "Pledge Agreement") for $1,000,000 with
an employee. Collateral under the Pledge Agreement was 155,038 shares of the
Company's common stock held by the employee.

On December 29, 2000, the Company amended the Note and Pledge Agreement to
remove the full-recourse provision and expand the collateral under the amended
Note. Collateral under the amended Pledge Agreement included any and all shares
of the Company's common stock the employee owns in excess of 34,428 as well as
upon exercise of any stock options, the employee shall pay the Company one-half
of the proceeds of the sale of such common stock to pay amounts due under the
Note.

As of December 31, 2000, the Note is recorded as an offset to equity. By
removing the recourse feature of the Note, under EITF 95-16, "Accounting for
Stock Compensation Arrangements with Employer Loan Features under APB Opinion
No. 25," 1,600,000 shares of common stock held by the employee as collateral for
the Note in effect becomes a variable option. As of December 31, 2000, no
compensation expense was recorded associated with this variable option because
the common stock price at December 31, 2000 was equal to common stock price on
December 29, 2000. The Company will have to account for future variations in the
price of the common stock above $0.63 per share as compensation expense until
the Note is paid.

5.    DEBT:

LINE OF CREDIT

In February 2000, the Company entered into a $10.0 million line of credit
agreement with its chief executive officer, Steven T. Francesco. The loan
agreement provided for interest of prime plus 5% on the outstanding principal.
No amounts were borrowed under this agreement. The line was terminated in March
2000 upon the Company completing an equity offering greater than $10.0 million.

In November 1997, the Company negotiated a $3.0 million line of credit agreement
with a lending institution to be used for working capital. Borrowings under the
line were based on qualified domestic accounts receivable and were
collateralized by the Company's assets. In February 2000, the Company terminated
this line of credit. At December 31, 1999, the Company had approximately $1.0
million outstanding of the $1.2 million available under the line of credit
agreement.

NOTE PAYABLE TO VENDOR

Through December 2000, the Company had an agreement with SMTC, the third party
contract manufacturer of substantially all of the Company's products, whereby
the Company ordered inventory based on three-month floating sales projections.
Under this agreement, the Company was required to purchase all projected
inventory amounts that were not sold to customers within 120 days after the end
of the three-month period. Company sales in the third and forth quarter of 2000
did not meet the projections submitted to SMTC, and, in the fourth quarter 2000,
the Company became obligated to purchase approximately $3.1 million of
additional inventory.

In January 2001, the Company entered into an unsecured promissory note with
SMTC. The note was established for the purpose of financing approximately $3.3
million of payables to SMTC, as well as the purchase of the additional $3.1
million of inventory described above. The $6.4 million note bears interest at
12% per year and is due in weekly installments of varying amounts through
December 2001. If the Company makes all installment payments on time, the
interest rate of the note will be reduced to 9.75%. In the event of default, the
balance of the note, including interest, becomes payable on demand.




                                       48
<PAGE>



6.    INCOME TAXES:

As of December 31, 2000, the Company had net operating losses of approximately
$167.5 million available for carryforward to offset future income for Federal
income tax purposes. Approximately $46.5 million of these net operating losses
will be limited due to the change in ownership that occurred prior to the
OpenROUTE acquisition.

These carryforwards expire in years 2002 through 2020 as follows (in thousands):

      2002                        $    1,659
      2003                             4,318
      2004                             2,552
      2005                             1,323
      Thereafter                     157,652
                                   ---------
            Total                  $ 167,504
                                   =========

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 $4.0 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
depreciation expense, capitalization of certain inventory costs for tax purposes
and bad debt reserves.

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

                                                         YEAR ENDED DECEMBER 31,
                                                         ----------------------
                                                              2000       1999
                                                              ----       ----
Federal regular tax operating loss carryforwards           $  63,652   $ 34,167
Research and development tax credit carryforwards              4,033      3,700
Other                                                          6,559      5,627
                                                           ---------   ---------
   Deferred tax assets                                        74,244     43,494
Valuation allowance                                          (74,244)   (43,494)
                                                           ----------  ---------
   Net deferred tax assets                                 $      --   $     --
                                                           ==========  =========

The Company has determined that the net deferred tax asset as of December 31,
2000 and 1999, does not satisfy the recognition criteria set forth in SFAS No.
109. Accordingly, a valuation allowance was recorded against the applicable net
deferred tax assets.

7.   COMMITMENTS AND CONTINGENCIES:

RESTRUCTURING CHARGES

In April 1999, the Company implemented a restructuring of operations to reduce
and economize its work force as part of an overall plan to return to
profitability. The restructuring charge of $0.9 million resulted from $0.8
million of accrued severance and benefit costs associated with a
reduction-in-force of 36 employees across all functional areas of the Company,
and $0.1 million of accrued facility costs resulting from the consolidation of
facilities and premature termination of various office leases. During the year
ended December 31, 1999, the Company paid $0.8 million of severance payments and
$0.1 million of lease termination costs. At December 31, 1999, there was no
remaining restructuring accrual related to this restructuring charge.

In April 1997, the Company implemented a restructuring of operations to reduce
and economize its work force in response to declining revenues and the
discontinuance of its micro.pop product. The restructuring resulted in an
overall reduction of personnel and related compensation and other associated
operating costs of the Company. The reduction-in-force occurred over


                                       49
<PAGE>

approximately a one-year period and severance payments were generally made in
lump sum in February 1997. The 1997 restructuring charges of $0.9 million
resulted from approximately $0.4 million of accrued severance and outplacement
costs associated with a reduction-in-force of approximately 37 employees across
all functional areas of the Company, approximately $0.4 million of fixed asset
write-offs and facility relocation charges 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, and other associated costs of approximately $0.1 million. During the
year ended December 31, 1999, the Company paid $0.1 million of final severance
payments to certain international employees that resulted from the April 1997
restructuring of operations. At December 31, 1999, there was no remaining
restructuring accrual related to this restructuring charge.

LEASES

The Company's principal administrative and research and development facilities
consist of approximately 56,000 square feet located in Herndon, Virginia and
approximately 44,000 square feet in Westborough, Massachusetts. The lease for
the Company's headquarters facility in Herndon, Virginia includes annual
escalations of a fixed amount during each year of the lease through April 2009.
In addition, the lease contains a financial covenant requiring the Company to
make timely rental payments with no forbearance period if net tangible assets
are less than $7.0 million. The Company currently does not have net tangible
assets of $7.0 million, therefore the Company is subject to immediate eviction
if a monthly rental payment is late.

From October 1, 1999 through October 31, 2000, the Company sub-leased 24,000
square feet in the principal Herndon, Virginia facility. The sub-lease space
increased to 27,500 square feet from November 1, 2000 through October 31, 2001.
From January 1, 1997 through October 1998, the Company subleased 28,000 square
feet in a secondary Herndon, Virginia facility. This lease was terminated in
October 1998. Sublease revenue of $0.1 million, $0.1 million, and $0.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively, is presented
as a reduction of rent expense in the accompanying consolidated statements of
operations.

The Westborough premises are occupied under a lease expiring in April 2002.
Additionally, the Company leases space for sales offices in the United States
and the United Kingdom. Among those sales offices is a lease through May 2007
for an office in Campbell, California. Due to a reduction in personnel in March
2001, the Company is currently in discussions with the landlord to return a
portion of this space. The Company also leases office space for the Company's
AetherWorks division in St. Paul, Minnesota. The Company recognizes rent
expense, net of any sublease revenue, on a straight-line basis. Net rent expense
was $1.9 million, $1.2 million and $1.8 million for the years ended December 31,
2000, 1999 and 1998, respectively.

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

    YEAR ENDING DECEMBER 31,      NET PAYMENTS
    -------------------------     ------------
      2001                         $   2,254
      2002                             1,868
      2003                             1,769
      2004                             1,819
      2005                             1,880
      Thereafter                       5,224
                                ------------
            Total                   $ 14,814
                                ============

The Company has ten capital leases with the Carlton Financial Corporation for
equipment located at the Company's Minnesota and California locations. These
leases pertain to a variety of equipment used by the Company's AetherWorks
division. All leases were signed on September 27, 1996 and expire at various
times, through May 31, 2002. As of December 31, 2000, the Company's total
remaining obligation under its capital leases is $0.7 million.




                                       50
<PAGE>





LITIGATION

In November 2000, the Company was served with complaints in purported class
action proceedings. The complaints allege violation of the federal securities
laws in connection with statements and disclosures made by certain of the
Company's executives between December 8, 1999 and April 24, 2000. The complaints
seek unspecified damages. The Company believes the allegations in the complaints
are without merit, and intends to vigorously defend its position in this
litigation.

