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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
(MARK ONE)
 
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
           ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
 
 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM        TO       .
 
                        COMMISSION FILE NUMBER 0-22087
                              YURIE SYSTEMS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              52-1778987
     (STATE OR OTHER JURISDICTION       (I.R.S. EMPLOYER IDENTIFICATION NO.)
   OF INCORPORATION OR ORGANIZATION)
 
        8301 PROFESSIONAL PLACE                         20785
             LANDOVER, MD                             (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
               
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 301-352-4600
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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          TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
          -------------------              -----------------------------------------
<S>                                        <C> 
COMMON STOCK, PAR VALUE $.01 PER SHARE     THE NASDAQ STOCK MARKET (NATIONAL MARKET)

</TABLE> 

 
 
  Indicate by check mark whether the registrant (1) has filed all reports 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. [_]
 
  The aggregate market value of the common stock of Yurie Systems, Inc. held
by non-affiliates as of March 20, 1998 based on the last reported sale price
for the registrant's common stock, as reported on the Nasdaq National Market,
was $132,744,427. Shares of common stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding common
stock, based on Schedule 13G filings, have been excluded since such persons
may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination of other purposes.
 
  As of March 20, 1998, the registrant had outstanding 25,445,268 shares of
its common stock.
 
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                     DOCUMENTS INCORPORATED BY REFERENCE:
 
  Portions of the registrant's definitive proxy statement, which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the end of the registrant's fiscal year, are incorporated by reference into
Part III, Items 10, 11, 12 and 13 of this report.
 
                              YURIE SYSTEMS, INC.
 
                          ANNUAL REPORT ON FORM 10-K
                              FOR THE YEAR ENDED
                               DECEMBER 31, 1997
 
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 <C>       <C>      <S>                                                 <C>
 PART I:   ITEM 1.  Business.........................................       3
           ITEM 2.  Properties.......................................      22
           ITEM 3.  Legal Proceedings................................      22
           ITEM 4.  Submission of Matters to a Vote of Securities
                    Holders..........................................      22
 PART II:  ITEM 5.  Market for the Registrant's Common Equity........      23
           ITEM 6.  Selected Financial Data..........................      23
           ITEM 7.  Management's Discussion and Analysis of Financial
                    Condition and Results of Operations..............      24
           ITEM 8.  Financial Statements and Supplementary Data......      30
           ITEM 9.  Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure..............      30
           ITEM 10. Directors and Executive Officers of the
 PART III:          Registrant.......................................      31
           ITEM 11. Executive Compensation...........................      31
           ITEM 12. Security Ownership of Certain Beneficial Owners
                    and Management...................................      31
           ITEM 13. Certain Relationships and Related Transactions...      31
           ITEM 14. Exhibits, Financial Statement Schedules and
 PART IV:           Reports on Form 8-K..............................      31
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                            INTRODUCTORY STATEMENT
 
  The Private Securities Litigation Reform Act (the "PLSRA") provides a "safe
harbor" for "forward-looking" statements. Certain statements included in this
Form 10-K are "forward-looking" within the meaning of the PLSRA. These include
statements regarding the anticipated growth in demand for ATM access products,
the anticipated growth in the Company's revenues from the development,
manufacture and sale of ATM access products, the expectation that such revenue
growth will result largely from sales of ATM access products to
telecommunications service providers and corporate end users, and statements
relating to the Company's international activities. Such forward-looking
statements, in addition to information contained in Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Form 10-K, are based on the Company's current expectations and are
subject to a number of risks and uncertainties that could cause actual results
in the future to differ significantly from results expressed or implied in any
forward-looking statements made by, or on behalf of, the Company. These and
other risks are detailed below. The Company assumes no obligation to update
any forward-looking statements contained herein, or that may be made from time
to time by, or on behalf of the Company.
 
  References made in this Annual Report on Form 10-K to "Yurie", the "Company"
or the "Registrant" refer to Yurie Systems, Inc. and subsidiaries.
 
                                    PART I
 
ITEM 1. BUSINESS
 
  Yurie designs, manufactures, markets and services ATM access equipment for
telecommunications service providers, Internet service providers corporate end
users and government end users. ATM is a standard for packaging and switching
digital information that facilitates high speed information transmission with
a high degree of efficiency. End users of telecommunications services have
traditionally maintained separate WANs for transmitting voice, data, video and
other electronic information among geographically dispersed locations. ATM
technology is conducive to consolidating these networks. The network
consolidation brought about by employing ATM access platforms can provide
savings in WAN communications costs and simplify network management.
 
  Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, designed primarily for telecommunications
carriers and Internet service providers, was released in September 1996. The
LDR50, designed for mid-size to large corporate offices, was released in March
1997. The Company designed its ATM access products to be flexible and
scaleable, so that customers can realize the benefits of ATM while preserving
their investments in existing equipment. The LDR products adhere to industry-
wide technical standards, allowing users to integrate the products into
current networks operating with other standards-compliant products. Yurie's
proprietary AQueMan algorithm allows the LDR products to reduce network
congestion while maintaining quality of service. The Company's LANET framing
protocol is capable of transporting ATM traffic over circuits of varying speed
and quality, including poor quality circuits. The Company's ATM access
products incorporate a variety of value-added features, including compact
size, scaleability, reliability and a broad variety of access interfaces.
 
  The Company's strategy centers on maintaining its technological leadership,
developing the telecommunications service provider, private label partner and
corporate end user markets while continuing to pursue government end users,
developing international markets and building strategic relationships. To
enhance its distribution efforts and pursue the telecommunications service
provider, private label partners and corporate
 
                                       3
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end user markets, the Company has established an international direct sales
force which currently consists of 26 sales personnel.
 
  During 1997, to further this strategy, Yurie entered into private-label
partner agreements with Bay Networks, Lucent Technologies, Inc. and Ericsson,
Inc., the U.S. subsidiary of Telefonaktiebolaget LM Ericsson. These agreements
permit each of Bay, Lucent and Ericsson to market and sell the Company's LDR
products into commercial and government markets for three years, subject to
renewal. None of these agreements has minimum purchase guarantees. In 1995,
Yurie and AT&T entered into an agreement (the "AT&T Agreement"), under which
AT&T received an exclusive license to sell Yurie products in government
markets, and guaranteed minimum annual purchases of $10 million for each of
1997 and 1998. During 1997, in response to the interest expressed by other
parties to sell Yurie products in government as well as commercial markets,
Yurie and AT&T amended the AT&T Agreement. Under this amendment, AT&T no
longer has the exclusive right to market and sell Yurie products in government
markets nor is it required to make its remaining minimum purchases of LDR
products in 1997 and 1998 totaling approximately $14.0 million.
 
  During 1997, the Company developed a significant customer relationship with
Splitrock Services, Inc. ("Splitrock"), a Texas corporation that provides
communications services specifically configured to meet the needs of large
network users. Splitrock purchased the underlying network assets of Prodigy
Services Corporation, an Internet service provider (the "Prodigy Network") in
1997. Yurie and Splitrock are parties to an agreement (the "Splitrock
Agreement") that requires Splitrock to purchase a minimum of $20.0 million of
LDR products from the Company in the period from July 1997 to December 1998
and provides for Yurie to furnish services to support deployment and
implementation of Yurie's products in Splitrock's network on a time and
materials basis. Kwok L. Li, the Chief Technology Officer and Vice Chairman of
the Board of Yurie, is Chairman of the Board of Splitrock and the majority and
controlling shareholder of Linsang Partners LLC. Linsang Partners LLC is the
majority shareholder of Splitrock.
 
  Of the Company's sales of LDR products in 1997, $12.4 million consisted of
direct purchases by Splitrock, $7.6 million of which purchases were credited
against Splitrock's minimum purchase guarantee under the Splitrock Agreement.
Splitrock and Ericsson executed a letter of intent on February 2, 1998,
pursuant to which Ericsson would provide Splitrock with certain services as
well as LDR products that Ericsson had purchased or will purchase under its
private-label partner agreement with the Company. Subsequently, during the
first quarter of 1998, Linsang Partners LLC agreed to purchase from Ericsson
for use in Splitrock's network, the $5 million of LDR products sold to
Ericsson in the fourth quarter of 1997. This expected $5 million purchase is
separate from the $12.4 million of product sales to Splitrock during 1997, and
upon such purchase by Linsang Partners LLC, will be credited against
Splitrock's minimum purchase guarantee under the Splitrock Agreement. Linsang
Partners LLC also submitted a purchase order to Ericsson for up to an
additional $2 million of LDR products, which purchases, as made, will also be
credited against Splitrock's minimum purchase guarantee under the Splitrock
Agreement.
 
  On December 1, 1997, Yurie acquired Data Labs, Inc., a privately-held
Delaware corporation ("Data Labs"), in a stock-for-stock merger (the "Data
Labs Merger"). Yurie issued shares of its common stock in the Data Labs Merger
in exchange for all of the outstanding capital stock of Data Labs and the Data
Labs common stock underlying all of the vested stock options and one-half of
the unvested stock options held by Data Labs directors, officers and
employees. The Data Labs Merger was treated as a pooling of interests for
financial reporting purposes.
 
INDUSTRY BACKGROUND
 
  Deregulation of the U.S. telecommunications industry, which began with the
breakup of AT&T in 1984, has triggered significant competition for the
provision of both long distance and local telecommunications services. The
Telecommunications Act of 1996 is expected to create even more competition
over the next few years. The international market has also experienced
increased deregulation, liberalization, privatization and the emergence of new
wireline and wireless alternatives to traditional carrier services. In this
intensely competitive
 
                                       4
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environment, telecommunications service providers throughout the world are
seeking to differentiate themselves, in part, by offering enhanced services
based on new and emerging technologies.
 
  Industry surveys show that both voice and data traffic are continuing to
expand. Businesses have increasingly deployed communications technology to
link remote sales offices, home offices, mobile offices and geographically
dispersed customers and suppliers. These businesses use increasingly powerful
computer technologies that enable new multimedia applications integrating
data, voice and video. The volume of network traffic has also grown
dramatically due to traffic on the Internet, a rapidly growing global web of
networks that permits users to communicate, share information and conduct
business throughout the world. Businesses demand telecommunications services
that provide significantly higher transmission capacity or bandwidth, the
flexibility to choose among services with varying bandwidths and the ability
to access communications services from remote locations.
 
  Driven by this combination of increased demand and competition, WAN
technology has made significant advances. Current WAN technology permits users
in geographically dispersed locations to communicate. However, most existing
networks have had difficulty keeping pace with the increase in WAN traffic,
resulting in network congestion and related performance inefficiencies.
 
 Today's Networking Technologies
 
  Time division multiplexing ("TDM") and frame relay are the networking
technologies currently most widely deployed in WANs. TDM, which was one of the
first technologies developed to send traffic through circuits across a WAN,
operates by dedicating a circuit--or fixed amount of bandwidth--to each end
device. TDM's use of dedicated circuits provides high quality service for all
network traffic, whether data, voice or video. Since information is not
continuously transmitted, however, the dedicated circuits are often idle. This
results in inefficient use of expensive bandwidth and high cost to TDM network
users.
 
  Frame relay was introduced in 1990 as a method of connecting local area
networks ("LANs") over WANs by using flexible bandwidth allocation to lower
the cost of transmission. Frame relay uses "packets" or "frames" to transmit
traffic, thereby allowing the same bandwidth to be shared by many users, each
using the bandwidth only for the time required to transmit a packet. Designed
primarily for data transmission, frame relay cannot guarantee the high quality
transmission of voice and video. Currently, frame relay is widely used to
transmit data over WANs, including the Internet. Due to the substantial
increase in data traffic over WANs, however, today's frame relay networks are
being used to transmit more traffic than they were designed to support,
resulting in network congestion.
 
  To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading the frame relay network
becomes more costly and inefficient and ultimately impractical.
 
 The Emergence of ATM as a Standard
 
  Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches in the "backbones" of their existing
networks. ATM segments data, voice and video traffic into small, uniform-sized
"cells," rather than the larger, variable-size "packets" or "frames" used in
frame relay. The addition of ATM backbone switches upgrades a network's
performance by increasing switching capabilities at the network's core. ATM's
cell-based architecture increases bandwidth utilization and seeks to provide
consistent quality of service and predictability for all traffic types. ATM is
also an enabling technology, making possible new network applications such as
video distribution, medical imaging and collaborative computing, all of which
would be impractical with conventional network technologies.
 
  ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of TDM and frame relay networks into
a single ATM network for data, voice and video. A single ATM network
 
                                       5
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offers the potential for economies of scale and streamlining of network
operations. ATM technology has been approved by both the ATM Forum, a group of
equipment manufacturers, telecommunications service providers and end users,
and the ITU as a standard in both the computer and telecommunications
industries. The standardization of ATM has allowed for compatibility of ATM
equipment and interoperability of ATM among a wide variety of interfaces and
vendors, which the Company believes will result in the widespread adoption
of ATM.
 
 Current Status of ATM
 
  The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because
ATM was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.
 
  Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to
"bandwidth hungry" users and limited ATM deployment within the providers'
networks. Driven by increasing competition and the rapid growth of data
traffic on frame relay systems, a number of telecommunications service
providers began deploying ATM for use in their network backbones to manage
heavy loads of user traffic and thereby relieve network congestion. Until
recently, providers have continued to install ATM primarily in their network
backbones and typically have not offered ATM service directly to end users.
End users have generally continued to use a costly mix of frame relay and TDM,
along with leased communications lines, to meet their data, voice and video
transport needs.
 
  The major telecommunications service providers have announced plans to begin
offering ATM services directly to end users at prices competitive with similar
frame relay and TDM access services. To utilize these direct ATM services, an
end user needs ATM access products either located at the local office of a
telecommunications service provider (in close proximity to the end user) or
deployed by the end user in its private network. Access products provide the
end user with network access through multiple network interfaces, traffic
concentration and data protocol translation.
 
  ATM access products are well suited to provide efficient connectivity to ATM
networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end
users of transmitting data, voice and video communications. For these reasons,
the Company believes that ATM access products, over time, will supplant TDM
and frame relay access products in WANs.
 
THE CHALLENGES OF WIDESPREAD ATM ACCESS
 
  Before telecommunications service providers and end users can fully deploy
ATM, several problems relating to the ATM access layer must be solved.
 
 Quality of Service and Network Congestion
 
  The architects of early ATM products focused almost exclusively on data
applications and did not fully implement ATM's traffic management capabilities
for voice and video. However, today's mixed-services environment demands
sophisticated traffic management to provide the level of bandwidth utilization
that makes a single ATM network more cost effective than separate voice and
data networks. An ATM network must be capable of delivering high quality
service for all traffic types, notwithstanding high levels of utilization.
 
 Support for Limited Circuit Types
 
  ATM was originally conceived for use only on high quality fiber optic
circuits (e.g., T3/E3, OC-3c and STM-1). At the access layer, however,
circuits come in all varieties, including wireless, copper and satellite. On
 
                                       6
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these circuits, quality may be affected by atmospheric conditions, interfering
transmissions or defects in the circuits themselves. Transmission on lower
quality or "noisy" circuits frequently results in uncorrectable errors and
corruption in the network. The inability of early ATM products to transmit
reliably over lower-quality circuits has limited the use of ATM to high
quality circuits, thereby limiting widespread ATM access.
 
 Need for Additional Product Features
 
  Early ATM access products did not meet the requirements of
telecommunications service providers and end users because they lacked
important features:
 
    Size and Scaleability. Telecommunications service providers, who often
  house thousands of pieces of equipment in their central offices, and end
  users, who incur costs for each square foot of office space, place a
  premium on space. To be attractive to telecommunications service providers
  and end users, an ATM access product must offer the required functionality
  in a compact package. At the same time, an access product must be scaleable
  to permit telecommunications service providers and end users to upgrade
  performance and capacity through minimal additions to existing equipment.
  Early ATM access products were physically large relative to their
  capacities.
 
    Reliability. Service interruptions can be disastrous to
  telecommunications service providers and end users, who need reliable
  products designed for continuous utilization. Redundant features are
  essential to the reliability of an access product. Early ATM access
  products provided little redundancy, typically limited to power supply.
  Products deployed to deliver public services or to carry mission-critical
  traffic across a private network must offer multiple levels of redundancy
  for a broad variety of features, including central processing unit, clock,
  backplane and interface cards.
 
    Access Interfaces. Early ATM access products generally did not interface
  with a wide range of standard communications equipment, such as private
  branch exchanges, video decoders, LAN routers, hubs and switches and IBM
  SNA-based equipment. This limited the utility of these products because
  users frequently employ a variety of non-ATM equipment.
 
THE YURIE SOLUTION
 
  Yurie has developed ATM access products that are designed to meet the
challenges of widespread ATM deployment. These products are capable of
furnishing telecommunications service providers, corporate end users and
government end users with flexible, cost-effective and reliable access to
present and future ATM-based services. The Company's product family includes
the LDR100, released in February 1995; the LDR200, released in September 1996;
the LDR50, released in March 1997 and the LDR5 originally released by Data
Labs. The LDR100, the LDR200 and the LDR50 have been engineered with a set of
Company-developed technologies designed to solve the current problems of ATM
access. These technologies include AQueMan, a proprietary queuing algorithm
designed to maximize bandwidth utilization while preserving quality of
service, and LANET, a robust framing protocol that facilitates ATM deployment
over low quality circuits. In addition, the LDR products offer value-added
features, such as compact size, scaleability and reliability. The LDR200 and
the LDR50 are both compatible with a wide range of interfaces.
 
