<Page>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    FORM 10-Q



(Mark One)

   X     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 -----   EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2001
                               -------------
                                       OR

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

For the transition period ended                            or
                                      ---------------------  -------------------


Commission File Number 0-15323


                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
                      ------------------------------------
             (Exact name of registrant as specified in its charter)




             Delaware                                            94-2904044
-----------------------------                             ----------------------
(State or other jurisdiction                                (I.R.S. Employer

         of incorporation or                              Identification Number)

            organization)

                            6530 Paseo Padre Parkway

                                Fremont, CA 94555

                                 (510) 713-7300
                                 --------------
               (Address, including zip code, and telephone number

                      including area code, of registrant's

                          principal executive offices)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes X No
                                      ---    ---

     The number of shares outstanding of the registrant's Common Stock, par
value $.01, on June 29, 2001 was 21,972,002.


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

                                     Page 1
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.



                                      INDEX
                                      -----


                                                                           Page

                                                                          Number
                                                                          ------


PART I.       FINANCIAL INFORMATION



      Item 1. Condensed Consolidated Financial Statements

              Condensed Consolidated Balance Sheets -
              June 29, 2001 and March 30, 2001                                3

              Condensed Consolidated Statements of Operations and
              Statements of Comprehensive Income (Loss)- Quarters ended
              June 29, 2001 and June 30, 2000                                 4

              Condensed Consolidated Statements of Cash Flows -
              Quarters ended June 29, 2001 and June 30, 2000                  5

              Notes to Condensed Consolidated Financial Statements            6


      Item 2. Management's Discussion and Analysis of
              Results of Operations and Financial Condition                   8


      Item 3. Quantitative and Qualitative Disclosures About Market Risk     19


PART II.      OTHER INFORMATION


      Item 6  Exhibits and Reports on Form 8-K                               20


SIGNATURES                                                                   21



                                     Page 2
<PAGE>

                                     Part I
                              FINANCIAL INFORMATION
Item 1.

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
                      Condensed Consolidated Balance Sheets
                     (In thousands except par value amounts)

<TABLE>
<CAPTION>
                                                                                          JUN. 29,         MAR. 30,
                                                                                            2001             2001
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>
Assets                                                                                (unaudited)               (1)
    Current assets:
        Cash and cash equivalents                                                       $  18,104         $  20,471
        Restricted cash                                                                     1,053               540
        Temporary cash investments                                                        100,691           112,766
        Accounts receivable, net of allowances of $2,217 at June 29, 2001 and
           $2,127 at March 30, 2001                                                        22,786            29,825
        Inventories                                                                        23,300            20,122
        Prepaid expenses and other assets                                                  10,200             8,554
-------------------------------------------------------------------------------------------------------------------
            Total current assets                                                          176,134           192,278
-------------------------------------------------------------------------------------------------------------------

    Property and equipment, net                                                            26,339            25,565
    Software production costs, net                                                          1,563             2,102
    Goodwill and other intangible assets, net                                              12,175            13,036
    Other assets                                                                            2,491             2,365
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 218,702         $ 235,346
===================================================================================================================

Liabilities and Stockholders' Equity
    Current liabilities:
        Accounts payable                                                                $   7,592         $   8,478
        Accrued liabilities                                                                31,371            33,712
-------------------------------------------------------------------------------------------------------------------
           Total current liabilities                                                       38,963            42,190
-------------------------------------------------------------------------------------------------------------------

    Long-term liabilities:
        Capital leases                                                                         16                42
        71/4% redeemable convertible subordinated debentures                               24,706            24,706
        Other long term liabilities                                                           163               175
-------------------------------------------------------------------------------------------------------------------
            Total long term liabilities                                                    24,885            24,923
-------------------------------------------------------------------------------------------------------------------

    Stockholders' equity:
        Preferred stock, $.01 par value
            Authorized: 5,000 shares
            Outstanding: none                                                                   -                 -
        Common stock, $.01 par value
            Authorized: 50,000 shares
            Outstanding: 21,972 shares at June 29, 2001 and
               21,840 shares at March 30, 2001                                                220               218
        Additional paid in capital                                                        181,722           182,335
        Treasury stock                                                                     (3,597)           (4,768)
        Cumulative comprehensive income                                                        11               174
        Accumulated deficit                                                               (23,502)           (9,726)
-------------------------------------------------------------------------------------------------------------------
           Total stockholders' equity                                                     154,854           168,233
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 218,702         $ 235,346
===================================================================================================================
</TABLE>

See accompanying notes to condensed consolidated financial statements (1)
Derived from the March 30, 2001 audited consolidated financial statements

                                     Page 3
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
     Condensed Consolidated statements of operations and comprehensive loss
              (In thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
                                                                                                QUARTERS ENDED
                                                                                                --------------
                                                                                           JUN. 29,       JUN. 30,
                                                                                              2001           2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>             <C>
Revenue:
    Product revenue                                                                      $   16,333      $   22,513
    Service and other revenue                                                                 7,536          20,890
-------------------------------------------------------------------------------------------------------------------
        Total revenue                                                                        23,869          43,403
-------------------------------------------------------------------------------------------------------------------
Cost of sales:
    Cost of product revenue                                                                   9,851          12,159
    Cost of service and other revenue                                                         7,222          13,822
-------------------------------------------------------------------------------------------------------------------
        Total cost of sales                                                                  17,073          25,981
-------------------------------------------------------------------------------------------------------------------
Gross margin                                                                                  6,796          17,422
Operating expenses:
    Sales and marketing                                                                       9,313          11,494
    Research and development                                                                 10,553          10,375
    General and administrative                                                                3,315           3,196
    Amortization of goodwill and other intangible assets                                        861             801
-------------------------------------------------------------------------------------------------------------------
        Total operating costs                                                                24,042          25,866
-------------------------------------------------------------------------------------------------------------------
           Loss from operations                                                             (17,246)         (8,444)
Interest income                                                                               1,758           1,868
Interest expense                                                                               (468)           (539)
Other income (expense)                                                                        2,210             432
-------------------------------------------------------------------------------------------------------------------
           Loss before income taxes                                                         (13,746)         (6,683)
Income tax provision                                                                             26              15
-------------------------------------------------------------------------------------------------------------------
           Net loss                                                                      $  (13,772)     $   (6,698)
===================================================================================================================
Loss per share:
    Basic                                                                                $    (0.63)     $   (0.31)
    Diluted                                                                              $    (0.63)     $   (0.31)
===================================================================================================================