In November 2000, the Company was served with a complaint in a purported class
action proceeding. The complaint alleges that between July 27 and November 2,
2000 the Company breached securities laws in connection with the circumstances
that led the Company to restate the financial statements for the quarter ended
June 30, 2000. The complaint seeks unspecified damages. The Company believes it
has meritorious defenses and intends to vigorously defend this litigation.

In addition to the legal proceedings discussed above, the Company is
periodically involved in disputes arising from normal business activities. In
the opinion of management, resolution of these matters will not have a material
adverse effect upon the financial position or future operating results of the
Company, and adequate provision for any potential losses has been made in the
accompanying financial statements.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

The Securities and Exchange Commission has commenced an investigation into the
matters surrounding the Company's restatement of revenues for its quarter ended
June 30, 2000. For the quarter ended June 30, 2000, the Company restated
revenues from $10.4 million to $8.4 million for sales made to two of its value
added resellers ("VARs"). These sales were dependent upon the payment to the
VARs from their customers.

8.   EMPLOYEE BENEFIT PLAN:

The Company has a 401k savings plan ("401k Plan") covering all eligible
employees. 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. In 2000,
1999, and 1998, the Company contributed approximately $221,000, $81,000 and
$18,000, respectively, to the 401k Plan.

9.       SEGMENT INFORMATION:

The Company adopted the Statement on Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131").  The Company's two reportable segments are products and services.
The Company evaluates the performance of its segments based on gross profit.
Under SFAS No. 131, the Company is required to provide enterprise-wide
disclosures about revenues by product and service revenues, long-lived assets
by geographic area and revenues from major customers.




                                       51
<PAGE>



REVENUES

Revenues consisted of the following (in thousands):

                                             YEAR ENDED DECEMBER 31,
                                             ----------------------

Product group:                             2000       1999        1998
                                           ----       ----        ----
    2200                               $   6,598  $   13,035 $   8,343
    2500                                   6,961      7,870      7,210
    3000                                     818          -          -
    S1000                                      -        647      1,076
    S10                                      199      1,589      3,357
    Telecom                                   52        246      1,854
    Internet                               4,737      1,113          -
    LAN                                      365          5          -
                                      ----------  --------- ----------
      Total product group revenues        19,730     24,505     21,840
Service group                              7,485      6,740      9,642
                                      ----------  --------- ----------
      Total revenues                    $ 27,215  $  31,245  $  31,482
                                      ==========  =========  =========

GEOGRAPHIC INFORMATION

The Company sells its products and services through its foreign affiliates in
the United Kingdom, Germany, Italy and Singapore. Information regarding revenues
and long-lived assets attributable to the United States and to all foreign
countries is stated below. The geographic classification of product and service
revenues was based upon the location of the customer.

The Company's product and service revenues for 2000, 1999 and 1998 were
generated in the following geographic regions (in thousands):

                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                    2000       1999        1998
                                                    ----       ----        ----
United States                                   $  14,073  $   16,441 $  14,933
Europe, Middle East and Africa                      7,653      8,971     13,149
Pacific Rim, Latin America and South America        5,489      5,833      3,400
                                                ---------  ---------  ---------

  Total revenues                                 $ 27,215  $  31,245  $  31,482
                                                 =========  =========  ========

Included in domestic product revenues are sales through systems integrators and
distributors to the Federal Government of $0.3 million, $0.2 million, and $0.5
million for the years ended December 31, 2000, 1999 and 1998, respectively.

The Company's long-lived assets including goodwill and acquired intangibles
were located as follows (in thousands):

                                          AS OF DECEMBER 31,
                                          -----------------
                                           2000          1999
                                           ----          ----
    United States                      $ 31,686      $  74,497
    United Kingdom                          114            201
    Germany                                   -              3
    Italy                                     -             12
                                       ----------   ----------
      Total long-lived assets          $ 31,800       $ 74,713
                                       ==========   ==========


                                       52


<PAGE>



SIGNIFICANT CUSTOMERS

Customers that accounted for greater than 10% of total revenues in 2000, 1999
and 1998 are described below (in thousands):

                                     YEAR ENDED DECEMBER 31,
                                     ----------------------
                                   2000       1999       1998
                                   ----       ----       ----
    Distributor 1                 $    *     $    *    $ 2,849
      Product                          *          *      2,235
      Service                          *          *        614

    Distributor 2                 $    *     $ 3,736   $  2,186
      Product                          *       3,645      2,176
      Service                          *          91         10

    Distributor 3                 $    *     $ 3,255   $     *
      Product                          *       3,255         *
      Service                          *          *          *

    Distributor 4                 $ 2,819    $    *    $     *
      Product                       2,299         *          *
      Service                         520         *          *

* Revenue accounted for less than 10% of total revenues for the period.


                                       53
<PAGE>





10.   QUARTERLY FINANCIAL DATA (UNAUDITED):

The following tables set forth selected unaudited quarterly financial data. The
quarterly financial data reflect, in the opinion of the Company, all normal and
recurring adjustments necessary to present fairly the results of operations for
such periods. Results of any one or more quarters are not necessarily indicative
of annual results or continuing trends.

                                   2000 Quarters Ended (unaudited)
                          ---------------------------------------------------
                           March 31(a)  June 30  September 30  December 31 (b)
                          ---------------------------------------------------
(In thousands, except per share data)
Revenues                    $ 8,943    $ 8,430      $ 6,699    $ 3,143
Gross profit                  3,455      3,058        1,383     (3,281)
Loss from operations       (48,407)    (18,981)     (21,566)    (92,274)
Net loss attributable to
common stockholders        (48,437)    (18,612)     (21,410)    (92,210)
Basic and diluted net
loss per share             $ (1.57)    $ (0.53)     $ (0.60)   $ (2.60)

                                  1999 Quarters Ended (unaudited)
                          ------------------------------------------------------
                           March 31    June 30   September  30  December 31 (c)
                          ------------------------------------------------------
(In thousands, except per share data)
Revenues                    $ 7,316    $ 6,011     $ 8,061    $  9,857
Gross profit                  3,197      2,742       4,299       4,472
Loss from operations         (1,172)    (2,496)     (1,397)    (19,527)
Net loss attributable to
common stockholders          (1,312)    (2,569)     (1,976)    (20,312)
Basic and diluted net
 loss per share            $  (0.11)   $ (0.22)     $(0.17)    $( 1.48)

(a)The quarter ended March 31, 2000 includes $30.8 million of an in-process
   research and development charge upon the completion of the AetherWorks
   acquisition (see Note 1).

(b)The quarter ended December 31, 2000 includes the effect of an additional
   $5.4 million of reserves for excess and obsolete inventory. The Company
   also recognized a $64.5 million impairment charge in the quarter (see Note 2)
   and a bad debt charge of $1.4 million resulting from one customer filing
   bankruptcy.

(c)The quarter ended December 31, 1999 includes stock compensation expense of
   $16.4 million for 1 million shares of common stock which became due to the
   Company's CEO upon completion of the OpenROUTE merger.




                                       54
<PAGE>





ITEM 8.   SUBSEQUENT EVENTS.

None

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

None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

  NAME                       AGE  OFFICE

  John E. DuBois.........     39   Chief Executive Officer, Chairman of the
                                   Board and Director
  Heidi Heiden...........     62   Director
  Dr. Robert M. Glorioso..    51   Director
  Thomas Liebermann.......    51   Director
  Douglas J. Mello.......     58   Director
  Richard Yalen..........     56   Director
  William Yundt...........    60   Director
  Steve Roberts..........     40   Chief Operations Officer
  Peter Kendrick.........     46   Vice President - Finance and
                                   Administration and Chief Financial Officer
  Jonathan Sachs..........    35   Chief Technology Officer and Senior Vice
                                   President of Engineering
  Jay R. Schifferli.......    40   General Counsel and Executive Vice
                                   President for Strategic Business
                                   Development

Our Board of Directors is divided into three classes. Class I is comprised of
Messrs. Yalen, Glorioso and Yundt, and their term of office expires at the 2002
annual meeting of stockholders. Class II is comprised of Messrs. Heiden, and his
term of office expires at the 2003 annual meeting of stockholders. Class III is
comprised of Messrs. DuBois, Mello and Liebermann, and their term of office
expires at the 2001 annual meeting of stockholders. Mr. John Faccibene and Mr.
Steve Francesco, each of whom was a Class II Director, resigned in February
2001. The Board has not yet determined whether it will seek to fill the
resulting vacancies or realign itself to add another Class II Director.