 Quality of Service and Reduced Network Congestion
 
  Yurie developed AQueMan to reduce network congestion while preserving
quality of service. AQueMan is a queuing algorithm that establishes separate
queues for time-sensitive traffic (typically voice) and loss-sensitive traffic
(typically data) and prioritizes traffic within these separate queues. This
technique reduces cell loss for loss-sensitive traffic and cell delay for
time-sensitive traffic, thereby allowing higher quality of service and more
optimal use of bandwidth. Time-sensitive cells are transmitted ahead of loss-
sensitive cells, but have a higher probability of being selectively deleted
during network congestion than loss-sensitive cells. In addition, when
comparing cells of the same traffic type (e.g., voice-to-voice or data-to-
data), AQueMan is able to ensure that more important time-sensitive traffic
will experience less delay and more important loss-sensitive traffic will have
 
                                       7
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a lower probability of being selectively deleted. With AQueMan, the LDR
products can meet the ATM Forum's quality of service standards for constant
bit rate, variable bit rate and unspecified bit rate traffic management even
during periods of network congestion. Through the use of AQueMan, Yurie's LDR
products substantially reduce the expense of sending information over a WAN by
achieving higher levels of bandwidth utilization.
 
 Support for Many Circuit Types
 
  Yurie developed LANET, a robust framing protocol that enables the transport
of ATM cells on any transmission medium, including low-speed and/or low-
quality circuits. LANET is particularly beneficial in wireless environments
(e.g., satellite, cellular and microwave), which often suffer from high bit
error rates and blocks of errors due to interfering transmissions or adverse
conditions such as inclement weather. LANET provides a framing structure that
allows ATM cells to be "multiplexed" into serial bit streams for transmission
over a single channel. This framing structure, which is scaleable to conform
to the transmission speed of the circuit, provides an embedded network
synchronization capability required for serving isochronous applications such
as voice and real-time video. LANET's simple framing structure makes the
required communication link synchronization relatively easy even in a noisy
environment. The Company's LDR products include a combination of LANET, Reed
Solomon forward error correction and error-tolerant addressing, which enable
the products to significantly increase the reliability of transmission of ATM
cells over noisy circuits.
 
 Other Value-Added Product Features
 
  Yurie's products incorporate a wide variety of value-added features,
including the following:
 
    Size and Scaleability. The LDR products are compact and can be easily
  upgraded. A single LDR200 platform occupies significantly less space than
  early ATM access products and can be upgraded with minimal additional space
  and at minimal cost. Also, because the LDR50 and the LDR200 support the
  same I/O and server modules, customers whose configurations outgrow the
  LDR50's four user slots can upgrade to the LDR200 (which has 11 or 15 user
  slots, depending on chassis size) with minimal expense.
 
    Reliability. Yurie's LDR200 satisfies a telecommunications service
  providers' need for reliability, offering uninterrupted service through
  comprehensive redundancy options, including power, central processing unit,
  clock, backplane and interface cards.
 
    Wide Variety of Access Interfaces. Yurie's ATM access products are built
  to interface with a wide variety of standard communications equipment
  including private branch exchanges, video decoders, LAN routers, hubs and
  switches and IBM SNA-based equipment. In addition, the LDR product line is
  designed to allow for the easy addition of new interfaces as they emerge.
 
STRATEGY
 
  Yurie's objective is to remain a leading provider of ATM access equipment to
both telecommunications service providers and end users. The key elements of
Yurie's strategy are as follows:
 
    Maintain Technology Leadership. Yurie is a leader in developing new
  technology for the ATM access market. The Company's LANET framing protocol
  was among the first technologies to facilitate ATM access at low speeds and
  across noisy circuits. Yurie's AQueMan queuing algorithm was one of the
  first to establish separate queues for voice and data and prioritize
  traffic types within each queue to improve quality and maximize bandwidth
  utilization. Yurie intends to continue to develop additional product
  features and network interfaces while reducing production costs. Yurie
  plans to continue to commit substantial resources to its active research
  and development program so it can remain in the forefront of ATM product
  development and maintain its position as a technology leader in the
  emerging ATM access market.
 
    Focus on ATM Access Solutions. Most ATM equipment suppliers have focused
  on designing and marketing products that can be used as backbone switches
  at major switching centers. Yurie, by contrast, has concentrated on
  developing ATM access products which act as gateways for non-ATM equipment
  and
 
                                       8
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  concentrators for lower speed ATM circuits. Yurie believes that by
  continuing to focus on this market segment and developing cost effective
  products designed specifically to provide ATM access, it can strengthen its
  current market position.
 
    Develop the Telecommunications Service Provider, Private Label Partner
  and Corporate End User Markets. The Company has successfully marketed its
  ATM access products to government end users and believes that the
  government's demand for these products will increase. Yurie intends to
  continue to market its products to the government directly, through its
  private-label partners, and through its strategic relationship with AT&T.
  The Company believes, however, that the market for ATM access products
  among telecommunications service providers, private label partners and
  corporate end users has greater potential than the government end user
  market. These customers should benefit greatly from an ATM access platform
  that can combine voice, video and data on a single ATM network. Yurie's LDR
  products are specifically designed to be attractive to these customers
  because they can connect to a variety of standard central office and
  customer premises equipment.
 
    Yurie has implemented a sales and pricing strategy that targets both the
  telecommunications service provider, private label partner and corporate
  end user markets. The Company has signed three-year agreements with each of
  Lucent Technologies, Bay Networks and Ericsson under which each of Lucent,
  Bay and Ericsson may sell Yurie's LDR products under their respective
  brands. The Company is also pursuing other private label agreements to
  extend its coverage of the access market. In addition, the Company is
  expanding its direct sales force, particularly in the geographic areas
  where the telecommunications service provider, private label partner and
  corporate end user markets are concentrated. This direct sales force is
  currently comprised of 26 direct sales personnel who have all had prior
  experience in commercial sales of networking and/or telecommunications
  products.
 
    Develop International Markets. Since ATM is an international standard,
  Yurie believes that the potential market for its ATM access products is
  global in scope. Yurie has begun to establish a sales and support
  organization in Europe and Asia, and to develop the product features and
  obtain the certifications required to pursue international markets. Yurie
  believes that international sales may provide an increasing portion of its
  revenues in the future.
 
    Build and Leverage Strategic Relationships. Yurie has entered into
  private-label agreements with each of Lucent Technologies, Bay Networks and
  Ericsson under which each of Lucent, Bay and Ericsson may sell Yurie's LDR
  products under their respective brands. The Company also has an agreement
  with Splitrock, under which Yurie has agreed to provide the ATM equipment
  for Splitrock's network, which was purchased from Prodigy. The Company is
  actively seeking to establish similar relationships for other markets with
  other telecommunications industry participants, including equipment
  suppliers and telecommunications service providers. As such relationships
  are established, Yurie intends to leverage its position in the marketplace
  by using the marketing expertise, distribution network, support
  capabilities and technologies of its strategic allies.
 
THE LDR PRODUCT FAMILY AND SUPPORTING SERVICES
 
  Yurie's LDR family of ATM access products includes the LDR200, the LDR50,
the LDR5 and the LDR100. All of Yurie's LDR products are based on an ATM
"cell" architecture that allows flexible transmission of all traffic types.
 
  The following table provides an overview of the Company's current LDR
products:
 
<TABLE>
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                                    NUMBER OF
                                      USER       BUS
   PLATFORM                           SLOTS   BANDWIDTH        DIMENSIONS
   --------                         --------- ---------- -----------------------
   <S>                              <C>       <C>        <C>
   LDR200 (19" or 23")............. 11 or 15    1.2 Gbps 7H x 10.5D x 19W or 23W
   LDR50...........................     4       600 Mbps  5.25 H x 10.25D x 19W
   LDR5............................     2     1.544 Mbps    3.5H x 10D x 19W
</TABLE>
 
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 The LDR200
 
  Yurie's second generation product, the LDR200, was first shipped in
September 1996. The LDR200 is designed to be easily deployed by
telecommunications service providers, corporate end users and government end
users. The LDR200 incorporates AQueMan and LANET, along with Reed Solomon
forward error correction, an industry standard method of detecting and
correcting transmission errors, and an error-tolerant addressing scheme that
ensures highly reliable communication over circuits of varying speeds and
quality. In addition, the LDR200 expands the capabilities of the Company's
first generation LDR product by offering higher throughput, greater port
density, a greater variety of interface types, enhanced scaleability and
higher speed.
 
  The LDR200, which comes in a 19" or 23" chassis, has a bus bandwidth of 1.2
gigabits per second and is scaleable up to 11 or 15 interface module slots,
depending on chassis size. It also provides enhanced reliability, offering
redundancy for the power, central processing unit, clock, backplane and
interface cards. The LDR200 conforms to carrier equipment installation
requirements, such as Bellcore's Network Equipment Building Standards (NEBS).
Additionally, the LDR200 complies with the ATM Forum's User Network Interface
standard and the IISP 1.0 network/network interface standards, providing
connectivity and interoperability with ATM backbone switches.
 
  Currently, the LDR200 supports high-speed WAN connections via DS3 and OC3c
for the North American marketplace and via E3 and STM-1 for the International
Marketplace. It uses DSI and E1 cards to support structured and unstructured
service in compliance with ATM forum's circuit emulation specification as well
as ATM cell-bearing and frame relay capabilities. The system also offers OC3-
c, High Speed, Ethernet, TAXI, and analog voice interfaces and a DPSI server
card, which provides voice compression, echo cancellation, and silence
suppression capabilities. The Company plans to introduce other interface and
server cards in the future.
 
  The current version of the LDR200 contains most of the features included in
the earlier LDR100, and the Company is in the process of developing the LDR200
to include all of the LDR100's attributes, along with additional value-added
features. The Company intends to phase out the LDR100 when the LDR200
development is completed but will continue to provide service support for the
LDR100 product.
 
 The LDR50
 
  Yurie's LDR50, which started shipping in March 1997, was designed to provide
access to ATM services for mid-sized to large corporate offices. Like the
LDR200, the LDR50 incorporates AQueMan and LANET, and contains most of the
features included in the LDR100.
 
  The LDR50 has a bus bandwidth of 600 megabits per second and is scaleable up
to 4 interface module slots supporting up to 32 ports, depending on
configuration. The LDR50 provides PVC support for ATM Forum UNI 3.0 and UNI
3.1 standard signaling and thus can interoperate with ATM equipment from other
manufacturers. Because the LDR50 supports the same I/O and server modules as
the LDR200, sites that outgrow the smaller system can easily upgrade to the
LDR200. The LDR50 currently supports all the standard network and user
interfaces supported on the LDR200.
 
  The LDR50's 19 x 10.25 x 5.25 chassis can be wall mounted, secured in a
standard 19 telco rack, or fitted for table-top use.
 
 The LDR5
 
  The LDR5 is an ATM access device that features full "CSU/DSU" capabilities,
thereby allowing frame relay and TDM equipment to interface with an ATM
network. The LDR5 offers low-cost ATM access for standard customer premises
equipment. It is designed for use in branch offices and other settings that do
not require the more sophisticated LDR200 or the LDR50 access products. The
LDR5 enables the Company to offer a full range of ATM access products.
 
 
                                      10
<PAGE>
 
 The LDR100
 
  Yurie's first access product, the LDR100, was originally built as a
prototype to demonstrate the AQueMan queuing algorithm and the LANET framing
protocol. The LDR100 was designed to meet the needs of highly technical users.
Beginning in 1995, the LDR100 was delivered, through AT&T, to a variety of
U.S. government agencies and their support contractors for deployment in
mission-critical environments, including the U.S. military operations in Haiti
and Bosnia. In addition to ships, aircraft and ground vehicles, the LDR100 has
been deployed in centralized locations, such as telecommunications equipment
closets and desktops.
 
  The LDR100, with a bus bandwidth of 64 megabits per second, aggregates high
speed ATM LAN traffic and non-ATM voice and data traffic onto a low-speed ATM
WAN. Where bandwidth utilization is especially critical, the LDR100 compresses
voice prior to transmission over the WAN. To further ensure quality over a
wide variety of circuit types, the LDR100 employs Reed Solomon forward error
correction, and a simple error-tolerant addressing scheme. The Company has
shipped more than 150 LDR100 access concentrators since February 1995.
 
 Product Management Protocol; Pricing
 
  Each of the Company's LDR products can be managed using any software package
supported by the Simple Network Management Protocol ("SNMP"), such as HP
OpenView and SunNet Manager. The LDR200 and LDR50 can also be managed using a
simple "dumb" terminal interface.
 
  The LDR200 product sells for prices ranging from $35,000 to $135,000, the
LDR50 from $20,000 to $40,000 and the LDR5's price ranges from $5,000 to
$10,000. Actual price depends on the configuration of the product selected.
 
 Product Support
 
  The Company offers comprehensive customer support for its LDR product line.
The Company's service organization offers installation, preventative
maintenance, multi-vendor services, repair, training and a variety of other
advanced services designed to enhance the reliability of a customer's
telecommunications network. The LDR200 and the LDR50 are sold with a standard
one-year warranty. The Company's customer support representatives are located
in Landover, Maryland and currently are available from 8:00 a.m. to 8:00 p.m.
Eastern time, Monday through Friday. At other times, the Company's customer
support representatives can page an on-call technical support person to
respond to technical support requests. In the future, the Company expects to
offer extended service for the Company's products that will be available 24
hours a day, seven days a week. The Company is currently considering whether
this service will be provided by a third party or in-house.
 
STRATEGIC RELATIONSHIPS
 
  During 1997, Yurie entered into private-label partner agreements with each
of Bay Networks, Lucent Technologies and Ericsson. These agreements permit
each of Bay, Lucent and Ericsson to market and sell the Company's LDR products
into both commercial and government markets for three years, subject to
renewal. None of these agreements has minimum purchase guarantees. Also during
1997, Yurie modified its agreement with AT&T, the AT&T Agreement, which
previously granted AT&T the exclusive right to market and sell its products in
government markets and required AT&T to make certain minimum purchase
guarantees. The AT&T Agreement was amended in response to the interest
expressed by other parties to sell Yurie products in government markets. As a
result of this amendment, AT&T no longer has an exclusive license to market
and sell Yurie products in government markets nor is it required to make the
remaining minimum purchases of LDR products in 1997 and 1998 provided for
under the AT&T Agreement totaling approximately $14.0 million.
 
 
                                      11
<PAGE>
 
SPLITROCK RELATIONSHIP
 
  The Company has a significant customer relationship with Splitrock, a Texas
corporation that provides communications services specifically configured to
meet the needs of large network users. Splitrock purchased the Prodigy Network
in 1997. Yurie and Splitrock are parties to an agreement, the Splitrock
Agreement, which requires Splitrock to purchase a minimum of $20.0 million of
LDR products from the Company in the period from July 1997 to December 1998
and provides for Yurie to furnish services to support deployment and
implementation of Yurie's products in Splitrock's network on a time and
materials basis. Kwok L. Li, the Chief Technology Officer and Vice Chairman of
the Board of Yurie, is Chairman of the Board of Splitrock and the majority and
controlling shareholder of Linsang Partners LLC. Linsang Partners LLC is the
majority shareholder of Splitrock.
 
  Of the Company's sales of LDR products in 1997, $12.4 million consisted of
direct purchases by Splitrock, $7.6 million of which purchases were credited
against Splitrock's minimum purchase guarantee under the Splitrock Agreement.
Splitrock and Ericsson executed a letter of intent on February 2, 1998,
pursuant to which Ericsson would provide Splitrock with certain services as
well as LDR products that Ericsson had purchased or will purchase under its
private-label partner agreement with the Company. Subsequently, during the
first quarter of 1998, Linsang Partners LLC agreed to purchase from Ericsson
for use in Splitrock's network the $5 million of LDR products sold to Ericsson
in the fourth quarter of 1997. This expected $5 million purchase is separate
from the $12.4 million of product sales to Splitrock during 1997 and upon such
purchase by Linsang Partners LLC will be credited against Splitrock's minimum
purchase guarantee under the Splitrock Agreement. Linsang Partners LLC also
submitted a purchase order to Ericsson for up to an additional $2 million of
LDR products, which purchases, as made, will also be credited against
Splitrock's minimum purchase guarantee under the Splitrock Agreement.
 
  AT&T and Splitrock have also entered into agreements pursuant to which AT&T
network services will be provided to Splitrock. In conjunction therewith, AT&T
Credit Corporation will lease Yurie products to Splitrock, including Yurie
products previously sold to AT&T.
 