Shares used in per share computation:
    Basic                                                                                    21,928          21,587
    Diluted                                                                                  21,928          21,587
===================================================================================================================
Consolidated Statements of Comprehensive Loss
-------------------------------------------------------------------------------------------------------------------
Net loss                                                                                 $  (13,772)     $   (6,698)
Other comprehensive income (loss), net of tax:
    Cumulative translation adjustments                                                           50            (162)
    Net unrealized gains (losses) on securities,
        net of taxes of $0                                                                     (213)            195
-------------------------------------------------------------------------------------------------------------------

           Comprehensive loss                                                            $  (13,935)     $   (6,665)
===================================================================================================================

</TABLE>

See accompanying notes to condensed consolidated financial statements

                                     Page 4
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (In thousands - unaudited)

<TABLE>
<CAPTION>
                                                                                             QUARTERS ENDED
                                                                                             --------------
                                                                                         JUN. 29,         JUN. 30,
                                                                                           2001             2000
------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>
Cash and cash equivalents at beginning of year                                         $   20,471        $   28,024

Cash flows from operating activities:
    Net loss                                                                              (13,772)           (6,698)
    Adjustments required to reconcile net loss to net
        cash provided by (used for) operations:
           Depreciation and amortization                                                    3,833             4,982
           Amortization of goodwill and intangibles                                           861               801
           Stock compensation                                                                   3                 -
           Loss on disposition of property and equipment                                      314               235
           Changes in assets and liabilities:
               Accounts receivable                                                          7,039            (1,993)
               Inventories                                                                 (3,178)              166
               Prepaid expenses and other assets                                           (1,819)              548
               Accounts payable                                                              (872)             (350)
               Accrued liabilities                                                         (2,360)           (2,468)
-------------------------------------------------------------------------------------------------------------------
        Net cash used in operating activities                                              (9,951)           (4,777)
-------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
    Purchases of temporary cash investments                                               (21,307)          (21,255)
    Proceeds from maturities of temporary cash investments                                 33,169             4,769
    Purchases of property and equipment                                                    (4,271)           (2,091)
    Cash paid for acquisition of company                                                        -            (1,500)
    (Increase) decrease in restricted cash                                                   (513)                -
    Other                                                                                    (128)           (1,286)
-------------------------------------------------------------------------------------------------------------------
        Net cash provided by (used for) investing activities                                6,950           (21,363)
-------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
    Sale of common stock                                                                      557               905
    Repurchase of common stock                                                                  -            (1,413)
    Insurance settlement proceeds                                                               -            10,000
-------------------------------------------------------------------------------------------------------------------
        Net cash provided by financing activities                                             557             9,492
-------------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                                        77               425
        Net decrease in cash and cash equivalents                                          (2,367)          (16,223)
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                               $   18,104        $   11,801
===================================================================================================================

Other cash flow information:
    Cash paid during the year:
        Interest                                                                       $      902        $      900
    Non-cash investing and financing activities:
        Unrealized gain (loss) on available-for-sale securities                        $     (213)       $      195

</TABLE>

See accompanying notes to the condensed consolidated financial statements

                                     Page 5
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of Network
Equipment Technologies, Inc. doing business as net.com ("net.com") and its
subsidiaries. Intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) considered necessary to present fairly the financial
position as of June 29, 2001, and the results of operations and cash flows for
the quarters ended June 29, 2001 and June 30, 2000. These financial statements
should be read in conjunction with the March 30, 2001 audited consolidated
financial statements and notes thereto. The results of operations for the
quarter ended June 29, 2001 are not necessarily indicative of the results to be
expected for the fiscal year ending March 29, 2002.

2. INVENTORIES

Inventories are stated at lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead costs. Inventories at June
29, 2001 and March 30, 2001 consisted of the following:


(Dollars in thousands)                    June 29, 2001           March 30, 2001
--------------------------------------------------------------------------------

Purchased components                           $  4,811                 $  4,198

Work-in-process                                  17,051                   14,860

Finished goods                                    1,438                    1,064
--------------------------------------------------------------------------------
                                               $ 23,300                 $ 20,122
================================================================================

3. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share have been computed based upon the weighted
average number of common shares outstanding for the periods presented. For
diluted earnings per share, shares used in the per share computation include
weighted average common and potentially dilutive shares outstanding. Potentially
dilutive shares consist of shares issuable upon the assumed exercise of dilutive
stock options. These shares totaled 67,000 and 158,000 for the quarters ended
June 29, 2001 and June 30, 2000, respectively. The shares for the quarters ended
June 29, 2001 and June 30, 2000 were excluded from the per share computation
because they were anti-dilutive. Additionally, there were 784,000 shares of
Common Stock issuable upon conversion of debentures. These shares, and the
related effect of the accrued interest on the debentures, were not included in
the calculation of diluted earnings per share for the periods June 29, 2001 and
June 30, 2000, as their inclusion would have been antidilutive in both periods.

4. COMPREHENSIVE LOSS

Cumulative comprehensive loss at June 29, 2001 and March 30, 2001 is comprised
of cumulative foreign translation adjustments of ($657,000) and ($707,000),
respectively, and cumulative net unrealized gains on available-for-sale
securities of $668,000 and $881,000, respectively.

5. RESTRUCTURE COSTS

During fiscal 1999, net.com recorded a restructuring charge of $4.7 million.
This charge was established to provide for a business reorganization, which
included severance, outplacement and office closure costs. During fiscal 2000,
net.com recorded two additional charges in the amount of $3.4 million and $12.2
million to provide for increased levels for severance, outplacement and office
closure costs associated with its plan of business reorganization.

Through June 29, 2001, net.com made payments in connection with its plan of
business reorganization for severance, outplacement and office closure costs in
the amount of $17.7 million. During fiscal 2001, net.com

                                     Page 6
<PAGE>

evaluated the adequacy of the remaining liability for restructure charges. This
evaluation resulted in a credit to operating expenses of $1.4 million.