Each of our executive officers serves at the discretion of the Board of
Directors.

      JOHN E. DuBOIS has been our Chief Executive Officer and a Director since
January 2001. In February 2001 he also became our Chairman of the Board. Prior
to joining us, John DuBois was a Vice President of Redback Networks where he
helped to build over half of the company's revenue in 1999, allowing it to grow
in four years from a start-up into one of the most successful IPOs in history.
As Vice President of Eastern Region and Canadian sales, and later, Vice
President of I-LEC Sales, he also brought some of the first and largest major
customers to Redback, including UUNET and Bell Atlantic (Verizon). Prior to
joining Redback in 1997, DuBois was Chairman and CEO of NetStation, the holding
company for Netrail, which was then and remains a National Backbone ISP. Prior
to that, he spent two years at Cascade, five years at Telematics/ECI Telematics
in sales, sales engineering, and management, and five years at GTE/Telenet in
communications software engineering. He also spent time at SRA, a defense
contractor, and worked for the federal government in telecommunication
capacities.



                                       55
<PAGE>

      HEIDI HEIDEN has been a Director since January 2001. Mr. Heiden recently
retired from UUNET, Inc., a MCI WorldCom company, where he was a Director,
acting President and Senior Vice President for Operations and Technology. He was
responsible for planning, building and operating UUNET's worldwide network, in
addition to customer support and all information systems. Prior to joining UUNET
in 1995, Mr. Heiden held several senior executive positions in the commercial
sector, including his tenure as Senior Operating Officer at Salomon Brothers
from 1990-1995, where he was responsible for advanced technology, networking,
video, information security, commercial technology sales and messaging and
groupware systems. Mr. Heiden created and ran the DDN (Defense Data Network),
the largest data system of its time consisting of many worldwide computer
networks that formed the basis of what is now known as the Internet.

      DR. ROBERT M. GLORIOSO has been a Director since the merger with
OpenROUTE on December 22, 1999, and he was previously a member of OpenROUTE's
board of directors since March 1997.  Since April 1993, Dr. Glorioso has held
the position of President and Chief Executive Officer of, and has served as a
board member of, Marathon Technologies Corp.  From January 1976 to December
1992, Dr. Glorioso held several senior executive positions at Digital
Equipment Corporation, including Vice President of Information Systems
Business and Vice President of Executive Consulting.

      THOMAS  R.  LIEBERMANN  has  been a  Director  since  the  merger  with
OpenROUTE  on December 22, 1999 and he was  previously  a member of  OpenROUTE's
board of  directors  since  July 1998.  Mr.  Liebermann  is the Chief  Executive
Officer of  MobileToys  dot,  which  specializes  in content  and  software  for
electronic accessories for automobiles.  Prior to joining MobileToys dot, he was
Chairman and Chief Executive Officer of Advanced Frequency Products,  LLC, which
develops specialized  subsystems and components for the wireless  communications
and  motion  sensing  markets,  since  1997.  Prior to that Mr.  Liebermann  was
President and Chief Executive Officer of Kaye Instruments from 1989 until 1996.

      DOUGLAS J. MELLO became a Director of the Company in April 1999.  Mr.
Mello was employed by Bell Atlantic and its predecessor corporations from
1965 until March, 1999.  From 1997 to 1999, he served as President, Large
Business Sales-North for Bell Atlantic.  From 1996 to 1997, he was NYNEX Vice
President-Business Marketing and Amp Sales, responsible for all business
customers in the New York and New England areas.   From 1994 to 1996, he
served as Vice President-Sales for NYNEX Corporation.  Prior to 1994, Mr.
Mello was Group Vice President-Manhattan Market Area for New York Telephone,
where he was responsible for the provisioning of telecommunications
technology.  From 1985 to 1991, he was President of Business Information
Systems Corp.  Mr. Mello is a director of Ixnet, Inc. and of Telexis Co.

         RICHARD YALEN became a Director in April 1999.  Mr. Yalen is the Chief
Executive Officer of NeutralAct, Inc., which he joined in April 2001.  Prior to
joining NeutralAct, he was the Chief Executive Officer since April 2000 and the
Chairman of the Board since 1999 of Plan B Communications Inc., a CLEC.
Subsequent to Mr. Yalen's departure from Plan B Communications Inc., that
Company filed for protection from creditors under Chapter 11 of the U.S.
Bankruptcy Code.  Prior to joining Plan B Communications Inc., Mr. Yalen was the
Chief Executive Officer of Dynamic Telcom Engineering LLC, a telecommunications
company.   From 1992 to 1998, prior to joining Dynamic Telcom, Mr. Yalen served
in various positions at Cable & Wireless USA, including that of Chief Executive
Officer.

      WILLIAM YUNDT has been a Director since February 2000.   Mr. Yundt is
the Vice President of Network Operations at WebTV Networks, Inc., a
wholly-owned subsidiary of Microsoft Corporation, which position he has held
since 1996.  From 1994 until joining WebTV, Mr. Yundt served as a Vice
President of BBN Planet, the internet service arm of BBN Inc.  While Director
of Networking and Communications Systems at Stanford University, he founded
BARRNET, the San Francisco Bay Area Regional Network, which pioneered the
Internet in Northern California.  Mr. Yundt managed the development of
BARRNET until it was purchased by BBN in 1994.

      STEVE ROBERTS, our Chief Operating Officer, joined us in January 2001.
Prior to joining us, Mr. Roberts was Vice President of Worldwide Sales and
Customer Service for Chromatis Networks (Lucent) where he developed corporate
sales and customer service strategies for RBOCs, National CLECs, National ISPs,
DLECS, Cable Operators and Emerging/Start-up Carriers. Prior to joining
Chromatis in 1999, Mr. Roberts was Director of Sales, Northeastern Region,


                                       56
<PAGE>

Carrier Packet Solutions for Nortel Networks where he built relationships with
customers including: UUNET, Agis, Global One, CAIS, RCN, Net2000, C&W, Prism,
Hyperion, NaviNet, Eclipse, IDT, BBN, PSI, CFW, and Teligent. Prior to joining
Nortel in 1999, he was at Aptis Communications, as Sales Director/Eastern
Region, where his successes included major trials for national and international
deployment with UUNET, BBN, PSI, Bell Atlantic, and Bell South. Before joining
Aptis in 1998, Mr. Roberts, at Cascade Communications, was the top performing
Sales manager for the company.

      PETER J. KENDRICK joined us in August, 1999 as Vice President and Chief
Financial Officer. Prior to joining us, he served as Vice President and Chief
Financial Officer of PACI, a Nasdaq listed company. From 1991 to 1996, he was
Vice President and Chief Financial Officer of Capital-Carosel, Inc. Mr. Kendrick
also served as Senior Vice President-Corporate Finance for Johnston, Lemon and
Company and Vice President and Chief Financial Officer of VSC, Inc. In addition
he has held senior executive roles with C3, Inc., The Source and SCS.

      JONATHAN A. SACHS became our Chief Technical Officer and Executive Vice
President - Technology in March 2000 when we acquired AetherWorks.  Mr. Sachs
had been the Chief Executive Officer, President and a director of AetherWorks
from its formation in 1993 until we acquired it.

      JAY R. SCHIFFERLI became the General Counsel and Executive Vice
President for Strategic Business Development in April 2000.  Prior to joining
us, Mr. Schifferli was a partner in the law firm of Kelley Drye & Warren
LLP.  Mr. Schifferli joined Kelley Drye in 1986 and concentrated his practice
in securities, mergers and acquisitions and corporate law.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Exchange Act requires our directors, certain officers
and persons holding more than 10% of a registered class of our equity securities
to file reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission and the Nasdaq National Market. Directors,
certain officers and greater than 10% stockholders are also required by SEC
regulations to furnish us with copies of all such reports that they file. Based
on our review of copies of such forms provided to us, we believe that all filing
requirements were complied with during the fiscal year ended December 31, 2000,
except one late filing of Form 4 by Jonathan Sachs, in his capacity as an
executive officer, and one late filing of a Form 4 by Mr. Lieberman in his
capacity as a Director.




                                       57
<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

      The following table sets forth information concerning the compensation for
the last three fiscal years of our Chief Executive Officer and our other most
highly compensated executive officers who earned at least $100,000 in salary and
bonus in 2000 (together, the "Named Executive Officers") for the year ended
December 31, 2000.