CUSTOMERS AND END USERS
 
  The Company markets and sells its products to telecommunication service
providers, Internet service providers, corporate end users and government end
users. The principal end users of Yurie's ATM access products have
historically been U.S. government agencies and their support contractors. The
Company has begun to obtain purchase orders from commercial customers. In the
quarter ended December 31, 1996, 14.0% of the Company's product sales were to
commercial customers. In the quarter ended December 31, 1997, 100% of the
Company's product revenue resulted from sales to commercial customers. Among
the more than 30 government organizations and commercial customers that have
purchased or used or have agreed to purchase the Company's products are:
 
Advanced Research Project                 AT&T
 Agency/Defense Information               Booz-Allen & Hamilton, Inc.
Systems Agency Joint Program Office       Applied Innovation, Inc.
U.S. Army Communications Electronics      Oneline Management, Inc.
 Command                                  Lunex Group, LLC
Defense Aerospace Reconnaissance          K-NET Ltd.
 Organization                             Government of Canada, Communications
North Atlantic Treaty Organization         Research Center
Naval Research Laboratory                 Ericsson, Inc.
Los Angeles Department of Water &         Kyung-In
 Power
Lucent Technologies
Splitrock Services, Inc.
Bay Networks, Inc.
Mitre Corporation
 
                                      12
<PAGE>
 
  Although there are more than 30 end users of Yurie's products, the Company's
customer base is highly concentrated and a small number of customers has
accounted for a significant portion of the Company's total revenue in recent
years. Sales to AT&T, either for its own use or for resale to government
agencies or their support contractors, accounted for 46.2%, 64.8%, 86.8% and
17.8% of the Company's total revenues in 1994, 1995, 1996 and 1997. Direct
sales to Splitrock accounted for approximately 26.5% of the Company's total
revenues in 1997. Bay Networks, Inc. and Ericsson, Inc. accounted for 16.4%
and 14.2% of total revenues for 1997, respectively. The Company continues to
expand its sales and marketing efforts to telecommunications service providers
and corporate end users.
 
RESEARCH AND DEVELOPMENT
 
  The Company's objective is to be a leader in developing new technology for
the ATM access market. The Company has established an active research and
development program that is focused on the development of new and enhanced
products using ATM technology. In particular, the Company's research and
development team is seeking to expand the capabilities of the LDR200's and
LDR50's interface modules, develop new server modules (such as primary rate
ISDN and voice compression), expand network management capabilities and
enhance service interworking capabilities. The Company actively solicits
product development ideas from telecommunications service providers and end
users of the Company's products, and develops additional ideas through
participation in industry organizations and international standards bodies
such as the ITU and ATM Forum.
 
  During 1995, 1996 and 1997, total research and development expenditures were
$563,000, $4.4 million and $8.7 million, respectively. The Company expects its
future research and development expenditures will grow commensurately with its
revenue growth. Approximately 92 Company employees were engaged in research
and development programs, including hardware and software development, test
and engineering support personnel as of March 20, 1998. The majority of these
employees currently are located in the Company's Landover, Maryland
headquarters. The Company has recently opened research and development
facilities in Alameda, California and Atlanta, Georgia. Over half of the
Company's research and development employees hold masters or higher degrees.
The Company believes that recruiting and retaining qualified engineering
personnel are essential to its continuing success.
 
SALES, MARKETING AND DISTRIBUTION
 
  In order to pursue customers in the telecommunications service provider and
corporate end user markets, the Company has expanded its direct sales force by
hiring sales personnel who have all had experience in commercial sales of
networking and/or telecommunications products. As of March 20, 1998, the
Company had 26 sales personnel in its direct sales organization. Domestic
sales offices are located in New York, Phoenix, San Francisco, Los Angeles,
Hartford, Dallas, Tampa, Atlanta and Landover, MD. In 1997, sales offices were
also opened in Aubrey, Texas; Wyndham, New Hampshire; Richardson, Texas;
Buffalo Grove, Illinois; as well as in several cities in New Jersey. All of
these offices, except the offices in Landover, MD, are currently located in
the homes of sales people. In 1997, the Company opened a marketing and
technical support office in Korea and maintains a sales office in the United
Kingdom.
 
 Direct Sales
 
  The Company continues to expand its direct sales force to market the
Company's products and to ensure direct contact with its customers and private
label partners. The primary roles of the Company's sales force are (i) to
provide support to commercial customers and seek additional strategic
partners, (ii) to support end users by addressing complex ATM access problems
and (iii) to differentiate the features and capabilities of the Company's LDR
products from competitive products. In addition, the Company believes that its
investment in a direct sales force will help the Company to monitor changing
customer requirements, competing products and the development of industry
standards.
 
                                      13
<PAGE>
 
  Yurie's 26-person direct sales force includes both sales persons and sales
engineers. Sales engineers provide support and services for the Company's
sales persons and for existing customers. Most of the members of the direct
sales force have had significant prior experience in sales with industry-
leading networking companies. Members of Yurie's sales team have had an
average of 10 years of sales experience, and many of the sales persons have
had experience selling and managing end user, telecommunications service
provider and strategic private label accounts.
 
 Marketing
 
  The Company has recently established a marketing program to support the sale
and distribution of its products. The objective of this program is to inform
potential strategic allies and end users about the capabilities and benefits
of the Company's products. The marketing program includes participation in
industry trade shows and technical conferences, technology seminars,
publication of customer newsletters and technical and educational articles for
the trade press and other industry journals. In addition, the Company
communicates frequently with its installed base of end users regarding
evolving applications for the Company's products.
 
MANUFACTURING AND SUPPLIERS
 
  The Company's manufacturing operations consist primarily of materials
planning and procurement, test and manufacturing engineering, module testing
and quality control. Yurie relies on three manufacturers, Sanmina Corporation,
Teledyne Electronic Technologies and Kuchera Industries, Inc. to manufacture
the majority of its common equipment circuit packs, backplanes, chassis and
printed circuit board assemblies used in the Company's products. Yurie does
not have a contract with these or any other manufacturers, and all of the
Company's products are manufactured pursuant to individual purchase orders.
The Company believes that its orders do not represent a significant portion of
these subcontract manufacturers' total business. In the past, Yurie has also
used several other manufacturers as supplemental sources for backplanes,
chassis and printed circuit boards, and may use these manufacturers in the
future as necessary. The Company believes that its strategy of using
subcontract manufacturers has increased its flexibility and responsiveness to
changes, as it is in a better position to reduce product costs, acquire
additional capacity and reduce its capital investment. It is, however,
currently relying on a limited number of manufacturers, and if one or more of
these manufacturers should experience quality or other problems, such problems
could result in delays in product shipments by the Company.
 
  Final testing of the Company's products is performed by the Company at its
Landover, Maryland facility. All products are rigorously tested using
automated test equipment prior to shipment to customers. All circuit boards
are tested individually. As each customer's network requires different product
features to provide the desired functionality, the products are not assembled
into complete units prior to shipment. Each feature is packaged and shipped
separately to the customers, who use instructions provided by Yurie to
configure the products at their locations. Yurie warrants all of its products
to be free from defects for a period of one year from the date of shipment.
 
  Generally, the Company uses industry standard components for its access
products. It uses field programmable gate arrays with erasable programmable
memory rather than custom integrated circuits in order to maximize its ability
to customize products quickly for telecommunications service providers and add
product features. Certain components used in the Company's products, including
microprocessors and communications chips manufactured by PMC-Sierra, Inc.,
Hewlett-Packard Company, Integrated Device Technology, Inc., Xilinx, Inc.,
Texas Instruments, Analog Devices and Altera Corporation, are currently
available from only one supplier. In the past, there have been shortages of
certain of these components because of vendor production problems and the
inability of suppliers to increase delivery rates. In addition, the Company
has experienced shortages of certain other key components. These component
shortages and delays have resulted in delays in the shipment of the Company's
products, and the component shortages have also resulted in higher component
costs. When these components are in short supply, Yurie must compete for them
with larger companies that often have longer established relationships with
these vendors. Certain components that currently are readily available may
become difficult to obtain in the future.
 
                                      14
<PAGE>
 
COMPETITION
 
  While the market for ATM access products is still evolving, the networking
industry as a whole is intensely competitive. Among the companies who have
already produced ATM access products are ADC Kentrox, 3Com, and Ascend
Communications. Other companies, including Cisco Systems/StrataCom, Nortel,
General DataComm, Digital Link, Fore Systems and Newbridge Networks, have
already developed networking equipment that may be competitive with the
Company's products. The Company expects that some of these companies and other
networking and computer systems companies may in the future announce plans to
develop ATM access products that are directly competitive with the Company's
products.
 
  The Company does not intend to compete solely on the basis of price.
Instead, it intends to compete by offering superior features, performance,
reliability and flexibility at competitive prices. Yurie's management is
adopting this strategy because equipment price is only one component in
overall communications costs. WAN bandwidth and network operating expenses
generally exceed the total cost of the network equipment for a typical
customer.
 
  As competition in the ATM access market increases, the Company believes that
the ATM access industry may be characterized by the intense price competition
similar to that present in the broader networking market. In response to this,
the Company has already implemented cost improvement measures and will
continue to seek ways to improve upon the LDR products' price-to-performance
ratio.
 
INTELLECTUAL PROPERTY, PROPRIETARY INFORMATION AND TECHNICAL KNOW HOW
 
  The Company believes that its future success depends, in part, upon its
ability to develop and protect proprietary technology contained in its
products. The Company currently relies upon a combination of trade secret,
copyright, patent and trademark laws, as well as contractual restrictions, to
establish and protect proprietary rights in its products. The Company also has
entered into nondisclosure, noncompete and invention assignment agreements
with substantially all of its employees and nondisclosure agreements with
certain of its suppliers, distributors and customers so as to limit access to
and disclosure of its proprietary information. There can be no assurance that
these statutory and contractual arrangements will prove sufficient to deter
misappropriation of the Company's technologies or independent third-party
development of similar technologies. The Company also possesses and relies
upon a valuable body of technical know how related to the design and operation
of its products.
 
  The U.S. Patent and Trademark Office has issued U.S. Patent No. 5,568,482 to
the Company for its LANET protocol. LANET is a significant technological
invention that allows ATM to run over transmission media of any speed or
quality. The Company provides the technology covered by the LANET patent at no
cost to the public because it believes that making the LANET technology freely
available to the public would have greater benefits than licensing the
technology to third parties or preserving the technology solely for its own
use. The Company, however, retains its patent rights in the LANET technology,
although third parties are free to use the technology in unmodified form for
their own purposes. The Company believes that making LANET available at no
cost to the public will create demand for and facilitate widespread use of
LANET and increase name recognition for Yurie as the developer of LANET.
 
  Two additional patent applications have been filed for (i) the AQueMan
algorithm developed by the Company to regulate and prioritize the flow of
traffic in ATM access products and (ii) error-tolerant addressing to enhance
the ability to transport ATM cells over noisy links (e.g., wireless circuits).
The Company intends to file another patent application for a method to
simplify authentication and key exchange in the establishment of secure links.
The Company does not now intend to make any of the technologies described in
these patent applications available to the public at no cost. There can be no
assurance that the Company's patent applications will result in issued patents
or that the Company's existing patent or future patents will be upheld as
valid or prevent the development of competitive products. The failure of the
Company to obtain a patent for AQueMan, or to be granted patents for any of
its other Company-developed technologies, could have a material adverse effect
on the Company's business and its growth prospects.
 
                                      15
<PAGE>
 
EMPLOYEES
 
  On March 20, 1998, Yurie employed 243 individuals on a full-time equivalent
basis. Of these, 92 were involved in engineering, 16 were working in
applications engineering in the professional services division, 49 were
employed in sales, marketing and customer support, 50 were engaged in
operations and manufacturing and the remaining 30 were devoted to
administration, finance and strategic planning. The Company considers its
relations with its employees to be good and has not experienced any
interruption of operations as a result of labor disagreements, nor are there
any collective bargaining agreements in place.
 
RISK FACTORS
 
  Limited Operating History and Operating Results. The Company was founded in
1992, began developing ATM access products in 1994 and commenced shipping ATM
access products in February 1995. Accordingly, there is only a limited
operating history upon which to base an evaluation of the Company and its
prospects. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, develop its technologies, commercialize products
incorporating these technologies, and attract, retain and motivate qualified
employees. There can be no assurance that the Company will be successful in
addressing these risks. The Company expects that its operating expenses will
increase in the future, and there can be no assurance that its revenues will
increase sufficiently to allow it to maintain profitability, either on an
annual or quarterly basis.
 
  Dependence on ATM; Product Concentration. Although ATM is an industry
standard, the ATM access market is still emerging and only a limited number of
telecommunications service providers have installed ATM networks. All of the
Company's product revenue to date has been derived from the sale of ATM access
products, and the Company expects that the sale of ATM access products and
related services will continue to account for substantially all of its
revenues for the foreseeable future. The Company's success will depend on the
market acceptance of ATM technology as a preferred networking solution
relative to other existing or newly developed solutions. The failure of ATM-
based networking products to achieve widespread market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
  Sales of the Company's LDR access products have accounted for substantially
all of its revenue to date, and these products and related enhancements are
expected to continue to account for a majority of the Company's revenue for
the foreseeable future. The Company's success depends in large part on
continued sales of the LDR product line. A decline in either demand for or the
average sales prices of the Company's LDR products, whether as a result of new
product introductions by competitors, price competition, technological change,
inability to provide enhancements on a timely basis or otherwise, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
  Dependence on Strategic Relationships. A major component of the Company's
strategy involves the establishment of strategic relationships with
telecommunications equipment providers and telecommunications service
providers to leverage these entities' distribution networks. The failure of
the Company to establish these relationships would have a material adverse
effect on the Company's growth prospects. Yurie has entered into private-label
partner agreements with Bay Networks, Lucent Technologies and Ericsson. These
agreements permit each of Bay, Lucent and Ericsson to market and sell the
Company's LDR products into commercial and government markets for three years,
subject to renewal. None of these agreements have minimum purchase guarantees.
Previously, under the AT&T Agreement, AT&T held an exclusive license to sell
Yurie products in government markets, and had agreed to certain minimum
purchase guarantees. In response to the interest expressed by other parties to
sell Yurie products in both commercial and government markets, Yurie and AT&T
amended the AT&T Agreement on November 3, 1997. Under this amendment, AT&T no
longer has an exclusive license to sell Yurie's products in government
markets, nor is it required to make minimum annual purchases. Sales to AT&T
represented 46.2%, 64.8%, 86.8% and 17.8% of the Company's total revenue
during 1994, 1995, 1996 and 1997, respectively. If the Company fails to
replace the sales that would have been made to AT&T
 
                                      16
<PAGE>
 
under its minimum purchase requirements with sales to other customers, there
could be a material adverse effect on the Company's business, results of
operations and financial condition.
 
  Dependence on Related Party Sales. The Company has a significant customer
relationship with Splitrock. Yurie and Splitrock are parties to an agreement,
the Splitrock Agreement, which requires Splitrock to purchase a minimum of
$20.0 million of LDR products from the Company in the period from July 1997 to
December 1998 and provides for Yurie to furnish services to support deployment
and implementation of Yurie's products in Splitrock's network on a time and
materials basis. Kwok L. Li, the Chief Technology Officer and Vice Chairman of
the Board of Yurie, is Chairman of the Board of Splitrock and the majority and
controlling shareholder of Linsang Partners LLC. Linsang Partners LLC is the
majority shareholder of Splitrock. Of the Company's sales of LDR products in
1997, $12.4 million consisted of direct purchases by Splitrock, $7.6 million
of which purchases were credited against Splitrock's minimum purchase
guarantee under the Splitrock Agreement. Splitrock and Ericsson executed a
letter of intent on February 2, 1998, pursuant to which Ericsson would provide
Splitrock with certain services as well as LDR products that Ericsson had
purchased or will purchase under its private-label partner agreement with the
Company. Subsequently, during the first quarter of 1998, Linsang Partners LLC
agreed to purchase from Ericsson for use in Splitrock's network the $5 million
of LDR products sold to Ericsson in the fourth quarter of 1997. This expected
$5 million purchase is separate from the $12.4 million of product sales to
Splitrock during 1997, and upon such purchase by Linsang Partners LLC, will be
credited against Splitrock's minimum purchase guarantee under the Splitrock
Agreement. Linsang Partners LLC also submitted a purchase order to Ericsson
for up to an additional $2 million of LDR products, which purchases, as made,
will also be credited against Splitrock's minimum purchase guarantee under the
Splitrock Agreement. The failure of Splitrock to purchase its guaranteed
minimum under the Splitrock Agreement could have a material adverse effect on
the Company's business, or results of operations.
 
  Rapid Technological Development; New Products; Product Errors. The market
for the Company's products is generally characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions
that can render existing products obsolete or unmarketable. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion, enhancements to its existing products and new
products that meet changing customer requirements and emerging industry
standards. The failure of the Company to introduce new products and respond to
industry changes on a timely basis could have a material adverse effect on the
Company's business, results of operations and financial condition.
 