The remaining liability for restructure charges is $1.1 million. Net.com
believes that all costs associated with its plan of business reorganization will
be paid not later than fiscal 2003.


6. RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, establishes
accounting and reporting standards for derivative instruments. Adoption of this
statement has not materially impacted our consolidated financial condition,
results of operations or cash flows. This statement was effective for us
beginning March 31, 2001.

In June 2001, the Financial Accounting Standards Board approved for issuance
Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations
and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses
the initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangibles assets acquired outside of a business
combination whether acquired individually or with a group of other assets. SFAS
No. 142 also addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. We are required to adopt SFAS
No. 142 no later than our fiscal year beginning March 30, 2002. At this time no
evaluation of the impact of adopting SFAS 142 has been performed.


7. ASSETS ACQUISITION

In the first quarter of fiscal 2001, we acquired the assets of privately held
Convergence Equipment Company ("Convergence") from Global Communication
Technologies, Inc. for $1.5 million in cash. Convergence designs and
manufactures next generation IP (internet protocol) telephony platforms. The
acquisition was accounted for as a purchase. Included in the transaction is
property, plant and equipment valued at $300,000 and the Convergence engineering
team, intellectual property, and a full-featured IP voice switch valued at $1.2
million. The $1.2 million is classified as an intangible asset and is amortized,
based on a five year life.


8. SALE OF N.E.T. FEDERAL, INC.'S PROFESSIONAL SERVICE BUSINESS

On December 1, 2000, we sold the assets of our federal services business
("F.S.B.") to CACI International, Inc. ("CACI"). The operating results of the
F.S.B. has been excluded from the consolidated statements of operations since
the date of sale. Had the sale taken place at the beginning of fiscal year 2000,
the unaudited pro forma results of operations would have been as follows for the
quarter ended June 30, 2000 (in thousands except for per share data):



                                                  Quarter ended
                                       June 29, 2001             June 30, 2000
                                       ---------------------------------------
    Net revenues                        $     23,869              $     31,237
    Net  loss                                (13,772)                  (10,501
    Basic and diluted loss per share           (0.63)                    (0.49)


The pro forma results of operations give effect to certain adjustments,
including adding back the effect of fixed corporate allocations.

In determining the allocation of certain revenues and expenses, management has
made estimates and assumptions that affect the reported amount of F.S.B.
revenues and expenses. Actual results could differ from these amounts.

                                     Page 7
<PAGE>

Item 2.

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


This discussion and analysis should be read in conjunction with Part II of the
Company's Form 10-K for the fiscal year ended March 30, 2001.

Statements made in this Management's Discussion and Analysis or elsewhere in
this quarterly report or other communications (including press releases and
analyst calls) contain forward-looking statements that involve risk and
uncertainty. These statements relate to future events or to our future financial
results. Forward-looking statements can often be identified by words such as
"may", "will", "should", "expect", "anticipate", "believe", "estimate" or words
of similar import. Our actual results may differ significantly from those
anticipated by any forward-looking statement as a result of a number of factors,
trends, and risks - many beyond our control. These factors and risks are
discussed further in the Business Environment and Risk Factors below and in the
Company's Form 10-K for the year ending March 30, 2001. We do not undertake an
obligation to update these forward-looking statements or risk factors to reflect
future events or circumstances.


RESULTS OF OPERATIONS

The following table depicts selected data derived from the Company's
Consolidated Statements of Operations expressed as a percentage of revenue for
the periods presented:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                      Quarter Ended
                                                                                      -------------

Percent of Revenue                                                        June 29, 2001           June 30, 2000
-------------------------------------------------------------------------------------------------------------------

<S>                                                                           <C>                     <C>
Product revenue                                                               68.4%                   51.9%

Service and other revenue                                                     31.6                    48.1

Total revenue                                                                100.0                   100.0


Product gross margin                                                          39.7                    46.0

Service and other revenue gross margin                                         4.2                    33.8

Total gross margin                                                            28.5                    40.1


Sales and marketing                                                           39.0                    26.5

Research and development                                                      44.2                    23.9

General and administrative                                                    13.9                     7.4

Amortization of intangibles                                                    3.6                     1.8

Total operating expenses                                                     100.7                    59.6


Loss from operations                                                         (72.3)                  (19.4)


Net loss                                                                     (57.7)%                 (15.4)%
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

REVENUE

Total revenue for the first quarter of fiscal 2002 decreased 45.0% or $19.5
million to $23.9 million from $43.4 million for the first quarter of fiscal
2001. Product revenue decreased 27.5% or $6.2 million to $16.3 million from

                                     Page 8
<PAGE>

$22.5 million compared to the same period in fiscal 2001. The decrease in
product revenue is primarily the result of lower sales of our circuit switched
or "narrowband" product line, Promina (R), which accounts for the majority of
our product sales worldwide. The market for narrowband products is declining as
the market for packet switched or "Broadband" products is increasing. In
addition, we completed the end of life for our "Sonic Transmission Mode",
("STM"), product line at the end of fiscal year 2001. Product revenue for the
STM product line in the first quarter of fiscal 2002 was $37,500 compared to
$1.4 million in the first quarter of fiscal 2001. We are currently developing
new products for the broadband equipment market, which are intended to offset
the decline in revenue of our Promina product line. We expect to generate
product revenue from the broadband products in the second half of fiscal 2002.

Service and other revenue for the first quarter of fiscal 2002 decreased 63.9%
to $7.5 million from $20.9 million for the first quarter of fiscal 2001. The
decrease in service and other revenue is primarily the result of our sale of the
Federal Services Business (F.S.B.) to CACI International Inc. in the third
quarter of fiscal 2001. Service and other revenue from the F.S.B. in the first
quarter of fiscal 2002 was $600,000 compared to $12.2 million in the first
quarter of fiscal 2001. In addition, service and other revenue declined in the
first quarter of fiscal 2002 as a result of a decline in the installed base of
equipment that requires ongoing service support. As part of our broadband
strategy, we are developing new service creation solutions that we expect will
expand our service offerings and offset part of the decline in service and other
revenue from the narrowband service offerings.