                           SUMMARY COMPENSATION TABLE

                                                    LONG-TERM
                                                    ---------
                                                    COMPENSATION
                                                    ------------
                                                     AWARDS
                                                     ------
                                                   SECURITIES
                        ANNUAL COMPENSATION         UNDERLYING     ALL OTHER
NAME/POSITION      YEAR SALARY  $BONUS($)   OTHER    OPTIONS(#)    COMPENSATION
-------------      ---- ------  ---------   -----   ----------     ------------
Steven T.          2000 279,800(2) --    31,730(3)   900,000           --
Francesco(1)       1999 126,201    --      15,000  1,600,000     1,000,000
   Chairman of     1998   --       --            --       --     shares(4)
   the Board of                                                        --
   Directors

Jay R. Schifferli  2000 136,365    --     7,826      200,000           --
(4)
 General Counsel   1999   --       --      --             --           --
 and Exec.VP -     1998   --       --      --             --           --
 Strategic
 Business
 Development

Peter J. Kendrick  2000 135,565    -      5,950       25,000           --
 Chief Financial   1999 42,214     -       --        100,000           --
 Officer and Vice  1998   --       -       --             --           --
 President

Gregory McNulty(1) 2000 195,184  50,000   9,134      250,000           --
 Exec.Vice         1999   --       -       --             --           --
 President -       1998   --       -       --             --           --
 Sales and
 Marketing

Jonathan Sachs     2000 177,692    -       --        504,742           --
 Exec.Vice         1999   --       -       --             --           --
 President  -      1998   --       -       --             --           --
 Technology and
 Chief Technology
 Officer

Jerry Carter       2000 128,211    -      3,400       75,000           --
 Vice President    1999   --       -       --             --           --
 Operations        1998   --       -       --             --           --
-----------

(1) Mr. Francesco resigned as the Chief Executive Officer in November
    2000.  Mr. McNulty resigned from the company in March 2001.
(2) Includes $4,800 of retroactive pay relating to 1999.
(3) For 2000, represents payment of accrued vacation time in connection
    with Mr. Francesco's resignation.  For 1999, represents reimbursement of
    moving expenses.
(4) Upon the merger with Open ROUTE, Mr. Francesco became entitled to
    1,000,000 shares of common stock pursuant to the change of control
    provisions of his employment contract.  Mr. Francesco deferred receipt of
    such payment until January 5, 2001.  The income attributed to Mr.
    Francesco was $382,800.
(5) Mr. Schifferli became interim Chief Executive Officer in November
    2000.  He ceased to serve in this capacity on January 7, 2001.





                                       58
<PAGE>



OPTION GRANTS

      The following table summarizes option grants during 2000 to the Named
Executive Officers:

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

----------------------------------------------------------------------------------------------------------------
                                                                                          POTENTIAL REALIZABLE
                                                                                              VALUE AT ASSUMED
                                                                                         ANNUAL RATES OF STOCK
                                                                                            PRICE APPRECIATION
----------------------------------------------------------------------------------------------------------------
                               % OF TOTAL
                   OPTIONS       OPTIONS        EXERCISE   MARKET
                  GRANTED       GRANTED TO      PRICE ($/  PRICE ($) EXPIRATION   0% ($)   5% ($)   10% ($)
NAME              ( #)(A)       EMPLOYEES       SHARE)       (B)       DATE                 (C)


-----------------------------------------------------------------------------------------------------------------
<S>               <C>                          <C>       <C>         <C>                <C>        <C>
Steven T.         400,000                      8.06      8.06        4/4/10       --    2,027,00   5,138,000
Francesco         500,000(E)      9.3          1.00      1.00      11/10/05       --     314,000     796,000


Jay R.
Schifferli        200,000(D)      2.1          8.06      8.06       4/17/10        --  1,013,000    2,569,000
Peter J.            25,000          *          7.25      7.25       5/25/10        --    114,000      289,000
Kendrick
Gregory McNulty  250,000(D)       2.6         6.00      14.93        1/4/10  2,232,000  4,579,000   8,181,000

Jonathan Sachs    242,250(F)                  6.81      22.91        1/1/10  3,904,000  7,398,000  12,758,000
                   34,427                     5.23      22.91       3/16/10    608,000  1,104,000   1,856,000
                   78,065                     1.60      0.62       12/29/10         --         --          --
                  150,000          5.2        0.75      0.62       12/29/05         --     71,000     179,000

Jerry Carter       75,000            *        7.25      7.25        5/25/10         --    342,000     685,000

</TABLE>

-----
* less than 1 percent of total options granted to employees.

(A) Under the terms of our incentive stock option plan, the board of directors
    retains discretion, subject to plan limits, to modify the terms of the
    outstanding options and to re-price the options. The options generally were
    granted for a term of 10 years, subject to earlier termination in the event
    of termination of employment.
(B) Equals fair market value of common stock on the date of grant.
(C) 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.
(D) Identified options were granted based on terms of an employment contract.
(E) Identified options were granted based on terms of a severance contract.
(F) 150,000 of the identified options were granted based on terms of an
    employment contract. 34,427 of the identified options were issued in the
    conversion of options originally granted by AetherWorks Corporation,
    pursuant to the agreement by which we acquired AetherWorks. 78,065 of the
    identified options were issued as an adjustment to the 34,427 options, in
    accordance with the AetherWorks acquisition agreement.




                                       59
<PAGE>



OPTION EXERCISES AND YEAR-END VALUES

      The following table summarizes option exercises during 2000 by the Named
Executive Officers and the value of the options held by such persons at the end
of 2000:

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

<TABLE>
<CAPTION>
                    SHARES
                   ACQUIRED                   NUMBER OF                  VALUE OF UNEXERCISED
                      ON         VALUE      UNEXERCISED OPTIONS          IN-THE-MONEY OPTIONS
                   EXERCISE    REALIZED      AT FISCAL YEAR-END (#)      AT FISCAL YEAR-END ($)
s    NAME              (#)         ($)      EXERCISABLE\UNEXERCISABLE    EXERCISABLE\UNEXERCISABLE
   ------          -------     --------    -------------------------    -------------------------
<S>                <C>         <C>         <C>                                  <C>
Steven Francesco       --          --       2,062,500 437,500                   --    --
Jay R. Schifferli      --          --              0  200,000                   --    --
Peter J. Kendrick      --          --              0  125,000                   --    --
Gregory McNulty        --          --              0  250,000                   --    --
Jonathan Sachs         --          --              0  504,742                   --    --
Jerry Carter           --          --              0  137,917                   --    --

</TABLE>

TEN YEAR OPTION RE-PRICINGS

      On December 23, 2000, the Board of Directors re-priced all options of our
employees and directors. The following table summarizes the effect of this
re-pricing on the Named Executive Officers.

                      OPTION RE-PRICING IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                          LENGTH OF
                                                  MARKET                                  ORIGINAL
                                                  PRICE         EXERCISE                 OPTION TERM
                                NUMBER OF        OF STOCK       PRICE          NEW        REMAINING
                                OPTIONS          AT TIME OF   AT TIME OF    EXERCISE     AT DATE OF
    NAME             DATE       RE-PRICED       RE-PRICING($) RE-PRICING($)  PRICE($)    RE-PRICING
   ------           ------    -------------      ---------   -------------   ---------  ------------
<S>                 <C>          <C>               <C>           <C>           <C>         <C>
Steven Francesco    12/23/00     400,000            0.75          1.50          0.75        8 years
                    12/23/00  1,200,0000            0.75          2.75          0.75        8 years
                    12/23/00     400,000            0.75          8.06          0.75        9 years
Jay R. Schifferli   12/23/00     200,000            0.75          8.06          0.75        9 years
Peter J. Kendrick   12/23/00     100,000            0.75          2.50          0.75        8 years
                    12/23/00      25,000            0.75          7.25          0.75        9 years
Gregory McNulty     12/23/00      50,000            0.75         12.43          0.75        8 years
                    12/23/00      50,000            0.75          2.50          0.75        8 years
                    12/23/00     250,000            0.75          6.00          0.75        9 years
Jonathan Sachs      12/23/00     242,250            0.75          6.81          0.75        9 years
                    12/23/00      34,427            0.75          5.23          0.75        9 years
                    12/29/00      78,065            0.62          1.60          0.75       10 years
Jerry Carter        12/23/00      75,000            0.75          7.25          0.75        9 years
                    12/23/00      50,000            0.75          2.50          0.75        8 years
                    12/23/00       7,667            0.75          1.69          0,75        8 years
                    12/23/00       5,250            0.75          3.13          0.75        7 years

</TABLE>





                                       60
<PAGE>





      REPORT OF THE COMPENSATION COMMITTEE ON OPTION RE-PRICING

      On December 23, 2000, at the recommendation of the compensation committee,
the board of directors re-priced all options outstanding to employees and
directors. The new exercise price was fixed at $0.75 per share, which was in
excess of the last reported sales price of the common stock on the Nasdaq Stock
Market on the preceding trading day. The last reported sales price on December
22, 2000 was $0.62 per share.