  The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Furthermore, the introduction
and marketing of new or enhanced products require the Company to manage the
transition from existing products in order to minimize disruption in customer
purchasing patterns. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, new products or
product enhancements, that its new products will adequately address the
changing needs of the marketplace, or that it will successfully manage the
transition from existing products. Nor can there be any assurance that the
Company will be able to identify, develop, manufacture or support new products
successfully, that such new products will gain market acceptance or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or product announcements by competitors. In addition, the
Company has on occasion experienced delays in the introduction of product
enhancements and new products. There can be no assurance that in the future
the Company will be able to introduce product enhancements or new products on
a timely basis. Products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released, and such errors have occurred in the Company's products in the
past. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products
after commencement of commercial shipments. The occurrence of such errors
could result in the loss or delay in market acceptance of the Company's
products, diversion of development resources, damage to the Company's
reputation or increased service or warranty costs,
 
                                      17
<PAGE>
 
any of which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
 
  Furthermore, from time to time, the Company may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycle of the Company's existing product offerings. There can be no
assurance that announcements of product enhancements or new product offerings
will not cause customers to defer purchasing existing Company products or
cause resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new product introductions and
any inability of the Company to respond effectively to technological changes,
emerging industry standards or product announcements by competitors, could
have a material adverse effect on the Company's business, operating results
and financial condition.
 
  Highly Competitive and Consolidating Market. Although the market for ATM
access products is still evolving, the Company anticipates that it will become
intensely competitive. The Company's direct competitors include ADC Kentrox
and 3Com. Each of these companies has already produced ATM access products
that are directly competitive with the Company's products. In addition, Ascend
Communications has developed an ATM access product that will be directly
competitive with the Company's products. Other companies, including Cisco
Systems/StrataCom, Nortel, General DataComm, Digital Link, Fore Systems and
Newbridge Networks have developed networking equipment that may be competitive
with the Company's products. The Company expects that some or all of these
companies and other networking and computer systems companies may in the
future announce plans to develop ATM access products that are directly
competitive with the Company's products. In addition, companies with interests
in other segments of the ATM market, such as central office equipment vendors,
cable television operators and long-distance telephone carriers, may seek to
apply their expertise to the ATM markets served by the Company.
 
  The entrance of new competitors would be likely to intensify competition in
the ATM access market. Some of the Company's current and possible future
competitors have greater financial, technical, marketing and other resources
than the Company, and some have well established relationships with current
and potential customers of the Company. It is also possible that alliances
among competitors may emerge and rapidly acquire significant market share or
that competition will increase as a result of networking industry
consolidation. Increased competition may result in price reductions, reduced
profitability and loss of market share, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
  In addition, there has recently been an increase in acquisitions by large,
well-established networking companies of smaller networking companies that
possess technology that will allow the larger companies to offer a more
complete product line. Among the companies that have announced or completed
acquisitions are Cisco Systems, Bay Networks, Cabletron Systems, Fore Systems,
Ascend Communications and 3Com. Consolidation within the industry could lead
to even greater competition than currently exists. In addition, the ability of
these larger companies to offer customers total networking solutions from one
vendor in the future may have a material adverse effect on the Company's
sales.
 
  Fluctuations in Quarterly and Annual Operating Results. The Company may
experience significant fluctuations in future quarterly and annual operating
results. Fluctuations may be caused by many factors, including the timing of
new product introductions or technological advances by the Company or its
competitors; market acceptance of enhanced or new versions of the Company's
products, including the LDR200 and the LDR50; the size and timing of
individual orders of the Company's products; price reductions by the Company
or its competitors; changes in the distribution channels through which the
Company's products are sold; the addition or loss of significant customers;
the mix of the products sold by the Company; the ability of the Company to
obtain sufficient supplies of sole or limited source components for the
Company's products; and general economic conditions. Quarterly fluctuations in
purchase orders by Splitrock, and the Company's private label partners, such
as Lucent, Bay, and Ericsson or inventory buildups by such customers, also
will cause fluctuations in the Company's operating results. In addition,
changes in the mix of the products sold by the
 
                                      18
<PAGE>
 
Company or the distribution channels through which the Company's products are
sold may cause fluctuations in the Company's gross and operating margins.
Also, the Company's anticipated operating expense levels are based, in part,
on its expectations as to future revenue and, as a result, net income may be
disproportionately affected by a reduction in revenue.
 
  The Company has recently experienced a period of revenue growth and a
substantial increase in orders, customers and employees. This growth, however,
is not necessarily indicative of future results. In addition, in view of the
significant growth of the Company's operations in the past three years, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance. The Company
has not experienced seasonal trends to date, but the Company's business,
operating results and financial condition may be affected by such trends in
the future. Fluctuations in operating results may result in volatility in the
price of the Company's Common stock.
 
  Management of Growth. The Company's growth has placed, and will continue to
place, strains on its management, operations and systems. To manage its
growth, the Company must continuously evaluate the adequacy of its existing
systems and procedures, including its financial and internal control systems
and management structure. There can be no assurance that the Company's
management will adequately anticipate all of the changing demands that growth
will impose on the Company's systems, procedures and structure. Any failure by
the Company's management to anticipate effectively, implement and manage the
changes required to sustain the Company's growth would have a material adverse
effect on the Company.
 
  Data Labs Merger. Yurie acquired Data Labs during the fourth quarter of
1997. Although Yurie expects that the Data Labs Merger will result in
beneficial synergies in the operations and technologies of Yurie and Data
Labs, achieving the anticipated effects of the Data Labs Merger will depend in
part upon whether the integration of the two companies' businesses,
technologies and key personnel is accomplished in an effective and efficient
manner, an outcome which cannot be assured. Achieving these anticipated
synergies will also depend on a number of other factors, including, without
limitation, industry-specific economic factors and Yurie's ability to market
and sell Data Labs' product, the LDR5, to new customers. Yurie was Data Labs'
largest customer for the year ended December 31, 1997. There can be no
assurance that the anticipated beneficial synergies will be achieved or that
sales of the LDR5 will be significant to the Company's operations.
 
  Dependence on Proprietary Technology. The Company's ability to compete
successfully will depend, in part, on its ability to protect the proprietary
technology contained in its products. The Company currently relies upon a
combination of trade secret, copyright, patent and trademark laws, as well as
contractual restrictions, to establish and protect its proprietary rights. The
Company also seeks to enter into non-competition, proprietary information and
assignment of invention agreements with its employees and non-disclosure
agreements with certain of its suppliers, distributors and customers that are
designed to limit access to and disclosure of its proprietary information.
There can be no assurance that these statutory and contractual arrangements
can effectively deter misappropriation of the Company's technology or
independent third-party development of competing technologies.
 
  The Company has one issued patent for its LANET protocol. The Company has
made the technology covered by the LANET patent available in unmodified form,
at no cost to the public, in the belief that this release will create demand
for and facilitate widespread use of LANET and increase name recognition for
Yurie as the developer of LANET. Two additional patent applications have been
filed for (i) the AQueMan algorithm developed by the Company to regulate and
prioritize the flow of traffic in ATM access products and (ii) error-tolerant
addressing to enhance the ability to transport ATM cells over noisy links
(e.g., wireless circuits). The Company intends to file another patent
application for a method to simplify authentication and key exchange in the
establishment of secure data links. There can be no assurance that the
applications will result in issued patents or that the Company's existing
patent or future patents will be upheld as valid or prevent the development of
competing products. The failure of the Company to obtain a patent for AQueMan,
or to be granted patents for any of its other Company-developed technologies,
could have a material adverse effect on the Company's
 
                                      19
<PAGE>
 
business. Defense of patents can be very costly and unsuccessful patent
litigation could have a material adverse effect on the Company's competitive
position. In addition, there can be no assurance that third parties will not
accuse the Company of patent infringement with respect to current or future
products. Any such claims could require the Company to spend significant sums
in litigation, pay damages, develop non-infringing technology or acquire
technology licenses. Also, effective copyright and trade secret protection may
not be available in every foreign country in which the Company's products are
or may be deployed.
 
  Dependence on Manufacturers and Suppliers. Yurie relies on three
manufacturers, Sanmina Corporation, Teledyne Electronic Technologies and
Kuchera Industries, Inc., to manufacture the majority of its common equipment
circuit packs, backplanes, chassis and printed circuit board assemblies used
in the Company's products. Yurie does not have contracts with these or any
other manufacturers, and all of the Company's products are manufactured
pursuant to individual purchase orders. The Company believes that its orders
do not represent a significant portion of these subcontract manufacturers'
total business. In the past, Yurie has also used several other manufacturers
as supplemental sources for backplanes, chassis and printed circuit boards,
and may use these manufacturers in the future as necessary. The Company
believes that its strategy of using subcontract manufacturers has increased
its flexibility and responsiveness to changes, as it is in a better position
to reduce product costs, acquire additional capacity and reduce its capital
investment. It is, however, currently relying on a limited number of
manufacturers, and if one or more of these manufacturers should experience
quality or other problems, such problems could result in delays in product
shipments by the Company. To the extent the Company would be required to find
replacements for its manufacturers, a change in manufacturers could result in
short term cost increases and time delays in deliveries of finished
assemblies, which could have a material adverse effect on the Company's
business and operating results and possibly on its relationships with
customers. While Yurie maintains some level of safety stock on critical
components and some level of reserve inventory, these levels would not be
sufficient to meet increases in demand occurring simultaneously with delayed
deliveries from manufacturers.
 
  Certain components used in the Company's products, including microprocessors
and communications chips that are manufactured by PMC-Sierra, Inc., Hewlett-
Packard Company, Integrated Device Technology, Inc., Xilinx, Inc., Texas
Instruments, Analog Devices and Altera Corporation, are currently available
from only one supplier. In the past, the Company has experienced shortages of
certain of these components because of vendor production problems and the
inability of suppliers to increase delivery rates to meet the Company's
requirements. In addition, the Company has experienced shortages of certain
other key components. These component shortages and delays have resulted in
delays in the shipment of the Company's products, and the component shortages
have also resulted in higher component costs. When these components are in
short supply, Yurie must compete for them with larger companies that often
have longer established relationships with these vendors. Certain components
used in the Company's products require an order lead time of up to 16 weeks.
Other components that currently are readily available may become difficult to
obtain in the future. Failure of the Company to predict accurately its
required quantities of these long lead time components could result in either
shortages or excess inventory of such components, which could have a material
adverse effect on the Company's business and operating results.
 
  Any extended delay in deliveries of components or of finished printed
circuit board assemblies would have a material adverse effect on the Company's
business and operating results and possibly on its relationships with
customers. Although Yurie typically maintains some reserve inventory of
components, this inventory would not cover a significant delay in the delivery
of such components.
 
  Dependence on Key Personnel. The Company's success depends to a significant
extent upon a number of key technical and management employees, including
Jeong H. Kim, the Company's Chief Executive Officer and Chairman of the Board
of Directors, Kwok L. Li, the Company's Vice Chairman of the Board and Chief
Technology Officer, Harry J. Carr, the Company's President, Chief Operating
Officer and a Director, and Barton Y. Shigemura, the Company's Senior Vice
President of Sales and Marketing and a Director. Mr. Li is the Chairman of the
Board of Splitrock, and the majority and controlling shareholder of Linsang
Partners LLC,
 
                                      20
<PAGE>
 
which is the majority shareholder of Splitrock, and as such, devotes a
significant amount of time to Splitrock. The loss of the services of any of
the Company's key employees could have a material adverse effect on the
Company. Mr. Carr has served in his position only since June 1997. As a
result, key members of the Company's management team have worked together for
only a short time. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain additional
highly-skilled technical, managerial, sales and marketing personnel.
Competition for such personnel, especially engineers, is intense and
competitors often employ aggressive tactics to recruit key employees. There
can be no assurance that the Company will be successful in attracting, hiring,
integrating and retaining the personnel that it requires.
 
  Compliance with Regulations and Evolving Industry Standards. The Company's
products must meet a significant number of voice and data communications
regulations and standards, some of which are evolving as new technologies are
deployed. In the U.S., the Company's products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories, as well as standards established by Bell Communications Research
("Bellcore"). Internationally, the Company's products must comply with
standards established by telecommunications authorities in various countries,
as well as with recommendations of the International Telecommunications Union
("ITU"). In addition, telecommunications service providers require that
equipment connected to their networks comply with their own standards, which
may vary from industry standards. A delay in obtaining, or the failure to
obtain, certification of its products domestically or in countries outside of
the U.S. could delay or preclude the Company's sales and marketing efforts,
which could have a material adverse effect on the Company's business and
operating results.
 
  Industry standards for ATM technology are still evolving. One of the bodies
setting industry standards is the ATM Forum, a group of industry participants
including equipment manufacturers, telecommunications service providers and
end users. As these standards evolve, the Company will be required to modify
its products or develop and support new versions of its products. The failure
of the Company's products to comply, or delays in achieving compliance, with
the various existing and evolving industry standards could delay introduction
of the Company's products, which could have a material adverse effect on the
Company's business and operating results.
 
  Government regulatory policies are likely to continue to have a major impact
on the pricing of both existing and new public network services and therefore
are expected to affect demand for such services and the telecommunications
products that support such services. Tariff rates, whether determined
autonomously by telecommunications service providers or in response to
regulatory directives, may affect the cost effectiveness of deploying public
network services. Tariff policies are under continuous review and are subject
to change. User uncertainty regarding future policies may also affect demand
for telecommunications products, including the Company's products.
 
  Risks Associated With International Sales and Currency Exchanges. Less than
1% of the Company's revenue in each of the years ended December 31, 1994,
December 31, 1995 and December 31, 1996, was derived from orders from
international customers. During 1997, 11.0% of the Company's revenue was
derived from orders from international customers. The Company intends to
continue its sales and marketing efforts outside of the U.S. and may enter
into international markets which will require significant management attention
and financial resources. Currently, Yurie maintains offices in Korea and the
U.K.
 
  Conducting business outside of the U.S. is subject to certain risks,
including longer payment cycles, unexpected changes in regulatory requirements
and tariffs, difficulties in staffing and managing foreign operations, greater
difficulty in accounts receivable collection and potentially adverse tax
consequences. Moreover, gains and losses on the conversion to U.S. dollars of
accounts receivable not denominated in U.S. dollars and accounts payable
arising from international operations may contribute to fluctuations in the
Company's business and operating results. Should the Company have a material
amount of sales or purchase obligations that are denominated in foreign
currencies in the future, the Company may engage in currency hedging
activities or derivative arrangements. Fluctuations in exchange rates could
affect demand for the
 
                                      21
<PAGE>
 
Company's products. For instance, the recent devaluations of certain
currencies in Asia, including the Korean won, could adversely effect the
Company's ability to sell LDR products in that region. The imposition of
exchange or price controls or other restrictions on foreign currencies could
have a material adverse effect on the Company's business and operating
results. If the Company increases its international sales, its revenue may
also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world.
 
  Potential Stock Price Volatility. The market price of the Company's common
stock may be volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or
proprietary rights, and general market conditions may have a significant
effect on the market price of the common stock. Further, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
 
  General Economic Conditions. Demand for the Company's products depends in
large part on the overall demand for communications and networking products,
which has in the past and may in the future fluctuate significantly based on
numerous factors, including capital spending levels and general economic
conditions. There can be no assurance that the Company will not experience a
decline in demand for its products due to general economic conditions. Any
such decline would have a material adverse effect on the Company's business,
operating results and financial condition.
 
  Control by Current Stockholders. Directors and executive officers of the
Company and their affiliates currently own beneficially approximately 69.0% of
the outstanding common stock. As a result, these stockholders are able to
elect a majority of the Company's Board of Directors and approve all matters
requiring stockholder approval, and will have significant control over the
Company and the conduct of its business. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company.
 
ITEM 2. PROPERTIES
 
  The Company's principal offices are located in a 137,000 square foot
facility leased by the Company at 8301 Professional Place, Landover, MD 20785-
2237 (a suburb of Washington, DC). Approximately 40% of the space in this
facility is used or reserved for manufacturing, product development and
testing; the balance is used or reserved for sales, marketing and other
general and administrative activities.
 
  The Company also leases approximately 5,300 square feet of space for a
research and development facility at 2020 Challenger Drive, Suite 101,
Alameda, California and approximately 5,400 square feet in Atlanta, Georgia.
Yurie believes that its present facilities are well maintained and in good
operating condition, although additional facilities may be needed to meet
anticipated levels of operations in the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
  There are no material pending legal proceedings to which the Company is
party or of which any of its property is subject.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  There were no matters submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1997.
 
                                      22
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
 
  The Company's common stock has been quoted on the Nasdaq National Market
under the symbol YURI since February 4, 1997 following its initial public
offering. The following table sets forth the high and low prices, as reported
by Nasdaq, for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                  HIGH    LOW
                                                                 ------- ------
   <S>                                                           <C>     <C>
   YEAR ENDED DECEMBER 31, 1997:
    First Quarter (from February 4)............................. $16.750 $9.500
    Second Quarter..............................................  19.125  9.375
    Third Quarter...............................................  37.250 15.750
    Fourth Quarter..............................................  39.875 17.250
</TABLE>
 
  On March 20, 1998, the last reported sale price of the Company's common
stock as reported by the Nasdaq National Market was $23 1/2. There were
approximately 3,300 holders of the Company's common stock as of March 1998.
 