GROSS MARGIN

Total gross margin, comprised of product and service margin, decreased as a
percentage of total revenue to 28.5% in the first quarter of fiscal 2002
compared to 40.1% in the first quarter of fiscal 2001. Total gross margins
declined primarily as a result of significantly lower service and other revenue.
Product revenue gross margins in the first quarter of fiscal 2002 declined to
39.7% from 46.0% in the first quarter of fiscal 2001. The decrease in product
gross margin resulted from unfavorable manufacturing variances that resulted
from lower product revenue and a charge of $690,000 for additional inventory
reserves that were required for excess narrowband inventory.

Service and other revenue gross margins decreased to 4.2% in the first quarter
of fiscal 2002 from 33.8% in the first quarter of fiscal 2001. The decline is
primarily from the reduction in service and other revenue as a result of the
sale of the F.S.B.. In addition, compensation related costs for service
personnel was higher as a result of increased headcount required for the support
of on-going field trials related to the new broadband products.


OPERATING EXPENSES

Operating expenses in the first quarter of fiscal 2002 decreased $1.8 million to
$24.0 million compared to $25.9 million in the first quarter of fiscal 2001.
Operating expenses as a percentage of total revenue increased to 100.7% in the
first quarter of fiscal 2002, compared to 59.6% in the first quarter of fiscal
2001. The lower operating expenses are primarily a result of less sales and
marketing expense, partially offset by higher research and development expense
and higher general and administrative expense. The increase in operating
expenses as a percentage of total revenue is primarily the result of lower
revenues.

Sales and marketing expenses in the first quarter of fiscal 2002 decreased $2.2
million to $9.3 million compared to $11.5 million in the first quarter of fiscal
2001. Sales and marketing expenses as a percentage of total revenue increased to
39.0% in the first quarter of fiscal 2002, compared to 26.5% in the first
quarter of fiscal 2001. The decrease in spending is the result of lower
compensation related expenses as result of reduced headcount and reduced product
revenues. We expect sales and marketing expenses to vary as a percentage of
sales volume for the remainder of the fiscal year.

Research and development expense in the first quarter of fiscal 2002 increased
$178,000 to $10.6 million compared to $10.4 million in the first quarter of
fiscal 2001. Research and development expense as a percentage of total revenue
increased to 44.2% in the first quarter of fiscal 2002 from 23.9% in the first
quarter of fiscal 2001. The increase in spending is primarily the result of
prototype material expenses that are required for the new broadband products
development. We expect research and development spending in future periods to
remain constant or to decrease slightly compared to the first quarter of fiscal
2002 as we balance the priority of cost control and the importance of
development for the new broadband products.

General and administrative expense in the first quarter of fiscal 2002 increased
$119,000 to $3.3 million compared to $3.2 million in first quarter of fiscal
2001. General and administration expense as a percentage of total revenue
increased to 13.9% in the first quarter of fiscal 2002 from 7.4% in the first
quarter of fiscal 2001. The increase in

                                     Page 9

<PAGE>

spending is primarily from third party legal costs that are partially offset by
lower compensation related expenses as a result of reduced headcount. We expect
general and administrative expense in the future periods to remain constant or
to decrease slightly compared to the first quarter of fiscal 2002.

Amortization of goodwill and other intangibles expense in the first quarter of
fiscal 2002 was $861,000 compared to $801,000 in the first quarter of fiscal
2001. The amortization expense is a result of two acquisitions, FlowWise
Networks, Inc. that occurred in the third quarter of fiscal 2000 and Convergence
Equipment Company that occurred in the first quarter of fiscal 2001. The
amortization for Convergence Equipment Company did not begin until the second
quarter of fiscal 2001 and is the reason for the difference quarter-over
quarter. We are amortizing the Goodwill and other intangibles on a straight-line
basis based on a five year life.


NON-OPERATING ITEMS

Interest income, primarily related to cash investments decreased $110,000 in the
first quarter of fiscal 2002 to $1.8 million compared to $1.9 million in the
first quarter of fiscal 2001. The decrease in interest income is the result of
lower yields on short-term cash investments as a result of lower interest rates.

Interest expense from: 1) the 7 1/4% convertible subordinated debentures, and 2)
the debt obligations assumed by net.com as part of the acquisition of FlowWise
decreased $71,000 to $468,000 compared to $539,000 from the comparable period in
fiscal 2001. The decrease is primarily related to reduction in principal for
debt obligations.

Other income in the first quarter of fiscal 2002 increased $1.8 million to $2.2
million compared to $432,000 in the first quarter of fiscal 2001. Other income
in the first quarter of fiscal 2002 consisted principally of a $2.5 million gain
as a result of certain milestones being met regarding contract renewals as part
of the sale of the Federal Services Business to CACI International Inc.

The first quarter of fiscal 2002 included a tax provision of $26,000 compared to
$15,000 in the first quarter of fiscal 2001.


LIQUIDITY AND CAPITAL RESOURCES

As of June 29, 2001, we had cash and cash equivalents of $18.1 million,
restricted cash of $1.1 million and short-term investments of $100.7 million for
a total of $119.8 million as compared to $133.8 million at the end of fiscal
2001. The decrease in cash, cash equivalents, restricted cash, and short term
cash investments was primarily the result of the net operating losses and the
related effect on cash.

Net cash used in operating activities in the first quarter of fiscal 2002 was
$10.0 million compared to net cash used in operating activities of $4.8 million
in the first quarter of fiscal 2001. The net increase in cash used by operations
in the first quarter of fiscal 2002 resulted primarily from a net loss of $13.8
million, an increase in inventory of $3.2 million, an increase in prepaid
expenses of $1.8 million and decreases in accrued liabilities and accounts
payable totaling $3.2 million. Net cash provided by operations included a
reduction in accounts receivable of $7.0 million and the adjustment for
depreciation and amortization of $4.7 million.