      In order to benefit from the re-pricing, an employee must elect to
participate in the option re-pricing program. In order to participate, each
employee must surrender all of his current options. The employee will then be
issued a number of new options equal to the number of the employee's options
surrendered. The new options will have a new vesting period. The new options
will vest as follows:

   o  With respect to any options vested at the time they are surrendered or any
      options scheduled to vest on or before March 31, 2001, the replacement
      options will vest in three installments. The first installment will equal
      25% of the employee's total options covered by this clause, and this
      installment will vest on March 31, 2001. The next installment will equal
      25% of the employee's total options covered by this clause, and this
      installment will vest on June 30, 2001. The remaining 50% of the
      surrendered options covered by this clause will vest on September 30,
      2001.
   o  With respect to any options surrendered by an employee that were
      scheduled to vest after March 31, 2001 but on or before June 30, 2001, the
      replacement options will vest in two installments. The first installment
      will equal 50% of the employee's total options covered by this clause, and
      this installment will vest on June 30, 2001. The remaining 50% of the
      surrendered options covered by this clause will vest on September 30,
      2001.
   o  With respect to any options surrendered by an employee that were scheduled
      to vest after June 30, 2001 but on or before September 30, 2001, the
      replacement options will vest on September 30, 2001.
   o  With respect to any surrendered option that was scheduled to vest after
      September 30, 2001, the replacement option will maintain the same vesting
      schedule.

      If we terminate an employee without cause prior to September 30, 2001 or
the employment relationship is terminated due to death or disability, then at
the time of termination the employee will become vested in all options that the
employee would have been vested if the employee had not participated in the
option re-pricing program. Except as described in this report, the replacement
options will be governed by the stock option plan under which they were issued.
The board of directors is evaluating a comparable vesting program with respect
to the re-priced options held by directors.

      The compensation committee recommended this re-pricing program to the
board of directors because of the need to retain the employees of the Company.
During the past year, we have emphasized equity participation as a significant
component of our employee compensation program. Given the decline of the
Company's stock price during 2000, all employee options were out of the money,
and for most of the options the discrepancy was so great that our employees
placed little or no value in their options. In light of this, we believed that
we would lose employees if we did not re-establish value in their equity
compensation. We believe the new option exercise price has the desired incentive
for our employees to maximize the value of the Company for all stockholders. In
order to realize our goal of ensuring employee retention, we also added a
vesting period, so only employees who stay with us during this period will fully
benefit from the re-pricing. We recognize there is a non-cash accounting charge
that results from the re-pricing program, but we considered the benefits of the
program to outweigh the accounting charge.

      Submitted by the Compensation Committee:

      Robert Glorioso
      John Faccibene




                                       61
<PAGE>





                            COMPENSATION OF DIRECTORS

      In 2000, each member of the board of directors who joined the board in
2000 and who was not an employee of the company was paid a one time grant of
50,000 stock options. The exercise price for these grants was $12.43, which was
the price at which the last grant to Directors had been made. On December 23,
2000, the Company re-priced the options issued to the board of directors to
$0.75 per share, the then market value. In addition, directors are reimbursed
for all reasonable expenses incurred by them in connection with their attendance
at board or committee meetings.

      In March 2001, the Board of Directors adopted a policy for grants of
options to Directors. The policy provides that options to acquire 50,000 shares
will be granted to new Directors, with an exercise price equal to the last
reported closing sales price at the time the Directors join the Board. In
addition, Directors will receive an annual grant of options to purchase 35,000
shares, effective on the anniversary of joining the Board, with an exercise
price equal to the last reported closing sales price at the time of the grant.

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The members of the compensation committee during 2000 were Doug Mello and
John Faccibene. Mr. Mello resigned from the committee in December 2000 when he
signed a consulting agreement with us. Robert Glorioso was appointed to the
compensation committee to replace Mr. Mello. Mr. Faccibene resigned from the
Board in February 2000, and Heidi Heiden was appointed to the compensation
committee to replace him. None of our executive officers currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing functions similar to the compensation
committee. No interlocking relationships exist between our board of directors or
our compensation committee and the board of directors of compensation committee
of any other company.

                      EMPLOYMENT AND SEVERANCE ARRANGEMENTS

      Each of the Named Executive Officers has an employment contract or
severance arrangement with us.

      Steven T. Francesco, our former Chairman and Chief Executive Officer,
entered into an employment agreement effective as of March 22, 1999. In
connection with Mr. Francesco's resignation as Chief Executive Officer in
November 2000, we entered into a Severance Agreement with him. Pursuant to his
Employment Agreement, upon his resignation Mr. Francesco became entitled to: (1)
continued base salary of $275,000 per year for a period of three years, (2)
accelerated vesting of 400,000 stock options that had not previously vested and
(3) continued participation in the Company's benefit plans for up to three
years. Mr. Francesco is also subject to a non-compete provision that extends for
three years.

      Pursuant to the terms of the Severance Agreement with Mr. Francesco, he
agreed to continue as a consultant to the Company through October 31, 2001,
providing services up to 20 hours per month, in exchange for a payment of
$12,500 per month. Mr. Francesco was also granted an additional 500,000 options
that vest quarterly over a two-year period but that only become eligible for
sale in equal quarterly installments of 125,000 shares. In addition, the
Severance Agreement provides mutual releases by each of the Company and Mr.
Francesco with respect to any claims related to actions during his employment
period.

      Jay Schifferli, our General Counsel and Executive Vice President -
Strategic Business Development, entered into an employment agreement effective
as of March 8, 2000. The term of Mr. Schifferli's agreement is through March 8,
2003. Under the agreement, Mr. Schifferli is paid a base salary of $200,000 per
annum, and he is eligible for an annual bonus to be established in the sole
discretion of the compensation committee. In addition, Mr. Schifferli has been
issued options to purchase 200,000 shares of common stock, and the options vest
over the term of his employment contract. Mr. Schifferli will become eligible
for up to an additional 50,000 options if certain performance criteria are met.
Mr. Schifferli's employment agreement also provides that, in the event of a
change in control of the Company, he will be issued 100,000 shares of common
stock. In the event Mr. Schifferli's employment is terminated by the Company


                                       62
<PAGE>

without cause or by Mr. Schifferli for good reason, as these terms are described
in the employment agreement, he will be entitled to: (1) receive an amount equal
to 12 months base salary, (2) accelerated vesting of all of his stock options
and (3) participation in the Company's benefit plans for up to 12 months. Mr.
Schifferli's employment agreement also contains non-compete provisions for up to
one year after termination of his employment, that relate to the manner in which
his employment is terminated. If the payment to Mr. Schifferli upon termination
or change of control results in the imposition of an excise tax pursuant to
Section 280G of the Internal Revenue Code, the Company will pay to Mr.
Schifferli a tax "gross-up" payment equal to the amount of his resulting tax
liability.

      Greg McNulty, our former Executive Vice President -Worldwide Sales and
Marketing, entered into an employment agreement effective as of January 4, 2000.
The term of Mr. McNulty's agreement was through January 4, 2003. Under the
agreement, Mr. McNulty was paid a base salary of $200,000 per annum, and he was
eligible for an annual bonus in the sole discretion of the compensation
committee. In addition, Mr. McNulty was issued options to purchase 250,000
shares of common stock, and the options were to vest over the terms of his
employment contract. He was also eligible for additional stock options if
certain performance criteria were met. Mr. McNulty's employment agreement also
provided that, in the event of a change in control of the company, he would be
issued 200,000 shares of common stock. Mr. McNulty's employment agreement also
contains non-compete provisions for up to one year after termination of this
employment, that relate to the manner in which his employment is terminated.