                                DIVIDEND POLICY
 
  The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. The declaration and payment by the Company of any future dividends and
the amounts thereof will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects, limitations imposed
by any credit agreements or senior securities and other factors deemed
relevant by the Board of Directors.
 
                       SALES OF UNREGISTERED SECURITIES
 
  The information required by this portion of Item 5 is incorporated by
reference to Item 15 of Part II of the Registration Statement on Form S-1
(File No. 333-45481), filed February 13, 1998 with the Securities and Exchange
Commission.
 
                  USE OF PROCEEDS -- INITIAL PUBLIC OFFERING
 
  As of December 31, 1997, the Company had used approximately $6.0 million of
the net proceeds from the Company's initial public offering for purchases of
equipment and systems hardware and software. At December 31, 1997, $33.9
million of the net proceeds was invested in municipal bonds, $2.0 million was
invested in mutual funds and $1.0 million was held by Commerce Bank for an
irrevocable letter of credit.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The selected financial data set forth below is derived from the audited
financial statements of the Company for the years ended December 31, 1993,
1994, 1995, 1996 and 1997. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and the notes thereto
included as Item 8 in this Form 10-K.
 
                                      23
<PAGE>
 
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                    --------------------------------------------
                                    1993(2)  1994(2) 1995(2)  1996(2) 1997(2)(3)
                                    -------  ------- -------  ------- ----------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>      <C>     <C>      <C>     <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
 Product revenue................... $   --   $    5  $2,880   $18,738  $47,064
 Service revenue...................     225   1,292   2,634     2,528    4,004
 Other revenue.....................     --      --    1,108       391      --
                                    -------  ------  ------   -------  -------
  Total revenue....................     225   1,297   6,622    21,657   51,068
Cost of revenue:
 Cost of product revenue...........     --        3   1,329     6,806   16,669
 Cost of service revenue...........     161     737   1,330     1,666    3,026
                                    -------  ------  ------   -------  -------
  Total cost of revenue............     161     740   2,659     8,472   19,695
Gross profit.......................      64     557   3,963    13,185   31,373
Operating expenses:
 Research and development..........      14      50     562     4,428    8,691
 Sales and marketing...............     --       22       5     1,880    6,787
 General and administrative........      66     314   1,871     2,980    7,373
                                    -------  ------  ------   -------  -------
  Total operating expenses.........      80     386   2,438     9,288   22,851
Income (loss) from operations......     (16)    171   1,525     3,897    8,522
Other income (expense).............      (6)      2      (2)       90    1,544
                                    -------  ------  ------   -------  -------
Income (loss) before income taxes..     (22)    173   1,523     3,987   10,066
Income taxes.......................     --       43     574     1,563    3,930
                                    -------  ------  ------   -------  -------
Net income (loss).................. $   (22) $  130  $  949   $ 2,424  $ 6,136
                                    =======  ======  ======   =======  =======
Basic net income (loss) per common
 share............................. $ (0.00) $ 0.01  $ 0.05   $  0.12  $  0.25
                                    =======  ======  ======   =======  =======
Basic weighted average shares out-
 standing(1).......................  16,337  16,337  20,505    20,606   24,714
                                    =======  ======  ======   =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                  AS OF DECEMBER 31,
                                        ---------------------------------------
                                        1993(2) 1994(2) 1995(2) 1996(2) 1997(2)
                                        ------- ------- ------- ------- -------
<S>                                     <C>     <C>     <C>     <C>     <C>
Balance Sheet Data (at end of period):
Cash and cash equivalents..............  $  6    $ 232  $3,803  $ 5,245 $ 8,142
Working capital........................   (82)    (128)    618    9,344  57,046
Total assets...........................    99      641   6,328   16,907  75,402
Stockholders' equity (deficit).........   (75)      57   1,216   11,571  65,134
</TABLE>
--------
(1) Computed on the basis described in Note 3 of Notes to Financial
    Statements.
(2) Effective December 1, 1997, Data Labs merged with a subsidiary of the
    Company. The transaction was accounted for as a pooling-of-interests.
    Accordingly, the financial statements of the Company have been restated to
    reflect Data Labs results for the periods shown. Acquisition costs
    totaling approximately $1 million are included.
(3)Sales to related parties totaled $13.5 million during 1997.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  Yurie, founded in 1992, designs, manufactures, markets and services ATM
access products for telecommunications service providers, corporate end users
and government end users. The Company began developing ATM access products in
1994 and began product shipments in February 1995. Prior to 1995, the
Company's revenue was derived primarily from telecommunications consulting and
related services.
 
 
                                      24
<PAGE>
 
  Today, the Company generates revenue primarily from the sale of the LDR200,
an ATM access product released in September 1996, and the LDR50, a related ATM
access product which was first shipped in March 1997. Yurie continues to
generate revenue from providing telecommunications and networking applications
consulting services, though these services generate an increasingly smaller
portion of total revenue. Since the release of the LDR100 in 1995, revenue
generated from the sale of the LDR products continues to represent an
increasingly larger portion of the Company's total revenue, and the Company
expects this trend to continue.
 
  During 1997, Yurie entered into private-label partner agreements with each
of Bay Networks, Lucent Technologies and Ericsson. These agreements permit
each of Bay, Lucent, and Ericsson to market and sell the Company's LDR
products into commercial and government markets for three years, subject to
renewal. None of these agreements has minimum purchase guarantees. Previously,
under the AT&T Agreement, AT&T held an exclusive license to sell Yurie's
products in government markets, and was required to make minimum purchases of
$10 million for each of 1997 and 1998. In response to the interest expressed
by other parties to sell Yurie products in government as well as commercial
markets, Yurie and AT&T amended the AT&T Agreement on November 3, 1997. Under
this amendment, AT&T no longer has an exclusive license to sell Yurie's
products in government markets, nor is AT&T required to make minimum annual
purchases. In 1994, 1995, 1996 and 1997, sales to AT&T represented 46.2%,
64.8%, 86.8% and 17.8%, respectively, of the Company's revenue. For the year
ended December 31, 1996, the Company shipped a total of $8.3 million of
LDR200s to AT&T. During 1997, the Company shipped $7.5 million of LDR 200s and
LDR 50s to AT&T.
 
  The Company has a significant customer relationship with Splitrock. Yurie's
agreement with Splitrock, the Splitrock Agreement, requires Splitrock to
purchase a minimum of $20.0 million of LDR products from the Company in the
period from July 1997 to December 1998 and provides for Yurie to furnish
services to support deployment and implementation of Yurie's products in
Splitrock's network on a time and materials basis. Kwok L. Li, the Chief
Technology Officer and Vice Chairman of the Board of Yurie, is Chairman of the
Board of Splitrock and the majority and controlling shareholder of Linsang
Partners LLC. Linsang Partners LLC is the majority shareholder of Splitrock.
 
  Of the Company's sales of LDR products in 1997, $12.4 million consisted of
direct purchases by Splitrock, $7.6 million of which purchases were credited
against Splitrock's minimum purchase guarantee under the Splitrock Agreement.
Splitrock and Ericsson executed a letter of intent on February 2, 1998,
pursuant to which Ericsson would provide Splitrock with certain services as
well as LDR products that Ericsson had purchased or will purchase under its
private-label partner agreement with the Company. Subsequently, during the
first quarter of 1998, Linsang Partners LLC agreed to purchase from Ericsson
for use in Splitrock's network $5 million of LDR products sold to Ericsson in
the fourth quarter of 1997. This expected $5 million purchase is separate from
the $12.4 million of product sales to Splitrock during 1997, and upon such
purchase by Linsang Partners LLC, will be credited against Splitrock's minimum
purchase guarantee under the Splitrock Agreement. Linsang Partners LLC also
submitted a purchase order to Ericsson for up to an additional $2 million of
LDR products, which purchases, as made, will also be credited against
Splitrock's minimum purchase guarantee under the Splitrock Agreement.
 
  AT&T and Splitrock have also entered into agreements pursuant to which AT&T
network services will be provided to Splitrock. In conjunction therewith, AT&T
Credit Corporation will lease Yurie products to Splitrock, including Yurie
products previously sold to AT&T.
 
  In 1995 and 1996, the Company generated non-recurring other revenue from
one-time fees earned under the technology evaluation portion of the AT&T
Agreement, which called for a total of $1.5 million to be earned over six
months beginning in August 1995.
 
  Revenue from the sale of Yurie's LDR product line is recognized upon
shipment or upon acceptance of the product depending on the terms of sale.
Revenue from the provision of telecommunications and networking applications
consulting services is recognized as the services are performed. Payments
received in advance of product delivery or the performance of services are
recorded as unearned revenue and recognized upon shipment
 
                                      25
<PAGE>
 
of product or performance of services by the Company. The LDR200 and LDR50
purchase price includes a standard warranty on parts and service, which
provides that the product will be free from defects for a period of one year
from the date of shipment. The Company does not generate revenue from extended
service contracts at this time. The Company is currently considering whether
to provide extended service for the Company's products through a third party
or in-house.
 
  Cost of product revenue consists primarily of the direct material, direct
labor and subcontract expenses associated with manufacturing and shipping the
Company's LDR products. This cost also includes a reserve for warranty
expenses. Cost of service revenue consists primarily of direct labor expenses
associated with providing the Company's telecommunications and networking
applications consulting services. The Company's other revenue has no
associated direct costs.
 
  The Company's operating expenses are composed of research and development,
sales and marketing and general and administrative expenses. Research and
development expenses consist primarily of personnel costs, as well as the cost
of materials, tools and other items associated with product development and
prototyping. All software development costs are included in research and
development expenses and have been expensed as incurred. Sales and marketing
expenses consist primarily of personnel costs, including commissions paid to
Company sales personnel, promotional costs and related operating expenses.
General and administrative expenses consist primarily of personnel costs
associated with general management, finance, information technology and
administration, as well as occupancy, accounting, legal and other general
operating expenses.
 
  In view of the Company's rapid revenue growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. In addition, the Company's results of operations may fluctuate
from period to period in the future.
 
 YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
 
  Revenue. Total revenue for 1997 was $51.1 million, compared with $21.7
million for 1996. This 135.8% increase resulted primarily from an increase in
sales of the Company's LDR products, and particularly from increased product
sales to the commercial marketplace. Product revenue was $47.1 million during
1997 compared with $18.7 million during 1996. Of this $47.1 million in product
revenue, $40.0 million, or 84.9%, resulted from sales to commercial customers
compared with $741,000 in sales to commercial customers during 1996. Of the
$47.1 million in product sales in 1997, $12.4 million were made directly to
Splitrock, $8.4 million to Bay Networks, $7.5 million to AT&T and $7.3 million
to Ericsson. In March 1998, Linsang Partners LLC, the majority shareholder of
Splitrock, agreed to purchase from Ericsson for use in Splitrock's network $5
million of the LDR products sold to Ericsson in the fourth quarter of 1997,
and has submitted a purchase order to Ericsson for up to an additional $2
million of LDR products. Splitrock, Bay Networks, AT&T and Ericsson comprised
75.6% of the Company's product revenue in 1997.
 
  Service revenue for 1997 was $4.0 million, compared with $2.5 million for
1996. This 58.4% increase was attributable to growth in both the number and
size of contracts with U.S. government customers and government contractors
and to service revenue totaling $1.1 million during 1997 to Splitrock for
which there was no corresponding revenue in 1996. Other revenue during 1996
totaled $392,000, coming from fees earned under the AT&T Agreement, which
called for a total of $1.5 million to be earned over the six months beginning
in August 1995.
 
  Gross Profit. Gross profit increased to $31.4 million for 1997 from $13.2
million in 1996. Gross margins were 61.4% and 60.9% during 1997 and 1996,
respectively. The increase in gross margin was due largely to a decrease in
product cost of goods sold, to 35.4% of product revenue in 1997 from 36.3% of
product revenue in 1996. This reflects the spread of the fixed portion of
direct costs over a larger number of units, an increase in shipments of
product to commercial customers, and an increase in the number of higher
margin software features sold. Cost of service revenue increased to 75.6% of
service revenue in 1997, from 65.9% in 1996.
 
                                      26
<PAGE>
 
  Research and Development. Research and development expenses were $8.7
million, or 17.0% of total revenue in 1997, compared with $4.4 million, or
20.4% of total revenue in 1996. This increase was due primarily to the hiring
of additional engineering personnel and increased prototyping expenses related
to the development of the Company's LDR products.
 
  Sales and Marketing. Sales and marketing expenses were $6.8 million, or
13.3% of total revenue in 1997, compared with $1.9 million, or 8.7% of total
revenue in 1996. This increase resulted primarily from the hiring of sales and
marketing personnel to support generally, the Company's entry into the
commercial marketplace, and specifically, the release of the Company's LDR200
product.
 
  General and Administrative. General and administrative expenses were $7.4
million or 14.4% of total revenue in 1997 compared with $3.0 million or 13.7%
of total revenue in 1996. This increase was due primarily to higher personnel
expenses related to increased staffing in finance, information technology and
administration undertaken in support of the Company's growth. Also, in June
1996 and again in June 1997, the Company relocated its operations to larger,
leased facilities, resulting in higher occupancy costs in 1997. In addition,
in December 1997, the Company acquired Data Labs, Inc. which was accounted for
as a pooling-of-interests. Acquisition costs totaling $1.0 million are
included in general and administrative costs in 1997.
 
  Provision for Income Taxes. The provision for income taxes in 1997 was $3.9
million, resulting in an effective tax rate of 39.0%. In 1996, the provision
for income taxes was $1.6 million, resulting in an effective tax rate of
39.2%.
 
 YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
 
  Revenue. Total revenue for 1996 was $21.7 million, compared with $6.6
million for 1995. This increase resulted primarily from an increase in sales
of the Company's LDR products. Product revenue was $18.7 million during 1996
compared with $2.9 million during 1995. Service revenues were relatively flat
when comparing 1996 to 1995. Other revenue in both periods came from fees
earned under the AT&T Agreement, which called for a total of $1.5 million to
be earned over the six months beginning in August 1995.
 
  During both 1996 and 1995, product sales to and service contracts with U.S.
government customers and government contractors comprised the majority of
total revenue. Product sales to or through AT&T represented $17.4 million, or
92.9% of product revenue during 1996 compared with $1.6 million, or 57.1% of
product revenue during 1995. Sales to or through AT&T represented 86.8% and
64.8% of total revenue during 1996 and 1995, respectively.
 
  Gross Profit. Gross profit increased to $13.2 million in 1996 from $4.0
million in 1995. Gross margins were 60.9% and 59.8% during 1996 and 1995,
respectively. The improvement in gross margins was due primarily to the more
rapid growth in product revenue, which has a higher gross margin than the
Company's service revenue. During 1996, product gross margin was 63.7%
compared with service gross margin of 34.1%. During 1995, product gross margin
was 53.9% compared with service gross margin of 49.5%.
 
  Research and Development. Research and development expenses were $4.4
million, or 20.4% of total revenue, in 1996, compared with $563,000 or 8.5% of
total revenue, in 1995. This increase was due primarily to the hiring of
additional engineering personnel and increased prototyping expenses related to
the development of the Company's LDR products.
 
  Sales and Marketing. Sales and marketing expenses were $1.9 million, or 8.7%
of total revenue, in 1996. The Company incurred virtually no sales and
marketing expenses in 1995. The expenses incurred during 1996 resulted from
the hiring of sales and marketing personnel to support the release of the
Company's LDR200 product, and the Company's entry into the telecommunications
service provider and corporate end user markets.
 
                                      27
<PAGE>
 
  General and Administrative. General and administrative expenses increased to
$3.0 million in 1996 from $1.9 million in 1995. This increase was due
primarily to higher personnel expenses, related to increased staffing in
finance, information technology and administration undertaken in support of
the Company's growth. Also, on June 1, 1996, the Company began a phased
relocation of its operations to a larger, leased facility, resulting in higher
occupancy costs. As a percentage of total revenue, general and administrative
expenses were 13.8% and 28.2% in 1996 and 1995, respectively. The decrease as
a percent of total revenue between the two years was due to the Company's
significant increase in total revenue.
 
  Provision for Income Taxes. The provision for income taxes in 1996 was $1.6
million, resulting in an effective tax rate of 39.2%. In 1995, the provision
was $575,000, resulting in an effective tax rate of 37.7%.
 
 YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
 
  Revenue. Total revenue in 1995 was $6.6 million, compared with $1.3 million
in 1994. This increase was due primarily to three factors. The Company had
$2.9 million in revenue from product sales in 1995 compared with virtually
none in 1994. Service revenue increased to $2.6 million in 1995 from $1.3
million in 1994 as a result of growth in both the number and size of contracts
with U.S. government customers and government contractors. Also, the Company
had $1.1 million of other revenue in 1995 from fees earned under the AT&T
Agreement compared with none in 1994.
 
  During both 1995 and 1994, U.S. government customers and government
contractors comprised virtually all of the revenue. Sales to or through AT&T
represented 57.1% of product revenue in 1995 and 64.8% and 46.2% of total 1995
and 1994 revenues, respectively.
 