Net cash provided from investing activities was $7.0 million in the first
quarter of fiscal 2002 compared to net cash used for investing activities of
$21.4 million in the first quarter of fiscal 2001. Net cash provided from
investing activities in the first quarter of fiscal 2002 consisted primarily
from the proceeds from maturing temporary cash investments of $33.2 million,
partially offset by net cash used for investing activities for purchases of
temporary cash investments of $21.3 million and purchases of property and
equipment of $4.3 million.

Net cash provided by financing activities in the first quarter of fiscal 2002
was $557,000 compared $9.5 million in the first quarter of fiscal 2001. The
$557,000 in the first quarter of fiscal 2002 resulted from the sale of common
stock from the employee stock purchase plan whereas the $9.5 million in the
first quarter of fiscal 2001 was primarily due to the receipt of $10.0 million
in cash in relation to our insurance settlement for construction defects at our
Fremont campus.

We believe that our current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through the next 12 months.

                                     Page 10

<PAGE>

BUSINESS ENVIRONMENT AND RISK FACTORS

net.com's business is subject to the risks below. Although we have tried to
identify the material risks to our business, this is not an all-inclusive list.
There may be additional risks not listed because either they have not yet been
identified or they are not material now, although they could become material in
the future. Any one of the risks identified below could materially impact our
business, results of operations or financial condition.


WE HAVE INCURRED NET LOSSES IN FISCAL YEAR 2000 AND 2001 AND EXPECT TO INCUR
FUTURE LOSSES.

For the past two fiscal years we have incurred net losses. Our ability to
achieve profitability on a continuing basis will depend on the successful
design, development, testing, introduction, marketing, and broad commercial
distribution of our new broadband equipment products, specifically our
SCREAM(TM) product line and to a lesser degree our SHOUTIP product line. We
expect to continue to incur significant product development, sales and marketing
and administrative expenses as we continue to maintain support of our existing
products and customers while launching new products. Although we have taken a
number of measures to reduce expenditures, most of our operating expenses are
fixed in the short term making it difficult to reduce expenses rapidly. At the
current revenue levels our operating expenses are too high to enable us to be
profitable. In order to achieve profitability, we need to generate significant
sales growth from our SCREAM product line or decrease expenses, in order to
offset declines in the sales of our existing Promina product line.


OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY.

Our operating results vary significantly from quarter to quarter. These
fluctuations are the result of a number of factors including:

     o    the volume and timing of orders from and shipments to our customers;

     o    the length and variability of the sales cycle of our products;

     o    the timing of and our ability to obtain new customer contracts;

     o    the timing of new products and services;

     o    the timing and level of prototype expenses;

     o    the availability of products and services;

     o    the overall capital expenditures of our customers;

     o    the market acceptance of new and enhanced versions of our products and
          services or variations in the mix of products and services we sell;

     o    the availability and cost of key components;

     o    the timing of revenue recognition/deferrals;

     o    the timing and size of Federal budget approvals; and

     o    general economic conditions as well as those specific to the
          telecommunications, Internet and related industries.

Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. Any
shortfall in revenue may impact our business, results of operations and
financial condition. You should not rely on our results or growth for one
quarter as any indication of our future performance.


OUR STOCK PRICE MAY BE VOLATILE.

Our common stock has experienced substantial price volatility, particularly as a
result of variations between our actual or anticipated financial results and the
published expectations of analysts, and as a result of announcements by our
competitors and us. In addition, the stock market has experienced extreme price
and volume fluctuations that have affected the market price of many companies,
in particular technology companies, and that have often been unrelated to the
operating performance of these companies. These factors, as well as general
economic, industry

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specific, and political conditions, may materially adversely affect the market
price of our common stock in the future. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our ability to
retain key employees, all of whom have been granted stock options.


THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS THAT WILL ACHIEVE MARKET ACCEPTANCE.

Our operating results will depend to a significant extent on the successful
design, development, testing, introduction, marketing, and broad commercial
distribution of our new broadband equipment products, specifically our SCREAM
product line and to a lesser extent on our SHOUTIP product line. The success of
these and other new products is dependent on several factors, including proper
new product definition, competitive product cost, timely completion and
introduction of new products, differentiation of new products from those of our
competitors and market acceptance of these products. The markets for our
products are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and evolving methods of building
and operating networks. Our SCREAM and SHOUTIP product lines target start-up
telecommunications companies and long established domestic carriers such as
AT&T, Worldcom, SBC Communications, and Sprint. There can be no assurance that
we will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, or achieve market acceptance of our
products or that products and technologies developed by others will not render
our products or technologies obsolete or non-competitive. That in turn could
have a material adverse effect on our business, results of operation, and
financial condition.


WE ARE DEPENDENT ON REVENUE FROM THE PROMINA PRODUCT LINE UNTIL WE GAIN REVENUE
TRACTION ON THE SCREAM PRODUCT LINE.

Currently, we derive the majority of our product revenue from our Promina(R)
product line, a circuit-based technology. We believe that the market for
circuit-based technology has declined and will continue to decline in the future
as new networks will likely employ packet based technology. The migration from
circuit to packet-based technology has happened more dramatically in the United
States commercial markets than in the United States Federal Government market
and the rest of the world. The decline of our business in the United States
commercial markets since fiscal 1999 has had a material adverse affect on our
business and results of operations. Should this migration extend into our
international and Federal Government markets in a similar fashion before we gain
traction on our new SCREAM product line, it could have a material adverse effect
on our business, results of operations, and financial condition.


A SIGNIFICANT PORTION OF OUR REVENUE IS GENERATED FROM SALES TO THE FEDERAL
GOVERNMENT.

A significant portion of our total revenue from product sales comes from
contracts with the United States Federal Government ("Federal Government"), most
of which do not include long-term purchase commitments. Historically, the
Federal Government has been slower to adopt new technology, such as packet based
technology, which has had the effect of extending the product life of our older
products. If the Federal Government accelerated adoption of new technology by
replacing the Promina(R) product line in their networks our product revenue
would decline sharply. Should we not be successful in renewing a significant
number of Federal Government contracts, and if sales to the Federal Government
were to decline sharply, it could have a material adverse impact on our
business, results of operations and financial condition.


OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE SCREAM AND SHOUTIP WILL DEPEND HEAVILY
ON THE WIDESPREAD ACCEPTANCE OF SERVICE CREATION AS A MEANS OF ACHIEVING MAXIMUM
NETWORK PRODUCTIVITY AND ON APPROPRIATE REGULATORY INCENTIVES.

Over the last five years, carriers generated revenue by adding more customers or
by offering additional services to existing customers. Offering additional
services to an existing subscriber base is generally a preferred approach to
generating additional revenue, but these services typically require network
upgrades and the purchase of expensive equipment. Over time, however, carriers'
aggressive price discounts, expensive direct marketing campaigns, and massive
capital outlays for infrastructure expansion have offset whatever incremental
revenue increases were generated by the new services and have eroded the
profitability of these companies. Since the second quarter of fiscal 2000, we
have spent the majority of our R & D and Marketing resources to position
ourselves and our SCREAM family of products as the next generation of
telecommunications equipment that will enable carriers to

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maximize the delivery of new services while leveraging their existing networks
and ensuring quality of service. The future success of SCREAM and SHOUTIP will
depend in large measure on carriers' acceptance of service creation as the
vehicle that will deliver revenue increases sought after by the carriers.
Failure to achieve this acceptance could affect our ability to sell the SCREAM
and SHOUTIP products and grow overall revenue, which could have a material
adverse effect on our business, results of operations, and financial condition.

In addition, without deregulation, in the United States and overseas, the
economic incentive for the incumbent carrier to actively engage in changing
their service delivery model to the service creation delivery model is low.
While the 1999 decision by the United States Federal Telecommunications
Commission's to decline to force incumbent local exchange carriers to unbundle
their ATM infrastructure, thus allowing incumbents to deny competitive carriers
access to their ATM networks, has made the service creation model viable for
carrier revenue growth, it remains to be seen whether or not the regulatory
structure in other countries will set the stage for the service creation model
to take hold. Failure to achieve the regulatory structure favorable to the
service creation model overseas could affect our ability to sell the SCREAM and
SHOUTIP products overseas and to grow overall revenue, which could have a
material adverse effect on our business, results of operations, and financial
condition.


OUR SHOUTIP PRODUCT LINE MAY NEVER GENERATE SIGNIFICANT REVENUE.

Our SHOUTIP product is a voice over IP product that we acquired from the
purchase of the assets of Convergence Technologies in May 2000. While we
continue to believe that the technology is good, and that there is a market for
the SHOUTIP product, it has not yet generated significant sales. Due to the
competitive nature of this market segment there can be no assurances that this
product will generate significant sales in the short term, if ever.


TO SUCCESSFULLY  MARKET SCREAM,  WE WILL NEED TO SIGN UP SIGNIFICANT  NEW
STRATEGIC  PARTNERS WHO CAN HELP SELL OUR PRODUCTS INTO THE SERVICE PROVIDER
MARKET.

In order to successfully market our SCREAM product, we will need to sign up new
strategic partners, such as software application partners and product OEM's or
resellers. The importance of the software application partners is that they
provide critical functions, such as billing, mediation, provisioning and
configuration that are needed to create a total service creation solution for
our customers. Product OEM or resale partners will be needed to supplement and
enhance our existing direct sales force both in the United States and overseas.
While we have begun the process of identifying and signing both software
application and OEM or resale partners, more partners may be necessary in all
these areas for us to be successful. In particular, we may need to find
strategic partners to assist us with integration of security functions, such as
digital certificates, third party firewall, intrusion detection and public key
management to meet evolving security needs, as well as to counter rival efforts
to assert differentiation in the security area. Additionally, we may need to
pursue partnerships with vendors who have optical core and core routing
technologies in order to counter the end-to-end solution providers, such as
Nortel, Cisco and Lucent as well as to bolster the company's co-marketing
efforts. Failure to sign up these new strategic partners could impact on our
ability to sell the SCREAM product and grow overall revenue, which could
adversely impact our business, results of operations and financial condition.


A CONTINUATION OF THE DOWN TURN IN THE NATIONAL ECONOMY COULD MATERIALLY IMPACT
OUR REVENUE AND AS A RESULT, EARNINGS AND OUR STOCK PRICE.

Growth in the United States economy slowed significantly in the later part of
fiscal year 2001 and has continued into fiscal year 2002. Companies in many
different market sectors have been impacted by the slow down. Telecommunications
and other technology related markets in particular have seen growth slow
significantly. This slow growth has led to decreased revenue or earnings, which
in turn has led to declines in the stock price for the technology sector as a
whole. We have seen our stock price decrease along with our competitors and
others in technology. Should the United States economy continue its slow down,
our revenues, earnings and ultimately our stock price could be materially
affected.


THE RECENT DECLINES IN PURCHASES BY TELECOMMUNICATIONS SERVICE PROVIDERS AND THE
OVERALL DECLINE OF PRODUCT SALES IN THIS MARKET COULD IMPACT SALES OVER THE NEXT
SEVERAL QUARTERS.

Over the last twelve months, the financial health of many of the newly emerging
telecommunications service providers, including many of the companies classified
as Competitive Local Exchange Carriers or "CLECs" began

                                     Page 13
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to deteriorate. In addition, there is evidence that other more established
service providers are cutting back on equipment purchases as part of an overall
slow down in economic growth. We believe that many telecommunications equipment
companies, including net.com, were impacted by this decline. In addition, the
timing and volume of purchases by emerging service providers can be
unpredictable due to other factors, including their need to build a customer
base and capacity while working within their budgetary constraints. Our ability
to recognize revenue from emerging service providers will depend on the relative
financial strength of the particular customer. We may be required to write off
or decrease the value of our accounts receivable from a customer whose financial
condition materially deteriorates. Decreases in purchasing volume of emerging
service providers or changes in the financial condition of emerging service
provider customers could have a material impact on our results of operations and
financial condition in future periods. In addition, the selling cycle of our
SCREAM product family could be extended as our service provider customers reduce
their capital budgets.


WE EXPECT GROSS MARGINS TO DECLINE OVER FUTURE PERIODS.