      Pursuant to the terms of the Severance Agreement with Mr. McNulty, he
resigned effective March 22, 2001. Upon his resignation, we appointed Mr.
McNulty to our Business Advisory Board. We agreed that Mr. McNulty would be
entitled to exercise the 100,000 options in which he had become vested as a
Director of the company and the 150,000 options he would have been vested in if
he had not entered into a re-pricing agreement with the company. We agreed that
Mr. McNulty would be permitted to exercise the options during the period ending
on the later of:

   o  June 20, 2001;
   o  90 days after the date the he ceases to be a member of our Business
      Advisory Board; or
   o  March 31, 2002 if we remove him from the Business Advisory Board without
      cause.

      Jonathan Sachs, our Executive Vice President - Technology and Chief
Technology Officer, entered into an employment agreement effective as of
December 29, 2000. The term of Mr. Sachs' agreement is through December 29,
2002. Under the agreement, Mr. Sachs is paid a base salary of $220,000 per
annum, and he is eligible for an annual bonus to be established in the sole
discretion of the compensation committee and a quarterly bonus to be established
in the discretion of the chief executive officer. In addition, Mr. Sachs has
been issued options to purchase 150,000 shares of common stock, and the options
vest over the term of his employment contract. In the event Mr. Sachs'
employment is terminated by the Company without cause or by Mr. Sachs for good
reason, as these terms are described in the employment agreement, he will be
entitled to: (1) continued payment of his base salary for the lesser of 12
months or the remaining term of his agreement, (2) accelerated vesting of all of
his stock options and (3) participation in the Company's benefit plans for up to
12 months. Mr. Sachs' employment agreement also contains non-compete provisions
for up to one year after termination of his employment, that relate to the
manner in which his employment is terminated.

      Peter Kendrick, our Vice President and Chief Financial Officer, entered
into an employment agreement effective as of August 2, 1999. The term of Mr.
Kendrick's agreement is through August 2, 2001. Under the agreement, Mr.
Kendrick is paid a base salary of $135,000 per annum, and he is eligible for an
annual bonus to be established in the sole discretion of the compensation
committee. In addition, Mr. Kendrick was issued options to purchase 100,000
shares of common stock pursuant to the agreement, and these options vested at
the time of the Company's acquisition of OpenROUTE Networks, Inc. in December
1999. In the event Mr. Kendrick's employment is terminated by the Company
without cause or by Mr. Kendrick for good reason, as these terms are described
in the employment agreement, he will be entitled to: (1) receive an amount equal
to twelve months base salary, (2) accelerated vesting of all of his stock
options and (3) participation in the Company's benefit plans for up to twelve
months. Mr. Kendrick's employment agreement also contains non-compete provisions
for up to one year after termination of his employment, that relate to the
manner in which his employment is terminated.



                                       63
<PAGE>

      Jerry Carter, our Vice President - Operations, entered into an executive
retention agreement effective as of February 1, 1999. In the event Mr.Carter's
employment is terminated by the Company without cause or by Mr. Carter for good
reason, as these terms are described in the retention agreement, he will be
entitled to: (1) receive an amount equal to six months base salary and (2)
continue to receive health, disability and similar benefits during this period.
The retention agreement also contains a six-month non-complete provision. The
term of the agreement extents until December 31, 2001, and automatically renews
for additional one-year periods unless notice of termination is provided at
least ninety days prior to the end of the term.

      In addition to these agreements with the Named Executive Officers, on
December 29, 2001 we entered into an employment agreement with John DuBois
pursuant to which he agreed to become our chief executive officer and a
director. The term of Mr. DuBois' agreement is through January 3, 2004. Under
the agreement, Mr. DuBois is paid a base salary of $260,000 per annum, and he is
eligible for quarterly and annual bonuses at the sole discretion of the board of
directors. In addition, Mr. DuBois has been issued options to purchase 3,200,000
shares of common stock. 500,000 of the options have vested and the remainder
vest over the term of his employment contract. Mr. DuBois exercised the 500,000
vested options upon signing his agreement. Mr. DuBois' employment agreement also
provides that, in the event of a change in control of the Company, he will be
issued 400,000 shares of common stock. In the event we terminate Mr. DuBois'
employment without cause or Mr. DuBois terminates his employment for good
reason, as these terms are described in the employment agreement, he will be
entitled to: (1) receive an amount equal to 12 months base salary, (2)
accelerated vesting of all of his stock options and (3) participation in our
benefit plans for up to 12 months. Mr. DuBois' employment agreement also
contains non-compete provisions for up to one year after termination of his
employment, that relate to the manner in which his employment is terminated. If
the payment to Mr. DuBois upon termination or change of control results in the
imposition of an excise tax pursuant to Section 280G of the Internal Revenue
Code, we will pay to Mr. DuBois a tax "gross-up" payment equal to the amount of
his resulting tax liability.

                      STOCK OWNERSHIP OF MANAGEMENT AND OTHERS

      The following table sets forth certain information, as of April 9, 2001,
with respect to the beneficial ownership of our common stock by:

   o  each of our directors;

   o  our chief executive officer and each of our other most highly compensated
      executive officers who earned at least $100,000 in salary and bonuses for
      fiscal 2000; and

   o  all of our directors and executive officers as a group.





                                       64
<PAGE>





      As of April 9, 2001, we believe that except as shown in the following
table no person beneficially owned more than 5% of the outstanding shares of our
common stock.

                                                  NUMBER OF       PERCENTAGE
                                                    SHARES         OF COMMON
                                                 BENEFICIALLY        STOCK
                BENEFICIAL OWNER                   OWNED(1)      OUTSTANDING (2)
                ----------------                   --------      ---------------


Steven Francesco.............................     4,300,000 (3)        9.0%

John DuBois..................................     3,776,682 (4)        7.9%


Douglas J. Mello.............................       225,866             *

Heidi Heiden.................................        12,500             *

 Richard Yalen...............................       105,866             *

 Thomas Liebermann...........................       75,866  (5)         *

 Robert Glorioso.............................       93,991  (6)         *

 William Yundt...............................       60,866  (7)         *

 Jay R. Schifferli...........................       25,000              *

 Peter J. Kendrick...........................       28,125              *

 Greg McNulty................................          --               *

 Jonathan Sachs..............................    2,205,603 (8)         4.9%

 Jerry Carter................................       35,625              *

All Directors and executive officers as
a group (14 persons).........................   10,945,990            21.5%
---------
*     Less than 1%




                                       65
<PAGE>





(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 that the individual has the right to
   acquire within 60 days after April 9, 2001 through the pursuant to
   outstanding preferred stock, warrants, options or other rights. The inclusion
   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. The address of each beneficial owner is care of the Company. Except
   as otherwise indicated, all shares shown in this column represent shares
   underlying stock options.
(2)Number of shares deemed outstanding includes approximately 44,390,000 shares
   outstanding as of April 9, 2001, plus any shares subject to preferred stock,
   warrants of options held by the person in question that are currently
   convertible or exercisable for common stock or will become convertible or
   exercisable within 60 days after April 9, 2001.
(3)Includes 1.0 million shares owned, 666,667shares issuable upon the
   conversion of preferred stock, 133,333 shares issuable upon the exercise of
   warrants and 2.5 million shares issuable upon the exercise of options.
(4)Includes 500,000 shares owned, 2,355,568 million shares issuable upon the
   conversion of preferred stock, 471,114 shares issuable upon the exercise of
   warrants and 450,000 shares issuable upon the exercise of options.
(5)Includes 15,000 shares owned, 5,000 shares held in trust for which he has
   dispositive and voting power and 55,866 shares issuable upon the exercise of
   options.
(6)Includes 5,625 shares owned and 88,366 shares issuable upon the exercise of
   options.
(7)Includes 5,000 shares owned and 55,866 shares issuable upon the exercise of
   options.
(8)Includes 2,007,324 shares owned and 198,279 shares issuable upon the
   exercise of options.



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<PAGE>






ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In February 2000, we entered into a $10.0 million line of credit agreement
with Steve Francesco, then our chief executive officer. The loan agreement
provided for interest of prime plus 5% on the outstanding principal. No amounts
were borrowed under this agreement. Per the agreement, the line was terminated
in March 2000 when we completed an equity offering greater than $10.0 million.

      From April, 2000 to July, 2000 John DuBois, our current Chief Executive
Officer and Chairman of the Board, was a member of our Advisory Board. In this
capacity he was granted options to acquire 12,500 shares of common stock at an
exercise price of $14.56 per share, subject to vesting requirements. Due to a
conflict of interest, he resigned from the Business Advisory Board in July, 2000
and all of his options cancelled.