  Gross Profit. Gross profit increased to $4.0 million in 1995 from $557,000
in 1994. Gross margins were 59.8% and 43.0% for 1995 and 1994, respectively.
The improvement in 1995 was due primarily to the commencement of product
sales, which have higher gross margins than the Company's service revenue. In
1995, product gross margin was 53.9% compared with service gross margin of
49.5%. In 1994, service gross margin was 43.0%.
 
  Research and Development. Research and development expenses were $563,000,
or 8.5% of total revenue in 1995, compared with $49,000, or 3.8% of total
revenue, in 1994. The increase was due primarily to the hiring of additional
engineering personnel related to development of the Company's LDR product
line.
 
  Sales and Marketing. The Company incurred sales and marketing expenses of
$4,700 for 1995 and $22,300 for 1994.
 
  General and Administrative. General and administrative expenses were $1.9
million, or 28.2% of total revenue in 1995, compared with $314,000 or 24.2% of
total revenue, in 1994. Both the dollar amount and percent of total revenue
increases were due primarily to 1995 bonus payments totaling $1.1 million.
These bonuses were paid primarily to senior executives of the Company. The
Company also increased its personnel-related and general operating expenses in
support of its sales growth.
 
  Provision for Income Taxes. The provision for income taxes in 1995 was
$575,000, resulting in an effective tax rate of 37.7%. In 1994, the provision
was $43,000, resulting in an effective tax rate of 24.9%. The lower effective
tax rate in 1994 was due primarily to the Company being in a lower tax bracket
and a net operating loss carryforward.
 
QUARTERLY INFORMATION--UNAUDITED
 
  The following table presents unaudited statement of operations data for each
of the eight quarters through the period ended December 31, 1997. This
information has been prepared by the Company on a basis consistent with the
Company's audited financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly
 
                                      28
<PAGE>
 
results are not necessarily indicative of future results of operations and may
fluctuate, depending on the timing of new product introductions, market
acceptance of enhanced or new versions of Yurie's products, the size and
timing of individual orders of the Company's products, price reductions by the
Company, changes in the Company's distribution channels, the addition or loss
of significant customers, the Company's ability to obtain components for its
products and general economic conditions. This information should be read in
conjunction with the Company's Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
 
<TABLE>
<CAPTION>
                                                 QUARTERS ENDED(1)(2)
                                       -----------------------------------------
                                       DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
                                       ----------- ------------ ------- --------
                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>         <C>          <C>     <C>
1997:
  Total revenues......................   $17,622     $14,119    $10,925  $8,403
  Gross profit........................    11,090       8,684      6,603   4,995
  Net income..........................     2,376       1,789      1,294     677
  Basic net income per common share...   $  0.09     $  0.07    $  0.05  $ 0.03
1996:
  Total revenues......................   $ 6,585     $ 6,245    $ 5,029  $3,798
  Gross profit........................     3,783       3,686      3,077   2,638
  Net income..........................       231         575        747     871
  Basic net income per common share...   $  0.01     $  0.03    $  0.04  $ 0.04
</TABLE>
--------
(1) Quarterly results have been restated to reflect the Data Labs, Inc. merger
    on December 1, 1997. Since the transaction was accounted for as a pooling-
    of-interests, the financial statements were restated to include Data Lab
    results for the periods shown.
(2) Quarterly sales to related parties amounted to $1.7 million (first
    quarter); $3.1 million (second quarter); $7.2 million (third quarter); and
    $1.5 million (fourth quarter).
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company finances its working capital and capital expenditure
requirements primarily from the proceeds from its February 1997 initial public
offering. At December 31, 1997, the Company had cash and cash equivalents of
$8.1 million, short term investments of $35.9 million and working capital of
$57.0 million. This compares to cash and cash equivalents of $5.2 million, no
short term investments and working capital of $9.3 million at December 31,
1996. The Company had no long term debt at either date. Interest receivable
increased by $402,000 reflecting the investment of proceeds from the Company's
February 1997 initial public offering. In June 1997, the Company provided
collateral of $1.0 million for a letter of credit relating to its new
headquarters facility which will be reduced periodically until it terminates
in December 1998. Accounts receivable and income tax receivable increased by
$8.6 million and $1.0 million, respectively, from December 31, 1996. Accrued
expenses increased by $4.3 million. The significant components of this
increase were a $653,000 decrease in deferred offering costs, a $2.4 million
increase in warranty accrual, and a $1.4 million increase in accrued salaries
and employee benefits. The Company anticipates that the warranty accrual
portion of accrued liabilities may fluctuate significantly from period to
period due to the timing of customer upgrades and other warranty work. Accrued
rent increased by $570,000 due to the lease of the Company's headquarters in
June 1997.
 
  Cash used in investing activities was $41.9 million for the year ended
December 31, 1997. Short term investments increased by $35.9 million from
December 31, 1996 to December 31, 1997, resulting from the investment of
certain proceeds of the Company's initial public offering. An additional $6.0
million was used for the purchase of property and equipment, primarily
computer hardware and software and assembly and test equipment.
 
  Financing activities generated cash of $48.7 million in the year ended
December 31, 1997, reflecting primarily the receipt of proceeds, net of
offering costs, from the Company's February 1997 initial public offering, as
well as the exercise of certain employee stock options. The Company sold 4.0
million shares of common stock
 
                                      29
<PAGE>
 
at $12.00 per share in its February 1997 initial public offering. Proceeds
from the exercise of stock options totaled $5.2 million. Of this amount, the
Company will receive a tax benefit of $4.2 million related to the exercise of
stock options during 1997.
 
  During the second quarter of 1997, Yurie entered into a lease to occupy, and
relocated its headquarters facility to, a 137,000 square foot facility located
at 8301 Professional Place, Landover, Maryland. This lease commenced on June
1, 1997 and will expire on November 30, 2004, subject to an optional 5-year
extension.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
  In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123 requires
expanded disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation expense to be measured
based on the fair market value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB No. 25, which recognizes
compensation costs based on the intrinsic value of the equity instrument
awarded. The Company has adopted SFAS 123 for disclosure purposes in 1996, but
will continue to apply APB No. 25 with respect to recognition and measurement
of its stock-based compensation awards to employees.
 
  In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". The
new standard specifies the computation, presentation and disclosure
requirements for entities with publicly held common stock. The objective of
the statement is to simplify the computation of earnings per share and to make
the U.S. standard for computing earnings per share more compatible with the
standards of other countries and with that of the International Accounting
Standards Committee. This standard will be effective for the Company beginning
in 1997.
 
  In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the statement is to report a measure of
all changes in equity of an enterprise that results from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all non-owner changes in
equity. This standard will be effective for the Company beginning in 1998.
 
  Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". This statement introduces a new
model for segment reporting that is based on the way the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. This standard will be effective for the
Company beginning in 1998.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The information required by this Item 8 is presented in Item 14, beginning
on page F-1 of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  None.
 
                                      30
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this Item 10 is incorporated herein by reference
to the Company's definitive proxy statement, which is expected to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's fiscal year.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this Item 11 is incorporated herein by reference
to the information to be set forth under the caption "Executive Compensation"
in the Company's definitive proxy statement, which is expected to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's fiscal year.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item 12 is incorporated herein by reference
to the information to be set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this Item 13 is incorporated herein by reference
to the information to be set forth under the caption "Certain Relationships
and Related Transactions" in the Company's definitive proxy statement, which
is expected to be filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year.
 
                                      31
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)Documents Filed as Part of this Report:
 
1. FINANCIAL STATEMENTS. The following consolidated financial statements are
filed as part of this Annual Report on Form 10-K:
 
<TABLE>
   <S>                                                                       <C>
   Independent Auditors' Report............................................  F-2
   Consolidated Statements of Income for the Years Ended December 31, 1997,
    1996 and 1995..........................................................  F-3
   Consolidated Balance Sheets as of December 31, 1997 and 1996............  F-4
   Consolidated Statements of Stockholders' Equity for the Years Ended De-
    cember 31, 1997, 1996
    and 1995...............................................................  F-5
   Consolidated Statements of Cash Flows for the Years Ended December 31,
    1997, 1996 and 1995....................................................  F-6
   Notes to Consolidated Financial Statements..............................  F-8
</TABLE>
 
2. EXHIBITS
 
  The documents required to be filed as exhibits to this report under Item 601
of Regulation S-K are listed in the Exhibit Index included elsewhere in this
report, which list is incorporated herein by reference.
 
(b) Reports on Form 8-K:
 
  The Company filed the following Reports on Form 8-K during the quarter ended
December 31, 1997:
 
    On November 24, 1997, the Company filed a report under Item 5 of Form 8-K
  to report its proposed acquisition of Data Labs, Inc.
 
    On December 9, 1997, the Company filed a report under Item 2 of Form 8-K
  regarding the completion of its acquisition of Data Labs, Inc.
 
                                      32
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                         <C>
Independent Auditors' Report............................................... F-2
Consolidated Statements of Income for the Years Ended December 31, 1997,
 1996 and 1995............................................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996............... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended Decem-
 ber 31, 1997, 1996
 and 1995.................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
 1997, 1996 and 1995....................................................... F-6
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
 
                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of
 Yurie Systems, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Yurie
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of the Company and
Data Labs, Inc., which has been accounted for as a pooling-of-interests as
described in Note 2 to the consolidated financial statements. We did not audit
the balance sheets of Data Labs, Inc. as of December 31, 1996, or the related
statements of operations, stockholders' equity and cash flows of Data Labs,
Inc. for the years ended December 31, 1996 and 1995, which statements reflect
total assets of $2,317,625 as of December 31, 1996, and total revenues of
$112,318 and $651,192, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Data Labs, Inc. for 1996 and 1995, is
based solely on the report of such other auditors.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
 
  In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Yurie Systems, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
Deloitte & Touche LLP
February 20, 1998
Washington, DC
 
                                      F-2
<PAGE>
 
                      YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                         --------------------------------------
                                            1997         1996          1995
                                         -----------  -----------  ------------
<S>                                      <C>          <C>          <C>
REVENUE:
 Product revenue.......................  $47,063,809  $18,737,693  $  2,879,882
 Service revenue.......................    4,004,481    2,527,823     2,633,916
 Other revenue.........................          --       391,667     1,108,333
                                         -----------  -----------  ------------
  Total revenue(1).....................   51,068,290   21,657,183     6,622,131
COSTS OF REVENUE:
 Cost of product revenue...............   16,669,662    6,806,202     1,328,966
 Cost of service revenue...............    3,025,725    1,666,312     1,330,102
                                         -----------  -----------  ------------
  Total cost of revenue................   19,695,387    8,472,514     2,659,068
                                         -----------  -----------  ------------
GROSS PROFIT...........................   31,372,903   13,184,669     3,963,063
OPERATING EXPENSES:
 Research and development..............    8,690,518    4,427,810       562,597
 Sales and marketing...................    6,786,996    1,880,019         4,701
 General and administrative............    7,373,149    2,980,320     1,870,639
                                         -----------  -----------  ------------
  Total operating expenses.............   22,850,663    9,288,149     2,437,937
                                         -----------  -----------  ------------
INCOME FROM OPERATIONS.................    8,522,240    3,896,520     1,525,126
 Interest income (expense).............    1,550,547       95,842        (3,457)
 Other income (expense)................       (6,566)      (5,208)        1,681
                                         -----------  -----------  ------------
INCOME BEFORE INCOME TAXES.............   10,066,221    3,987,154     1,523,350
 Provision for income taxes............    3,930,000    1,563,482       574,685
                                         -----------  -----------  ------------
  NET INCOME...........................  $ 6,136,221  $ 2,423,672  $    948,665
                                         ===========  ===========  ============
BASIC NET INCOME PER COMMON SHARE......  $      0.25  $      0.12  $       0.05
                                         ===========  ===========  ============
BASIC WEIGHTED AVERAGE SHARES OUTSTAND-
 ING...................................   24,714,072   20,605,659    20,504,641
                                         ===========  ===========  ============
DILUTED NET INCOME PER COMMON SHARE....  $      0.23  $      0.11  $       0.05
                                         ===========  ===========  ============
DILUTED WEIGHTED AVERAGE SHARES OUT-
 STANDING..............................   26,656,146   22,145,719    20,504,641
                                         ===========  ===========  ============
</TABLE>
--------
(1) Revenue includes amounts from related parties of $13,519,212 for the year
    ended December 31, 1997.
 
 
                See notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                      YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1997         1996
                                                      -----------  -----------
<S>                                                   <C>          <C>
                       ASSETS
CURRENT ASSETS:
 Cash and cash equivalents........................... $ 8,142,205  $ 5,245,321
 Restricted cash.....................................   1,000,000          --
 Short-term investments..............................  35,916,699          --
 Accounts receivable(1)..............................  13,314,853    4,993,360
 Income tax receivable...............................     993,478          --
 Interest receivable.................................     402,228          --
 Inventory...........................................   5,467,045    2,573,559
 Deferred offering costs.............................         --       910,442
 Deferred income taxes...............................   1,246,058      475,214
 Prepaid expenses....................................     226,956      410,200
                                                      -----------  -----------
  Total current assets...............................  66,709,522   14,608,096
                                                      -----------  -----------
PROPERTY AND EQUIPMENT:
 Furniture & fixtures................................     661,426      220,360
 Computers, software and office equipment............   7,372,103    2,419,639
 Leasehold improvements..............................     594,221          --
                                                      -----------  -----------
  Total property and equipment.......................   8,627,750    2,639,999
 Less accumulated depreciation and amortization......  (1,637,874)    (398,728)
                                                      -----------  -----------
   Net property and equipment........................   6,989,876    2,241,271
DEFERRED INCOME TAXES................................   1,028,490          --
OTHER ASSETS.........................................     674,609       57,756
                                                      -----------  -----------
TOTAL ASSETS......................................... $75,402,497  $16,907,123
                                                      ===========  ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable.................................... $ 2,137,498  $ 2,014,053
 Accrued liabilities.................................   7,471,789    3,249,972
 Unearned revenue....................................      37,500          --
 Note payable........................................      16,620          --
                                                      -----------  -----------
  Total current liabilities..........................   9,663,407    5,264,025
ACCRUED RENT.........................................     584,733       14,932
DEFERRED INCOME TAXES................................         --        19,310
CAPITAL LEASE OBLIGATIONS............................      20,205       38,210
STOCKHOLDERS' EQUITY:
 Preferred Stock, par value $.01, authorized
  10,000,000 shares, none issued.....................         --           --
 Common Stock, par value $.01 per share; authorized
  50,000,000 shares; issued 25,316,468 and 20,945,385
  shares at December 31, 1997 and 1996, respectively.     253,165      209,454
 Additional paid-in capital..........................  56,700,676    8,046,437
 Treasury stock (753 shares at December 31, 1997)....     (23,127)         --
 Foreign currency translation adjustment.............    (647,948)         --
 Retained earnings...................................   8,851,386    3,314,755
                                                      -----------  -----------
  Total stockholders' equity.........................  65,134,152   11,570,646
                                                      -----------  -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $75,402,497  $16,907,123
                                                      ===========  ===========
</TABLE>
--------
(1) Accounts receivable includes amounts from related parties of $1,425,601 at
    December 31, 1997.
 