Due to increases in competition, material and labor costs, subcontractor costs
and changes in the mix of products we sell, we expect that our gross margins
could decrease in future quarters. Some of the new products we introduced
recently have lower gross margins than our Promina product line. However, we
expect that new product offerings slated for introduction in the second half of
fiscal 2002 will have gross margins similar to or higher than our Promina
product line. In addition, if product sales continue to decrease as a percentage
of total revenue, overall margins may decrease because service revenue has a
lower margin than product sales. In addition, to the extent we expand our sales
through product resellers and strategic partnerships, we expect to earn lower
gross margins. Recently our subcontractor manufacturer increased our material
costs by 10% due to increased demand and an overall shortage of capacity in the
semiconductor and other component industries. The current economic slowdown may
help alleviate some of the pricing pressure on component parts, although there
is no assurance that these benefits will be passed on to us from our suppliers
or contract manufacturer. Any one of these factors by themselves or all of them
in combination may decrease our product margins and our overall gross margins.


FACTORS BEYOND OUR CONTROL COULD AFFECT OUR ABILITY TO SELL INTO INTERNATIONAL
MARKETS

As a general rule, international sales tend to have risks that are difficult to
foresee and plan for including political and economic stability, regulatory
changes, currency exchange rates, changes in tax rates and structures, and
collection of accounts receivable. Unforeseen events in various areas of the
globe may have an adverse impact on us. Further, our international markets are
served primarily by non-exclusive resellers who themselves may be severely
impacted by economic or market changes within a particular country or region.
Unforeseen or unpredictable changes in international markets could have a
material adverse effect on our business, results of operations and financial
condition.


WE CANNOT GUARANTEE THAT OUR DIVESTITURE OF OUR FEDERAL SERVICES BUSINESS WILL
PROVE SUCCESSFUL.

On December 1, 2000, we closed the sale of our Federal Services Business ("FSB")
to CACI International Inc ("CACI"), who will continue to provide maintenance and
other services to our federal customers. We continue to sell net.com products
directly to the Federal Government and, additionally, have a strategic alliance
with the acquirer, CACI, to jointly market each other's products and services.
For the divestiture to be successful, CACI must continue to provide the level of
service to which our customers have become accustomed. Should CACI experience
difficulties in providing those services, it could impact purchasing decisions
for our product and cause federal customers to seek products from other vendors.

In addition, in order to realize the full economic benefits of the sale, net.com
must facilitate the assignment and extension of certain contracts with the
Federal Government that trigger up to an additional $10.5 million of
consideration under the divestiture agreement. If the divestiture of our FSB
proves unsuccessful, it could have an adverse impact on our business, financial
condition or results of operation.


INCREASED COMPETITION IS LIKELY IN THE FUTURE.

The market for telecommunication equipment is a highly competitive and dynamic
market characterized by the easy entrance of new start-up companies, rapid
changes to and the convergence of technologies and a worldwide

                                     Page 14

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migration from existing circuit technology to the new packet based technologies.
We compete directly both internationally and domestically with many different
companies, some of which are large, established suppliers of end-to-end
solutions such as Cisco, Lucent, Alcatel and Nortel. In addition, there are a
number of new start-ups that are targeting this market, including CoSine,
Ellacoya, Quarry, Gotham, Celox and others. Many of the large suppliers have
greater financial, marketing and technical resources and offer a wider range of
networking products than we offer. They are often able to devote greater
resources to the development, marketing and sale of their products and to use
their equity or significant cash reserves to acquire other companies with
technology and/or products that compete directly with ours. They often can
compete favorably on price because their large product selection allows them to
bundle multiple solutions together without significantly impacting their overall
product margins. Small start-up ventures are better able than net.com to focus
their resources on a particular product development unencumbered by the
requirements to support an existing product line. Through these acquisitions,
competitors can obtain strategic advantages that may adversely affect our
business, financial condition or results of operations.

In addition, the networking equipment market has seen the constant introduction
of new technologies that has reduced the value of older technology solutions.
This has created pricing pressure on older products while increasing the
performance expectations of newer networking equipment. Moreover, broadband
technology standards are constantly evolving and alternative technologies or
technologies with greater capability are constantly introduced and sought by our
customers. It is possible that the introduction of other technologies will
either supplant our current technologies and those technologies we have in
development or that it will require us to significantly lower our prices in
order to remain competitive. To remain competitive, we need to develop new
products that meet the ever-changing technology needs of the networking market
but that can be sold at a competitive price. We also must enhance our current
products to provide needed features that increase their overall value
proposition for the customer while keeping the price competitive. Due to the
competitive nature of the market and the relative age of our current product
offerings, we may not be able to maintain prices for our products at levels that
will sustain profitability over the short or long term. That may have a material
adverse effect on our business, results of operations and financial condition.


OUR INABILITY TO SIGN COMPETITIVE RESALE PARTNERS INTERNATIONALLY COULD
SIGNIFICANTLY AFFECT FUTURE PRODUCT AND SERVICE REVENUE.

Because the transition from circuit to packet technology is slower outside the
United States, we expect international sales will continue to account for a
significant portion of our Promina(R) product sales (other than that sold in the
Federal channel) in future periods. Our International sales are made almost
entirely through indirect channels that include distributors and resellers
worldwide. They do not have minimum purchase requirements that they must meet.
While we require them to use their best efforts to resell our products, because
our product line is small, our distributors and resellers must often resell
product lines from other networking companies, including our competitors, such
as Cisco, in order to sustain a profit. Because of the size of Cisco and its
dominant position in the network equipment market, it is difficult for us to
find a distributor or reseller who does not resell Cisco products. Due to the
difficulty of signing up distributors and resellers without pre-existing
competitive relationships, our distributors and resellers are not always
successful in promoting our products thereby impacting the sustainability of our
international product sales. If we cannot develop relationships with
distributors and resellers that can effectively market and sell our products and
services, we may not be able to meet our forecasted sales and revenue in future
quarters.


OUR PRODUCTS HAVE LONG SALES CYCLES MAKING IT DIFFICULT TO PREDICT WHEN A
CUSTOMER WILL PLACE AN ORDER AND WHEN TO FORECAST REVENUE FROM THE RELATED SALE.