      In April 2000, we loaned $1,000,000 to Jonathan Sachs, our Chief
Technology Officer. The loan is evidenced by a promissory note and bears
interest at the rate of 9% per annum. Mr. Sachs pledged his shares of common
stock and certain other rights to secure the obligation. The loan must be repaid
on or before May 15, 2003, and the loan documents provide that Mr. Sachs must
pay over to us any proceeds he receives from the sale of common stock (other
than common stock received upon the exercise of options) and one-half of any
proceeds he receives from the sale of common stock upon exercise of options as
prepayment of the loan.

      Jay Schifferli, our General Counsel, was a Partner at Kelley Drye & Warren
LLP, an international law firm, prior to joining us. During the course of 2000,
Kelley Drye was our primary corporate counsel. We incurred fees to Kelley Drye
of $149,000 during 2000.

      In November 2000 we entered into a severance agreement with Steve
Francesco, then our chief executive officer and a member of our Board of
Directors pursuant to which Mr. Francesco resigned as an officer and employee
but continued to serve as a Director. Pursuant to the agreement, he agreed to
continue as a consultant to us through October 31, 2001, providing services up
to 20 hours per month, in exchange for a payment of $12,500 per month. Mr.
Francesco was also granted an additional 500,000 options that vest over two
years and become eligible for sale in equal quarterly installments of 125,000
shares. In addition, the Severance Agreement provided mutual releases by each of
the Company and Mr. Francesco with respect to any claims related to actions
during his employment period.

      In December 2000, John DuBois, our Chief Executive Officer, and Steve
Francesco, then our Chairman of the Board, participated in a private offering of
preferred stock and warrants that we conducted. Mr. DuBois invested $1.5 million
and received preferred stock convertible into 2.0 million shares of common stock
at a conversion price of $0.75 per share and warrants to purchase 400,000 shares
of common stock at an exercise price of $0.90 per share. Mr. Francesco invested
$500,000 and received preferred stock convertible into 666,670 shares of common
stock at a conversion price of $0.75 per share and warrants to purchase 133,333
shares of common stock at an exercise price of $0.90 per share. The last
reported closing market price of the common stock on the date of this
transaction was $0.625.

      On December 29, 2000, we entered into a consulting agreement with Doug
Mello, one of our Directors. Pursuant to the agreement, Mr. Mello agreed to
perform services requested of him by the company, and to devote at least five
days a month to the company. In return, we agreed to pay to him $120,000 per
annum and we granted him 120,000 options that vest over a six-month period. The
agreement has a one-year term.

      In January 2001, Steve Roberts, who soon after joined us as our Chief
Operating Officer, participated in a private offering of preferred stock that we
conducted. Mr. Roberts invested $500,000 and received preferred stock
convertible into 307,692 shares of common stock at a conversion price of $1.62
per share. The last reported closing market price of the common stock on the
date of this transaction was $2.25.

      In March 2001, John DuBois, our Chief Executive Officer and Chairman of
the Board, participated in a private offering of preferred stock and warrants


                                       67
<PAGE>

that we conducted. Mr. DuBois invested $500,000 and he received preferred stock
convertible into 355,568 shares of common stock at a conversion price of $1.4062
per share and warrants to purchase 71,114 shares of common stock at an exercise
price of $2.11 per share. The last reported closing market sales price of our
common stock on the date of this transaction was $1.4062 per share.

                                     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

      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
      ------------------------------------------
                                                                        PAGE
                                                                        ----

            Report of Independent Public Accountants                      28
            Consolidated Statements of Operations                         29
            Consolidated Balance Sheets                                   30
            Consolidated Statements of Stockholders' Equity               31
            Consolidated Statements of Cash Flows                         32
            Notes to Consolidated Financial Statements                    33

      (2)  FINANCIAL STATEMENT SCHEDULES

      INDEX TO CONSOLIDATED FINANCIAL STATEMENT SUPPLEMENTAL SCHEDULE
      ---------------------------------------------------------------

                                                                        PAGE
                                                                        ----
      Report of Independent Public Accountants on
         Supplemental Schedule .......................................... 75
      For the three years in the period ended
         December 31, 2000:
      Schedule II - Consolidated Valuation and
         Qualifying Accounts............................................. 76

All other Schedules have been omitted because the required information is either
shown in the consolidated financial statements or notes thereto or they are not
applicable.

(3)   EXHIBITS

ITEM 16.  EXHIBITS

Exhibit
NUMBER        DESCRIPTION

2.1           Agreement and Plan of Merger, dated September 30, 1999, between
              Netrix Corporation and OpenROUTE Networks, Inc. (incorporated by
              reference to Exhibit 4.2 to our quarterly report on Form 10-Q
              filed on August 16, 1999).

2.2           Amendment to Agreement and Plan of Merger between Netrix
              Corporation and OpenROUTE Networks, Inc., dated November 9, 1999
              (incorporated by reference to our registration statement on Form
              S-4 filed on November 19, 1999).

2.3           Agreement and Plan of Merger, dated December 31, 1999 among
              Netrix Corporation, Nx1 Acquisition Corp. and AetherWorks
              Corporation (incorporated by reference to Exhibit 2.1 to our
              current report on Form 8-K filed on January 14, 2000).



                                       68
<PAGE>

Exhibit
NUMBER        DESCRIPTION

3.1           Amended and Restated Certificate of Incorporation of Netrix
              Corporation (incorporated by reference to Exhibit 3.1 to our
              registration of Form S-1 filed on September 18, 1992, as amended,
              File No. 33-50464 (the "l992 S-1")).

3.2           Amendment to Certificate of Incorporation of Netrix Corporation
              dated August 26, 1999 (incorporated by reference to Exhibit 4.8 to
              our registration statement on Form S-3, filed on June 18, 1999, as
              amended, File No. 333-81109 (the "1999 S-3")).

3.3           Certificate of Merger between Netrix Corporation and OpenROUTE
              Networks, Inc. (incorporated by reference to our annual report
              on Form 10-K for the year ended December 31, 1999).

3.4           Amendment to Certificate of Incorporation of Netrix Corporation
              dated September 13, 2000. (filed as Exhibit 3.4 to our
              Registration Statement on Form S-3 filed on January 17, 2001 File
              No. 333-53852(the "January 2001 S-3").

4.1           Specimen certificate of common stock of Nx Networks, Inc. (filed
              as Exhibit 4.1 to the January 2001 S-3).

4.2           Certificate of designations for the form of Series B 8%
              convertible preferred stock. (filed as Exhibit 4.2 to the
              January 2001 S-3).

4.3           Form of Warrant. (filed as Exhibit 4.3 to the January 2001 S-3).

4.4           Certificate of designations for the form of Series C 8%
              convertible preferred stock.

4.5           Certificate of designations for the form of Series D 8%
              convertible preferred stock.

4.6           Amendment to Certification of Incorporation of Nx Networks, Inc.
              dated March 2001.

4.7           Subscription Agreement related to the March 2001 private sale of
              common stock.

10.1          Employment Agreement dated December 29, 2000 between Nx
              Networks, Inc. and John DuBois (filed as Exhibit 10.1 to the
              January 2001 S-3).

10.2*         Severance Agreement dated November10, 2000 between Nx Networks,
              Inc. and Steven T. Francesco, as amended (filed as Exhibit 10.2
              to the January 2001 S-3).

10.3*         Employment Agreement between Netrix Corporation and Steven T.
              Francesco, dated March 22, 1999 (incorporated by reference to
              Exhibit 10.5 to our quarterly report on Form l0-Q, filed on
              November 15, 1999).

10.4*         Employment Agreement between Netrix Corporation and Peter J.
              Kendrick, dated August 2, 1999 (incorporated by reference to
              Exhibit 10.6 to our quarterly report on Form 10-Q, filed on
              November 15, 1999).

10.5*         Employment Agreement between Nx Networks Corporation and Gregory
              C. McNulty, dated January 4, 2000 (incorporated by reference to
              Exhibit 10.23 to our annual report on Form 10-K for the year ended
              December 31, 1999).



                                       69
<PAGE>

Exhibit
NUMBER        DESCRIPTION

10.6*         Employment Agreement dated March 8, 2000 between Nx Networks,
              Inc. and Jay R. Schifferli. (filed as Exhibit 10.6 to the
              January 2001 S-3).

10.7*         Employment Agreement dated December 29, 2000 between Nx
              Networks, Inc. and Jonathan Sachs, together with note and pledge
              agreement.  (filed as Exhibit 10.7 to the January 2001 S-3).