                See notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                      YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                             COMMON STOCK     ADDITIONAL             RETAINED     FOREIGN
                          -------------------   PAID-IN   TREASURY   EARNINGS    CURRENCY
                            SHARES    AMOUNT    CAPITAL    STOCK    (DEFICIT)   TRANSLATION    TOTAL
                          ---------- -------- ----------- --------  ----------  ----------- -----------
<S>                       <C>        <C>      <C>         <C>       <C>         <C>         <C>
BALANCE, JANUARY 1,
 1995...................  16,336,985 $163,370 $       --  $    --   $  (57,582)  $     --   $   105,788
 Common stock issuance..   4,208,400   42,084     119,604      --          --          --       161,688
 Net income.............         --       --          --       --      948,665         --       948,665
                          ---------- -------- ----------- --------  ----------   ---------  -----------
BALANCE, DECEMBER 31,
 1995...................  20,545,385  205,454     119,604      --      891,083         --     1,216,141
 Common stock issuance..     400,000    4,000   7,926,833      --          --          --     7,930,833
 Net income.............         --       --          --       --    2,423,672         --     2,423,672
                          ---------- -------- ----------- --------  ----------   ---------  -----------
BALANCE, DECEMBER 31,
 1996...................  20,945,385  209,454   8,046,437      --    3,314,755         --    11,570,646
 Common stock issuance
  from initial public
  offering, net of
  transaction costs of
  $4,858,230............   4,000,000   40,000  43,101,770      --          --          --    43,141,770
 Exercise of stock op-
  tions, including tax
  benefit of $4,208,750.     358,007    3,580   5,159,938      --          --          --     5,163,518
 Purchase of treasury
  stock,
  27,593 shares at cost.         --       --          --  (736,554)        --          --      (736,554)
 Reissuance of treasury
  stock for
  exercise of stock op-
  tions,
  26,840 shares.........         --       --          --   713,427    (599,590)        --       113,837
 Issuance of stock for
  employee
  benefit plans.........      13,076      131     127,031      --          --          --       127,162
 Foreign currency trans-
  lation
  adjustment............         --       --          --       --          --     (647,948)    (647,948)
 Fair value attributed
  to non
  employee stock op-
  tions.................         --       --      120,500      --          --          --       120,500
 Contributions from
  shareholders of merged
  company...............         --       --      145,000      --          --          --       145,000
 Net income.............         --       --          --       --    6,136,221         --     6,136,221
                          ---------- -------- ----------- --------  ----------   ---------  -----------
BALANCE, DECEMBER 31,
 1997...................  25,316,468 $253,165 $56,700,676 $(23,127) $8,851,386   $(647,948) $65,134,152
                          ========== ======== =========== ========  ==========   =========  ===========
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                      YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                            -----------------------------------
                                               1997         1996        1995
                                            -----------  ----------  ----------
<S>                                         <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income...............................  $ 6,136,221  $2,423,672  $  948,665
 Adjustments to reconcile net income to
  net cash provided by
  (used in) operating activities:
  Depreciation............................    1,239,146     281,509      71,995
  Provision for losses on accounts receiv-
   able...................................      300,000         --      162,023
  Compensation due to stock issuance......      120,500         --          --
  Expense related to shareholder contribu-
   tion...................................      145,000         --          --
  Deferred income taxes...................   (1,818,644)   (520,899)     42,680
 Changes in assets and liabilities:
  Accounts receivable.....................   (8,621,493) (3,755,240) (1,063,214)
  Restricted cash.........................   (1,000,000)        --          --
  Interest receivable.....................     (402,228)        --          --
  Inventory...............................   (2,893,486) (1,919,112)   (654,447)
  Prepaid expenses........................      183,244    (401,364)      2,179
  Other assets............................     (616,853)    (36,818)     (5,718)
  Accounts payable and other accrued ex-
   penses.................................    4,345,476   4,021,516     342,120
  Income taxes (receivable) payable.......     (993,478)   (432,059)    412,839
  Due to/from stockholder.................          --          --         (583)
  Unearned revenue........................       37,500  (4,000,000)  3,724,563
  Accrued rent............................      569,801     (10,729)      7,150
                                            -----------  ----------  ----------
 Net cash provided by (used in) operating
  activities..............................   (3,269,294) (4,349,524)  3,990,252
                                            -----------  ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of short-term investments......  (35,916,699)        --          --
  Purchase of property and equipment......   (5,987,751) (1,919,312)   (467,882)
                                            -----------  ----------  ----------
Net cash used in investing activities.....  (41,904,450) (1,919,312)   (467,882)
                                            -----------  ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common
   stock..................................   44,051,998   4,542,558         --
  Proceeds from exercise of stock options
   including related tax benefits.........    5,163,518         --          --
  Acquisition of treasury stock...........     (622,717)        --          --
  Proceeds from issuance of preferred
   stock..................................          --    3,130,833      48,329
  Stock issued for employee benefit plans.      127,162         --          --
  Capital lease obligations...............       (1,385)     38,210         --
                                            -----------  ----------  ----------
 Net cash provided by financing activi-
  ties....................................   48,718,576   7,711,601      48,329
                                            -----------  ----------  ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...     (647,948)        --          --
                                            -----------  ----------  ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.    2,896,884   1,442,765   3,570,699
CASH AND CASH EQUIVALENTS, BEGINNING OF
 YEAR.....................................    5,245,321   3,802,556     231,857
                                            -----------  ----------  ----------
CASH AND CASH EQUIVALENTS, END OF YEAR....  $ 8,142,205  $5,245,321  $3,802,556
                                            ===========  ==========  ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
  Cash paid for income taxes..............  $ 2,375,450  $2,699,000  $  119,166
                                            ===========  ==========  ==========
</TABLE>
 
                                      F-6
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
 
  During 1995, the Company issued 4,208,400 shares of common stock that was
recorded as compensation expense in the amount of $162,023. During 1997, the
Company issued 70,000 stock options to outside consultants and recorded
compensation expense of $120,500.
 
  In 1996, the Company entered into capital leases totaling $55,000 for
equipment and had accrued deferred offering costs of $653,000.
 
 
 
 
                See notes to consolidated financial statements.
 
                                      F-7
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Yurie Systems, Inc. and its subsidiaries (the "Company") design,
manufacture, market and service asynchronous transfer mode ("ATM") access
products for telecommunications service providers, internet service providers,
corporate end users and government end users. ATM is a standard for packaging
and switching digital information that facilitates high speed information
transmission with a high degree of efficiency.
 
  Principles of Consolidation--The consolidated financial statements include
the accounts of Yurie Systems, Inc. and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated. The
consolidated financial statements have also been restated to reflect the
merger with Data Labs, Inc. on December 1, 1997 which was accounted for as a
pooling-of-interests. (See Note 2).
 
  Revenue Recognition--For financial reporting purposes, the Company records
revenue from product sales upon shipment. Contract service revenue is
primarily generated from cost-reimbursable contracts, including cost-plus-
fixed-fee contracts, and is recorded on the basis of reimbursable costs plus a
pro rata portion of the fee. A portion of the Company's service revenue is
derived from various fixed-price contracts and is accounted for using the
percentage-of-completion method. Losses on contracts, if any, are recorded
when they become known. Contract costs for services supplied to the U.S.
government, including indirect expenses, are subject to audit by the
government's representatives. All revenue is recorded in amounts that are
expected to be realized upon final settlement.
 
  Cash and Cash Equivalents--The Company considers all highly liquid temporary
investments including those with an original maturity of three months or less
to be cash equivalents. Cash and cash equivalents consist primarily of
interest bearing accounts.
 
  Restricted Cash--In July 1997, the Company entered into an irrevocable
letter of credit for $1,000,000 deposited with and held by Commerce Bank on
behalf of the lessor as security for its lease of its headquarter building.
This amount is reduced monthly by $83,333 beginning January 25, 1998 and is
expected to be fully released by December 24, 1998.
 
  Short Term Investments--Highly liquid investments with original maturities
in excess of three months are classified as available-for-sale and reported at
fair value. Cost approximates fair value for all components of short-term
investments; unrealized gains and losses are reflected in stockholders' equity
and are not material.
 
  Unbilled Receivables--Unbilled receivables include certain costs and a
portion of the fee and expected profit which is billable upon completion of
the contracts or the completion of certain tasks under terms of the contracts.
 
  Inventories--Inventory is stated at the lower of cost or market using the
first-in, first-out method.
 
  Depreciation and Amortization--Property and equipment is recorded at cost.
The cost of furniture and fixtures, computers and office equipment is
depreciated from the date of installation using the straight-line method over
the estimated useful lives of the various classes of property, which range
from three to seven years. The costs of software are amortized using the
straight-line method over three years. Leasehold improvements are amortized
over the life of the lease.
 
  Warranty Reserve--Estimated warranty costs are accrued at the time revenue
is recognized and are charged to cost of revenues.
 
  Software Development Costs--Software development costs incurred for products
to be sold are capitalized after technological feasibility has been
established, in accordance with the guidance under SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
As of December 31, 1997, all costs related to software development have been
expensed as incurred.
 
                                      F-8
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of
all events that have been recognized in the financial statements are measured
based on provisions of enacted tax law to determine the amount of taxes
payable or refundable in future periods.
 
  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses for the period. Actual results could differ from those estimates.
 
  Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk principally consist of trade
accounts receivable. Single customers accounted for approximately 52% and 63%
of gross accounts receivable at December 31, 1997 and 1996, respectively. In
addition, there was one other customer with a balance approximately 10% of
gross accounts receivable as of December 31, 1997. There were no other
customers with a balance in excess of 10% as of December 31, 1996. The Company
performs ongoing credit evaluations of its customers, but generally does not
require collateral to support customer receivables. Losses on uncollectable
accounts have consistently been within management's expectations and have
historically been minimal.
 
  Foreign Currency Translation--The assets and liabilities of the Company's
foreign subsidiaries whose functional currency is other than the U.S. dollar
are translated at the exchange rates in effect on the reporting date, and
income and expenses are translated at the weighted average exchange rate
during the period. The net effect of such translation gains and losses is not
included in determining net income, but is accumulated as a separate component
of shareholders' equity. Foreign currency transaction gains and losses are
included in determining net income.
 
  New Accounting Pronouncements--As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of. The adoption had no effect
on the financial position or the results of operations of the Company. SFAS
No. 123, Accounting for Stock-Based Compensation, has been adopted by the
Company as of December 31, 1996. However, the Company has not adopted the
recognition and measurement provisions of SFAS No. 123 and therefore, will
provide only the applicable disclosures. (See Note 13). In March 1997, the
FASB issued SFAS No. 128, Earnings per Share. The new standard simplifies the
standard for computing earnings per share, effective December 15, 1997. As a
result, the Company's reported earnings per share for 1996 and 1995 have been
restated. In 1998, the Company will be required to adopt the provisions of
SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Company will
report comprehensive income in a separate statement which will show the
effects of the foreign currency translation loss as a component of
comprehensive income.
 
  Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation.
 
NOTE 2--BUSINESS COMBINATION
 
  On December 1, 1997, the Company issued 336,985 shares of its common stock
in exchange for all of the outstanding stock of Data Labs, Inc. ("Data Labs").
The merger has been accounted for as a pooling-of-interests and accordingly,
the Company's financial statements have been restated to include the results
of Data Labs for all periods presented.
 
 
                                      F-9
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements, along with the
related intercompany eliminations follow. Included in the table are
adjustments made to net income to reflect Data Labs tax benefit not previously
recorded which will be utilized by the combined companies.
 
<TABLE>
<CAPTION>
                                           NINE MONTHS
                                              ENDED
                                          SEPTEMBER 30,
                                              1997         1996         1995
                                          ------------- -----------  ----------
                                           (UNAUDITED)
      <S>                                 <C>           <C>          <C>
      Revenue:
        Yurie............................  $33,350,725  $21,610,755  $5,970,939
        Data Labs........................      265,918      112,318     651,192
        Intercompany eliminations........     (170,582)     (65,890)        --
                                           -----------  -----------  ----------
         Combined........................  $33,446,061  $21,657,183  $6,622,131
                                           ===========  ===========  ==========
      Net income (loss):
        Yurie............................  $ 4,980,599  $ 3,152,408  $  896,855
        Data Labs........................   (1,987,385)  (1,168,293)     51,810
        Intercompany eliminations........       20,956      (26,356)        --
        Tax adjustment...................      766,907      465,913         --
                                           -----------  -----------  ----------
         Combined........................  $ 3,781,077  $ 2,423,672  $  948,665
                                           ===========  ===========  ==========
</TABLE>
 
  Acquisition costs totaling $1,014,000 were recorded in the fourth quarter of
1997 and are included in general and administrative expenses. They consisted
primarily of fees for investment bankers, attorneys, accountants, financial
printing, severance costs and other related charges.
 
NOTE 3--NET INCOME PER COMMON SHARE
 
  In February 1997, SFAS No. 128, Earnings Per Share was issued. This
statement requires dual presentation of basic and diluted earnings per share
on the face of the income statement. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. SFAS No. 128 is effective for fiscal years ending
after December 15, 1997, and accordingly, has been adopted by the Company as
of December 31, 1997.
 
  Diluted earning per share include stock options calculated using the
treasury stock method. Common stock and options issued within one year prior
to the original filing of the Company's initial public offering (IPO) at
prices below the IPO price, which had previously been considered outstanding
for all periods presented have been reflected in the computations of basic and
diluted net income per share in accordance with SFAS No. 128 and Securities
and Exchange Commission Staff Accounting Bulletin No. 98, issued February 3,
1998. Such common stock and options have been treated as outstanding only
since issuance.
 
                                     F-10
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following is a reconciliation of the amounts used in calculating basic
and diluted net income per common share.
 
<TABLE>
<CAPTION>
                                                                       PER SHARE
                                                   INCOME     SHARES    AMOUNT
                                                 ---------- ---------- ---------
      <S>                                        <C>        <C>        <C>
      Basic net income per common share for the
       year ended December 31, 1997:
       Income available to common stockholders.  $6,136,221 24,714,072   $0.25
                                                                         =====
       Effect of dilutive stock options........         --   1,942,074
                                                 ---------- ----------
      Diluted net income per common share for
       the year ended December 31, 1997........  $6,136,221 26,656,146   $0.23
                                                 ========== ==========   =====
      Basic net income per common share for the
       year ended December 31, 1996:
       Income available to common stockholders.  $2,423,672 20,605,659   $0.12
                                                                         =====
       Effect of dilutive stock options........         --   1,540,060
                                                 ---------- ----------
      Diluted net income per common share for
       the year ended December 31, 1996........  $2,423,672 22,145,719   $0.11
                                                 ========== ==========   =====
      Basic net income per common share for the
       year ended December 31, 1995:
       Income available to common stockholders.  $  948,665 20,504,641   $0.05
                                                                         =====
       Effect of dilutive stock options........         --         --
                                                 ---------- ----------
      Diluted net income per common share for
       the year ended December 31, 1995........  $  948,665 20,504,641   $0.05
                                                 ========== ==========   =====
</TABLE>
 
NOTE 4--LINE OF CREDIT
 
  On June 28, 1996, the Company entered into a revolving loan agreement with
Commerce Bank, which provided for maximum borrowings of $3,000,000, based upon
certain percentages of accounts receivable and inventory as borrowing bases.
The interest varied from prime to prime plus 1 percent depending upon the
amounts borrowed. At December 31, 1996, the prime rate was 8.25%. At December
31, 1996, there were no borrowings under this agreement. This agreement
expired on May 31, 1997.
 
  In October 1996, Data Labs entered into a line of credit agreement for
$400,000 that was to mature on April 5, 1998. Borrowings under the line of
credit accrued interest at a rate of prime plus 1 percent. All amounts
outstanding were repaid upon the merger and the line of credit was not
renewed. There were no borrowings outstanding under this line of credit at
December 31, 1996.
 
  The Company had no line of credit at December 31, 1997.
 
                                     F-11
<PAGE>
 
                      YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 5--ACCOUNTS RECEIVABLE
 
  At December 31, 1997 and 1996 accounts receivable consisted of the following:
 
<TABLE>
<CAPTION>
                                                           1997         1996
                                                        -----------  ----------
      <S>                                               <C>          <C>
      Billed........................................... $13,075,944  $4,174,343
      Unbilled.........................................     437,420     764,863
      Other............................................     101,489      54,154
      Allowance for doubtful accounts..................    (300,000)        --
                                                        -----------  ----------
        Total accounts receivable...................... $13,314,853  $4,993,360
                                                        ===========  ==========
</TABLE>
 
NOTE 6--INVENTORY
 
  At December 31, 1997 and 1996 inventory consisted of the following:
 
<TABLE>
<CAPTION>
                                                              1997       1996
                                                           ---------- ----------
      <S>                                                  <C>        <C>
      Raw materials....................................... $1,963,926 $1,836,581
      Work-in-process.....................................  1,755,968    688,686
      Finished goods......................................  1,747,151     48,292
                                                           ---------- ----------
        Total inventory................................... $5,467,045 $2,573,559
                                                           ========== ==========
</TABLE>
 
NOTE 7--ACCRUED LIABILITIES
 
  At December 31, 1997 and 1996 accrued liabilities consisted of the following:
 
<TABLE>
<CAPTION>
                                                             1997       1996
                                                          ---------- ----------
      <S>                                                 <C>        <C>
      Accrued salaries and employee benefits............. $3,008,492 $1,639,481
      Accrued sales and use tax..........................    168,398    272,784
      Warranty accrued...................................  2,948,918    544,306
      Deferred offering costs............................        --     653,000
      Other accrued liabilities..........................  1,345,981    140,401
                                                          ---------- ----------
        Total accrued liabilities........................ $7,471,789 $3,249,972
                                                          ========== ==========
</TABLE>
 
NOTE 8--INCOME TAXES
 
   The provision for income taxes is comprised of the following:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                                  1997         1996       1995
                                               -----------  ----------  --------
      <S>                                      <C>          <C>         <C>
      Current................................. $ 5,748,644  $2,084,381  $532,005
      Deferred................................  (1,818,644)   (520,899)   42,680
                                               -----------  ----------  --------
        Total................................. $ 3,930,000  $1,563,482  $574,685
</TABLE>
 
                                      F-12
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                               ----------------
                                                               1997  1996  1995
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Expected statutory amount................................ 34.0% 34.0% 34.0%
     State income taxes, net of federal tax...................  4.6   4.6   4.6
     Other....................................................  0.4   0.6  (0.9)
                                                               ----  ----  ----
       Effective tax rate..................................... 39.0% 39.2% 37.7%
</TABLE>
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
 
  The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                      1997      1996     1995
                                                   ---------- -------- --------
     <S>                                           <C>        <C>      <C>
     Deferred tax assets:
       Allowance for doubtful accounts............ $  123,000 $    --  $    --
       Warranty reserve...........................  1,400,483  210,210      --
       Uniform capitalization.....................     20,500   19,310      --
       Consultant options.........................     49,405      --       --
       Deferred rent..............................    239,741    5,767    9,987
       Valuation allowance reversal...............    993,748  465,913      --
                                                   ---------- -------- --------
         Total deferred tax assets................  2,826,877  701,200    9,987
     Deferred tax liabilities:
       State taxes................................    167,987      --       --
       Depreciation...............................    205,000   19,310   25,685
       Unbilled receivables.......................    179,342  225,986   49,297
                                                   ---------- -------- --------
         Total deferred tax liabilities...........    552,329  245,296   74,982
                                                   ---------- -------- --------
         Net deferred tax assets/(liabilities).... $2,274,548 $455,904 $(64,995)
                                                   ========== ======== ========
</TABLE>
 
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
 
  Cash and Cash Equivalents--The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
 
  Accounts Receivable and Accounts Payable--The carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate
fair value.
 