10.8*         Form of Retention Agreement with Executive Officers of Netrix
              Corporation (incorporated by reference to Exhibit 10.7 to our
              quarterly report on Form l0-Q, as amended, filed on November 15,
              1999).

10.9          Consulting Agreement, dated December 29, 2000 between Nx
              Networks, Inc. and Keir Kleinknecht. (filed as Exhibit 10.9 to
              the January 2001 S-3).

10.10*        Consulting Agreement, dated December 29, 2000 between Nx
              Networks, Inc. and Doug Mello. (filed as Exhibit 10.10 to the
              January 2001 S-3).

10.11*        1999 Long Term Incentive Plan of Netrix Corporation, as amended
              (incorporated by reference to Exhibit 10.9 to our quarterly report
              on Form 10-Q filed on November 15, 1999).

10.12*        Amended and Restated Incentive Stock Option plan of Netrix
              Corporation, as amended (incorporated by reference to Exhibit 10.1
              to our annual report on Form 10-K for the year ended December 31,
              1995).

10.13*        1992 Employee Stock Purchase Plan of Netrix Corporation
              (incorporated by reference to Exhibit 10.2 to our annual report on
              Form 10-K for the year ended December 31, 1995).

10.14*        1992 Directors Stock Option Plan of Netrix Corporation
              (incorporated by reference to Exhibit 10.3 to our annual report on
              Form 10-K for the year ended December 31, 1995).

10.15*        1996 Stock Option Plan of Netrix Corporation (incorporated by
              reference to Exhibit 10.4 to our annual report on Form 10-K for
              the year ended December 31, 1995).

10.16*        Amended and Restated 1997 Stock Option Plan of AetherWorks
              Corporation. (filed as Exhibit 10.16 to the January 2001 S-3).

10.17         1991 Restated Stock Option Plan of OpenROUTE Networks, Inc.
              (filed as Exhibit 19.1 to OpenROUTE's quarterly report on Form
              10-Q for the quarter ended June 27, 1992).

10.18         1988 Nonqualified Stock Option Plan of OpenROUTE Networks, Inc.
              (filed as Exhibit 10.7 to OpenROUTE's registration statement on
              Form S-1).

10.19         1991 Restated Stock Option Plan of OpenROUTE Networks, Inc.
              (filed as Exhibit 19.1 to OpenROUTE's quarterly report on Form
              10-Q for the quarter ended June 27, 1992).


                                       70
<PAGE>

Exhibit
NUMBER        DESCRIPTION

10.20         Restated Employee Stock Award Plan of OpenROUTE Networks, Inc.
              (filed as Exhibit 10.8 to OpenROUTE's registration statement on
              Form S-1).

10.21         Settlement Agreement and Release dated December 29, 2000 by and
              among Nx Networks and certain of the former owners of
              AetherWorks Corporation. (filed as Exhibit 10.21 to the January
              2001 S-3).

10.22         Office lease, dated July 1998, by and between Netrix Corporation
              and Bedminster Capital Funding LLC (incorporated by reference to
              Exhibit 10.15 to our amended quarterly report on Form 10-Q filed
              December 21, 1999).

10.23         Office Sublease, dated September 30, 1999, by and between Netrix
              Corporation and Scoreboard, Inc. (incorporated by reference to
              Exhibit 10.14 to our quarterly report on Form l0-Q, filed on
              November 15, 1999).

10.24         Lease Agreement, dated December 19, 1994, by and between OpenROUTE
              Networks, Inc. and WCB Twenty Limited Partnership (filed as
              Exhibit 10.31 to OpenROUTE's annual report on Form 10-K for the
              year ended December 31, 1994).

10.25         Amendment to Lease Agreement, dated December 19, 1994, by and
              between OpenROUTE Networks, Inc. and WCB Twenty Limited
              Partnership, dated May 23, 1997 (filed as Exhibit 10.18 to
              OpenROUTE's annual report on Form 10-K for the fiscal year ended
              December 31, 1997).

10.26         Amendment to Lease Agreement, dated December 19, 1994, by and
              between OpenROUTE Networks, Inc. and WCB Twenty Limited
              Partnership, dated June, 2000. (filed as Exhibit 10.26 to the
              January 2001 S-3).

10.27         Lease Agreement dated May 18, 2000 between Water Tower Campbell
              LLC and Netrix Corporation (incorporated by reference to Exhibit
              10.1 to our quarterly report on Form l0-Q, filed on August 15,
              2000).

10.28         Software License Agreement, dated January 1, 1990, by and
              between OpenROUTE Networks, Inc. and Noel Chiappa (filed as
              Exhibit 10.5 to OpenROUTE's registration statement on Form S-1).

10.29         Manufacturing Agreement, dated September, 1999, by and between
              Netrix Corporation and SMT Centre S.F. Inc. (incorporated by
              reference to Exhibit 10.8 to our quarterly report on Form 10-Q,
              as amended, filed on November 15, 1999).

10.30         Master Manufacturing and Purchase Agreement, dated August 1,
              1998, by and between OpenROUTE Networks, Inc., and U.S.
              Assemblies New England. (filed as Exhibit 10.30 to the January
              2001 S-3).

10.31*        Amendment to the 1999 Long Term Incentive Plan dated March 7,
              2001.



                                       71
<PAGE>

Exhibit
NUMBER        DESCRIPTION

10.32*        Termination Agreement dated March 22, 2001 between Nx Networks,
              Inc. and Greg McNulty.

23.1          Consent of Arthur Andersen LLP.


----------------
*This exhibit is a compensatory plan or arrangement in which executive officers
or directors of the Registrant participate.

+Confidential treatment has been requested for portions of this document.




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<PAGE>





(b)  Reports on Form 8-K

We did not file any Reports on Form 8-K during the period from September 30,
2000 to December 31, 2000.



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<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 Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

                                             NX NETWORKS, INC.


Date:   April 9 , 2001                   By:  /S/ JOHN E. DUBOIS
                                            ---------------------------------
                                                    John E. DuBois
                                          Chairman and Chief Executive Officer


        SIGNATURE                    TITLE                     DATE

/s/ John E. DuBois
---------------------------
       JOHN DUBOIS              Chairman, Chief            April 9, 2001
                                    Executive
                              (Principal Executive
                                   Officer)
/s/ Peter J. Kendrick
---------------------------
    PETER J. KENDRICK          Vice President of           April 9, 2001
                                   Finance and
                            Administration and Chief
                                Financial Officer
                              (Principal Financial
                                   Officer)

/s/ Jennifer Bell-Gordon
---------------------------
 JENNIFER BELL-GORDON              Controller               April 9, 2001
                             (Principal Accounting
                                   Officer)

/s/ Douglas J. Mello
---------------------------
     DOUGLAS J. MELLO              Director                April 9, 2001


/s/ Richard Yalen
---------------------------
      RICHARD YALEN                Director                April 9, 2001


/s/ Robert Glorioso
---------------------------
     ROBERT GLORIOSO               Director                April 9, 2001


/s/ Thomas Liebermann
---------------------------
    THOMAS LIEBERMANN              Director                April 9, 2001


/s/ William Yundt
---------------------------
     WILLIAM YUNDT                 Director                April 9, 2001


/s/ Heidi Heiden
---------------------------
    HEIDI HEIDEN                    Director                April 9, 2001





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                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Nx Networks, Inc.:

We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Nx Networks, Inc. (a Delaware
corporation, formerly Netrix Corporation) and its subsidiaries included in this
Form 10-K and have issued our report thereon dated April 9, 2001. Our report on
the financial statements includes an explanatory paragraph regarding Nx
Networks, Inc.'s ability to continue as a going concern. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The information included on Schedule II, Consolidated Valuation and
Qualifying Accounts 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

Vienna, Virginia
April 9, 2001




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<PAGE>





SCHEDULE II

                CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

                               BALANCE   CHARGES TO                  BALANCE AT
                                  AT     REVENUES                     END OF
DESCRIPTION                    BEGINNING   AND     OTHER* DEDUCTIONS  PERIOD
-----------                    OF PERIOD  EXPENSES ------ ----------  ------
                               --------- ---------

ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------

Year Ended December 31, 1998:  $ 1,505    1,489     --    (2,198)    $   796
Year Ended December 31, 1999:  $   796    1,364    1,812  (1,070)    $ 2,902
Year Ended December 31, 2000:  $ 2,902    3,962     --    (1,678)    $ 5,186





* Other represents the account balance acquired from OpenROUTE on December 22,
1999.



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