                                     F-13
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10--COMMITMENTS
 
  On May 1, 1997, the Company entered into a lease for approximately 137,000
rentable square feet. This facility is being used as the Company's principal
offices. The lease commenced on June 1, 1997 and expires on November 30, 2004.
Rental payments began on December 1, 1997, with the monthly rent being
recorded on a straight line basis over the life of the lease.
 
  On March 1, 1997, the Company entered into a sub-lease for approximately
5300 rentable square feet for a research and development facility in Alameda,
California. This lease expires on June 30, 1998.
 
  The Company is also obligated under capital lease obligations for equipment
which expire in May 2000.
 
  The following is a composite schedule, by year, of minimum rental payments
as of December 31, 1997:
 
<TABLE>
<CAPTION>
     YEAR ENDED DECEMBER 31,                                           AMOUNT
     -----------------------                                         ----------
     <S>                                                             <C>
     1998........................................................... $1,215,862
     1999...........................................................  1,212,719
     2000...........................................................  1,230,971
     2001...........................................................  1,256,651
     2002...........................................................  1,288,068
     Thereafter.....................................................  2,558,194
                                                                     ----------
     Total minimum lease payments................................... $8,762,465
                                                                     ==========
</TABLE>
 
  Rental expense for the years ended December 31, 1997, 1996 and 1995, was
$1,252,122, $320,897, and $149,204, respectively.
 
  Employment Agreements--The Company has employment agreements with three of
its executive officers. The agreements provide for a minimum salary level as
well as for bonuses which are determined by the Board of Directors. Two of the
employment agreements are for one-year terms that renew automatically unless
terminated by either party. The other agreement ends on June 30, 2000 but is
automatically extended for one-year terms unless terminated by either party.
 
NOTE 11--RELATED PARTY TRANSACTIONS
 
  In March 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of Splitrock Services, Inc.
("Splitrock"), a corporation that provides communications services
specifically configured to meet the needs of large network users. Yurie had
product sales to this company totaling $12,406,865 during the year ended
December 31, 1997. In addition, during the year, Yurie generated service
revenue totaling $1,112,347 from Splitrock. At December 31, 1997, accounts
receivable from this company totaled $1,425,601.
 
NOTE 12--PENSION PLAN
 
  Until December 31, 1995, the Company had an employee pension plan, which was
administered as a self-employment plan under Internal Revenue Service
regulations. It was Company policy to contribute annually an amount equal to
15% of qualified employees' salaries. Pension expense for the year ended
December 31, 1995 was $93,557. The investment options were employee directed.
All employees are fully vested at the end of one year of consecutive service.
 
                                     F-14
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Effective January 1, 1996, the plan is administered as a 401(k) profit
sharing plan that covers substantially all full time employees. Employees are
eligible to participate on the first day of the quarter following the date of
their employment and may contribute up to 12% of their annual compensation not
to exceed certain statutory limitations. Eligible employees vest in employer
contributions and investment earnings thereon in 20% increments over a five
year period. Pension expense for the year ended December 31, 1996 totaled
$37,661. During 1997, the Company contributed 5521 shares of common stock to
the plan.
 
NOTE 13--STOCKHOLDERS' EQUITY
 
  On January 3, 1995, the Board of Directors approved a stock split in the
ratio of forty-to-one that increased the number of shares, all held at that
time by the Chief Executive Officer of the Company, from 200,000 to 8,000,000.
 
  On May 22, 1995, the Company issued 4,000,000 shares of common stock to Kwok
Li as compensation for his services in connection with the development of the
LDR100. Also on May 22, 1995, and June 14, 1995 the Company issued 202,400 and
6,000 shares of common stock, respectively, to several employees as
compensation for their services to the Company. The Company recorded these
grants at $.077 per share, the then current fair value of the common stock
based on an independent appraisal conducted as of May 22, 1995.
 
  On April 3, 1996, the Board of Directors recommended, and the shareholders
approved, a two-for-one stock split on outstanding shares of common stock as
well as options outstanding. At the same time, the option price per share was
reduced by 50%.
 
  On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of common stock at $12.00 per share,
resulting in net proceeds of $44,640,000 after deducting underwriting
discounts. Other deferred costs related to the initial public offering
totaling $1,498,230 as of December 31, 1997 have been netted against paid-in
capital.
 
  During 1997, the Company put in place an Employee Stock Purchase Plan. All
employees are eligible for participation in this plan after 90 days of service
which allows them to purchase stock at 85% of the current market price of
stock. During the year ended December 31, 1997, 13,767 shares were issued
under this plan.
 
  The Company's Board of Directors approved a nonstatutory stock option plan
effective January 31, 1996, which was amended on April 2, 1996, July 18, 1996,
September 6, 1996, December 20, 1996, and May 14, 1997, and was approved by
the shareholders on April 3, 1996, July 31, 1996, December 23, 1996 and June
26, 1997. The number of shares available for grant under the plan is
7,000,000. The exercise price per share is determined based upon estimated
fair value on the date of grant. Options are generally exercisable over a four
year period and expire ten years after the date of the grant.
 
  A summary of stock option activity, described above, under the stock option
plan is as follows:
 
<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,
                               -------------------------------------------------
                                         1997                     1996
                               ------------------------ ------------------------
                                            WEIGHTED                 WEIGHTED
                               NUMBER OF    AVERAGE     NUMBER OF    AVERAGE
                                SHARES   EXERCISE PRICE  SHARES   EXERCISE PRICE
                               --------- -------------- --------- --------------
     <S>                       <C>       <C>            <C>       <C>
     Outstanding at beginning
      of year................  3,212,922     $ 1.81           --        --
      Granted................  2,954,020      14.00     3,212,922     $1.81
      Exercised..............    385,600       2.48           --        --
      Cancelled..............    159,113      18.87           --        --
                               ---------     ------     ---------     -----
     Outstanding at end of
      year...................  5,622,229     $ 7.69     3,212,922     $1.81
                               =========     ======     =========     =====
     Exercisable at end of
     year....................    945,126     $ 1.24       271,500     $0.52
                               =========     ======     =========     =====
</TABLE>
 
                                     F-15
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Information with respect to stock options outstanding and stock options
exercisable at December 31, 1997, is as follows:
 
<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING
     -----------------------------------------------------------------------
                              NUMBER                        WEIGHTED AVERAGE
     RANGE OF EXERCISE    OUTSTANDING AT   WEIGHTED AVERAGE    REMAINING
          PRICES         DECEMBER 31, 1997  EXERCISE PRICE  CONTRACTUAL LIFE
     -----------------   ----------------- ---------------- ----------------
     <S>                 <C>               <C>              <C>
        $0.52                1,846,172          $0.52             8.34
         2.70                  723,733           2.70             8.61
         9.00                  373,630           9.00             8.95
      9.50--9.63             1,349,000           9.60             9.33
        12.00                  188,400          12.00             9.04
     14.00--17.31              401,300          16.98             9.51
     18.00--20.19              739,994          20.19            10.00
                             ---------
                             5,622,229
                             =========
</TABLE>
 
<TABLE>
<CAPTION>
                       OPTIONS EXERCISABLE
     ----------------------------------------------------------
     RANGE OF EXERCISE   NUMBER EXERCISABLE AT WEIGHTED AVERAGE
          PRICES           DECEMBER 31, 1997    EXERCISE PRICE
     -----------------   --------------------- ----------------
     <S>                 <C>                   <C>
        $0.52                   740,745             $0.52
        2.70                    171,899              2.70
        9.00                     23,632              9.00
        12.00                     8,050             12.00
     14.00-18.88                    800             16.66
                                -------
                                945,126
                                =======
</TABLE>
 
  The Company accounts for its employee stock-based compensation plans under
APB No. 25. All options granted to employees have been granted with an
exercise price equal to the fair value of the Company's common stock on the
date of grant, therefore no compensation expense has been recognized.
Compensation expense has been recognized only in connection with options
granted to outside consultants totaling $120,500 during 1997. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. There were no options
granted prior to 1996. For SFAS No. 123 purposes, the fair value of each
option grant has been estimated as of the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions
for 1997 and 1996: risk-free interest rate of 5.63% and 5.96%, respectively,
expected life of three years, dividend rate of zero percent, and expected
volatility of 73.66% and 68.30%, respectively. Using these assumptions, the
fair value of the stock options granted in 1997 and 1996 is $19,513,044 and
$2,919,254, respectively, which would be amortized as compensation expense
over the vesting period of the options. The options generally vest equally
over four years. Had compensation expense been determined consistent with SFAS
No. 123, utilizing the assumptions detailed above, the Company's net income
and earnings per share for the years ended December 31, 1997 and 1996 would
have been reduced to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                             1997       1996
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Net Income:
      As Reported........................................ $6,136,221 $2,423,672
      Pro forma.......................................... $2,934,147 $1,988,299
     Basic net income per common share:
      As Reported........................................ $     0.25 $     0.12
      Pro forma.......................................... $     0.12 $     0.10
</TABLE>
 
                                     F-16
<PAGE>
 
                     YURIE SYSTEMS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The resulting pro forma compensation cost may not be representative of that
expected in future years.
 
  On November 7, 1996, the Amerindo Technology Growth Fund Inc. (Amerindo)
acquired 400,000 shares of common stock of the Company for a purchase price of
$12.00 per share. In addition, Amerindo acquired 600,000 shares from officers
of the Company for $12.00 per share. Pursuant to the stock purchase agreement,
the Company granted Amerindo certain registration rights that begin one year
after the date of the effective date of a registration statement relating to
an initial public offering effected by the Company (or February 5, 1998).
 
NOTE 14--SIGNIFICANT CUSTOMER
 
  For the years ended December 31, 1997, 1996 and 1995, approximately 18%, 87%
and 65%, respectively, of total revenues were generated from sales through or
to one customer, AT&T. Included in Other Revenue in the Statement of
Operations for the years ended December 31, 1996 and 1995 are fees of $391,667
and $1,108,333, respectively, earned under an agreement entered into in August
1995 that granted AT&T certain rights to market and sell products of the
Company. Revenues for the year ended December 31, 1997 included revenues from
two other significant customers which accounted for approximately 16% and 14%
of total revenue.
 
 
 
                                     F-17
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHOIRZED, IN LANDOVER,
MARYLAND, ON THIS 31ST DAY OF MARCH, 1998.
 
                                          Yurie Systems, Inc.
                                          (Registrant)
 
                                          By:    /s/ Dr. Jeong H. Kim
                                             ----------------------------------
                                             Name:  Dr. Jeong H. Kim
                                             Title: Chairman of the Board and
                                                     Chief Executive Officer
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THIS 31ST DAY OF MARCH, 1998.
 
              SIGNATURE                        TITLE                 DATE
 
          /s/ Jeong H. Kim             Chairman of the          March 31, 1998
-------------------------------------   Board and Chief
            JEONG H. KIM                Executive Officer
 
           /s/ Kwok L. Li              Vice Chairman of the     March 31, 1998
-------------------------------------   Board and Chief
             KWOK L. LI                 Technical Officer
 
          /s/ Harry J. Carr            President, Chief         March 31, 1998
-------------------------------------   Operating Officer,
            HARRY J. CARR               and a Director
 
       /s/ Barton Y. Shigemura         Senior Vice              March 31, 1998
-------------------------------------   President, Sales
         BARTON Y. SHIGEMURA            and Marketing and a
                                        Director
 
        /s/ Harry J. D'Andrea          Chief Financial          March 31, 1998
-------------------------------------   Officer and
          HARRY J. D'ANDREA             Treasurer (also
                                        serves as Chief
                                        Accounting Officer)
 
        /s/ R. James Woolsey           Director                 March 31, 1998
-------------------------------------
          R. JAMES WOOLSEY
 
          /s/ Herbert Rabin            Director                 March 31, 1998
-------------------------------------
            HERBERT RABIN
 
        /s/ William J. Perry           Director                 March 31, 1998
-------------------------------------
          WILLIAM J. PERRY
 
        /s/ Kenneth D. Brody           Director                 March 31, 1998
-------------------------------------
          KENNETH D. BRODY
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
   2.1   Agreement and Plan of Merger by and among Yurie Systems Inc., Nicole
         Acquisition Corporation and Data Labs, Inc., dated December 1, 1997
         (filed as Exhibit 2.1 to the Company's Registration Statement on Form
         S-1, filed on February 13, 1998 (the "February 1998 Form S-1").
   3.1*  Amended and Restated Certificate of Incorporation of Yurie Systems,
         Inc. (filed as Exhibit 3.1 to the Company's Registration Statement on
         Form S-1, filed on November 7, 1996, as amended No. 333-15759 (the
         "November 1996 Form S-1")).
   3.2*  Amended and Restated Bylaws of Yurie Systems, Inc. (filed as Exhibit
         3.2 to the Company's Quarterly Report on Form 10-Q for the Quarter
         Ended March 31, 1997 (the "March 31, 1997 Form 10-Q")).
   4.1*  Specimen Certificate representing the Common Stock (filed as Exhibit
         4.1 to the November 1996
         Form S-1).
  10.1*  Yurie Systems, Inc. Amended and Restated 1996 Non Statutory Stock
         Option Plan, as amended June 30, 1997.
  10.2*  Jeong H. Kim Employment Agreement, dated as of July 31, 1996 (filed as
         Exhibit 10.3 to the November 1996 Form S-1).
  10.3*  Kwok Li Employment Agreement, dated as of July 31, 1996 (filed as
         Exhibit 10.4 to the November 1996 Form S-1).
  10.4*  Amendment to Kwok Li Employment Agreement, dated as of June 27, 1997.
  10.5*  Registration Rights Agreement between Yurie Systems, Inc. and Jeong H.
         Kim, dated as of July 31, 1996 (filed as Exhibit 10.5 to the November
         1996 Form S-1).
  10.6*  Registration Rights Agreement between Yurie Systems, Inc. and Kwok L.
         Li, dated as of July 31, 1996 (filed as Exhibit 10.6 to the November
         1996 Form S-1).
  10.7*  Registration Rights Agreement between Yurie Systems, Inc. and Kenneth
         D. Brody, dated as of July 1, 1996 (filed as Exhibit 10.7 to the
         November 1996 Form S-1).
  10.8*  Registration Rights Agreement by and among Yurie Systems, Inc. and the
         shareholders of Data Labs, Inc., dated as of December 1, 1997 (filed
         as Exhibit 2.1 to the February 1998 Form S-1).
  10.9*  Equity Incentive Agreement between Yurie Systems, Inc., Jeong H. Kim
         and Kenneth D. Brody, dated as of July 1, 1996 (filed as Exhibit 10.8
         to the November 1996 Form S-1).
 10.10*  Agreement of Lease between Digital Equipment Corporation and Yurie
         Systems, Inc., dated as of April 18, 1997 (filed as Exhibit 10.9 to
         the March 31, 1997 Form 10-Q).
 10.11*  Amended and Restated Agreement between AT&T Corp. Government
         Markets/Defense Markets and Yurie Systems, Inc., dated as of December
         4, 1996, and as amended on November 3, 1997 (see Exhibit 10.17 for
         addendum)(filed as Exhibit 10.10 to the November 1996 Form S-1).
 10.12*  Stock Purchase Agreement Between Yurie Systems, Inc. and Amerindo
         Technology Growth Fund, Inc., dated October 31, 1996 (filed as Exhibit
         10.11 to the November 1996 Form S-1).
 10.13*  Yurie Systems, Inc., Employee Stock Purchase Plan (filed as Exhibit
         10.12 to the November 1996
         Form S-1).
 10.14*  Yurie Systems, Inc. 401(k) Savings Plan (filed as Exhibit 10.13 to the
         November 1996 Form S-1).
 10.15*  Harry J. Carr Employment Agreement, dated as of April 30, 1997 (filed
         as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
         Quarter Ended June 30, 1997 (the "June 30, 1997 Form 10-Q").
 10.16*  Harry J. Carr Stock Option Agreement, dated as of April 30, 1997
         (filed as Exhibit 10.2 to the June 30, 1997 Form 10-Q).
 10.17*  Purchase Agreement between Yurie Systems, Inc. and Splitrock Services,
         Inc., dated as of July 1, 1997 (filed as Exhibit 10.3 to the June 30,
         1997 Form 10-Q).
 10.18*  AT&T Yurie Addendum dated as of November 3, 1997.
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER              DESCRIPTION
 -------             -----------
 <C>     <S>
 21.1    Subsidiaries of the Registrant
 23.1    Consent of Deloitte & Touche, LLP.
 27.1    Financial Data Schedule.
</TABLE>
--------
* Incorporated herein by reference.