Our products are very complex pieces of networking equipment and represent a
significant capital expenditure to our customers. The purchase of our products
can have a significant impact on how a customer designs its network and provides
services either within its own organization or to an external customer.
Consequently, our customers often engage in extensive testing and evaluation of
products before purchase. There are also numerous financial and budget
considerations and approvals that the customer often must obtain before it will
issue a purchase order. As a result, the length of our sales cycle can be quite
long, up to a year in some cases. In addition, our customers, including
resellers, have the contractual right to delay scheduled order delivery dates
with minimal penalties and to cancel orders within specified time frames without
penalty. The ability to delay or cancel orders makes it difficult to predict
whether or not an order may actually ship. Moreover, while customers may tell us
that they are planning to purchase our products, to ensure a purchase order is
placed, we often must incur substantial sales and marketing

                                     Page 15
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expense. If the order is not placed in the quarter forecasted because approvals
took longer than anticipated by the customer, our sales may not meet forecast
and revenues may be insufficient in that quarter to meet expenses.


OUR LACK OF BACKLOGGED  PRODUCT ORDERS MAKE IT DIFFICULT FOR US TO ACCURATELY
FORECAST SALES AND CREATES A RISK OF CARRYING TOO MUCH OR TOO LITTLE INVENTORY

Historically, the majority of our revenue in each quarter has resulted from
orders received and shipped in that quarter. However, for the last two years, we
have not started a quarter with a sufficient amount of backlogged orders to meet
the sales forecast for that quarter. While we do not believe that backlog is
necessarily indicative of future revenue levels, our customers' ordering
patterns and the absence of backlogged orders create a significant risk that we
could carry too much or too little inventory if orders do not match forecasts.
Rather than base forecasts on orders received, we have been forced to schedule
production and commit to certain expenses based more upon forecasts of future
sales, which are difficult to predict in the telecommunications industry.
Furthermore, if large orders do not close when forecasted or if near-term demand
weakens for the products we have available to ship, our operating results for
that or subsequent quarters would be materially adversely affected.


WE HAVE OFFERED AND MAY CONTINUE TO OFFER CUSTOMER FINANCING ARRANGEMENTS.

Historically, our customers have been comprised of larger corporate enterprises
or well-established service providers. Over the past three fiscal years, we have
targeted several emerging global carriers, international voice resellers and
smaller rural incumbent local exchange carriers ("ILECS") and CLECS. These
companies generally do not have substantial operating histories or significant
capital resources and often do not qualify for credit from traditional lending
sources. Consequently, vendor-financing programs have become a competitive
factor in obtaining business. We have worked with customers and third-party
financial institutions to finance projects through negotiated financing
arrangements or leases. This program includes a loss sharing provision under
which there is limited recourse to us in the event of default. In addition, we
entered into a loss sharing agreement with one of our resellers wherein we share
in a percentage of any loss arising from a customer's failure to pay the
reseller for our equipment. Both of these programs are for companies based in
the United States only. As of June 29, 2001 we had $4.7 million of outstanding
lease financing that was subject to limited recourse provisions. We have
experienced losses due to customers failing to meet their obligations and
demands by lessors under recourse provisions. Any significant increase in the
use of vendor financing by our customers or any further degradation of the
market in which our customers compete could increase our exposure to credit risk
and have a material adverse effect on our operating results and financial
condition.


IF WE ARE UNABLE TO HIRE QUALIFIED NEW EMPLOYEES OR TO RETAIN EXISTING
EMPLOYEES, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS.

Our success is dependent on being able to attract and retain highly skilled
engineers, managers and other key employees. In the past two years we have seen
a large turnover in our direct sales force in North America. This turnover has
negatively impacted our ability to sell products in the United States. Until
very recently, the tight job market made competition for employees very intense
for all employers. The large job growth in the San Francisco Bay Area and the
competition for employees from both established and start-up companies has made
it difficult for many departments in net.com including Marketing and Engineering
to attract and recruit new employees in a timely manner. The recent lay-offs at
Internet and telecommunications companies have improved somewhat our employee
retention and recruitment concerns. While we have put additional focus and
resources into our recruitment activities and have taken steps including the
introduction of compensation packages and other incentives that we hope will
mitigate these competitive advantages, we cannot say that in the current economy
our increased efforts will substantially improve the recruitment and retention
issues faced by our company at this time. Our inability to attract, recruit and
retain key personnel, particularly engineers and sales and marketing employees,
could impact our ability to meet important company objectives such as product
delivery deadlines and sales targets. That in turn could significantly impact
our business, results of operations and financial condition.


WE RELY ON A NUMBER OF SOLE SOURCE SUPPLIERS FOR OUR COMPONENT PARTS.

We purchase key components from single source suppliers, in particular, our back
planes, ASICS and power supplies. If our sole source suppliers or we fail to
obtain components in sufficient quantities when required, delivery of our
products could be delayed resulting in decreased revenues. In addition, if one
of these suppliers were no

                                     Page 16
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longer able to supply a required component, it could result in our having to
significantly reengineer the affected product. Further, due to increased demand
and cyclical shortages of capacity in the semiconductor industry, lead times for
ordering parts have increased from time to time. If we encounter shortages or
delays in receiving ordered components or if we are not able to accurately
forecast our ordering requirements, this could adversely impact our ability to
ship ordered products and could ultimately negatively impact our results of
operations and financial condition.


THE AVAILABILITY OF UNINTERRUPTED ELECTRIC POWER COULD IMPACT OUR ABILITY AND
OUR SUPPLIERS' ABILITY TO MAINTAIN OUR OPERATIONS IN CALIFORNIA.

Recently, the public electric utility that provides power to our facilities and
many of our suppliers' facilities has been subject to shortages of electric
power. These shortages have led to dramatic increases in operating costs and
have subjected us to unpredictable rolling blackouts where power has been
completely interrupted for extended periods of time. Should this power shortage
persist, and the frequency of outages increase, it may become more difficult for
our subcontract manufacturer and other suppliers to meet delivery commitments.
In addition, continued interruptions of power may impact our ability to deliver
new products to the market place on a timely basis. Should the electric utility
not be able to secure sufficient power supplies in the future, it could have a
material adverse impact on our financial condition and results of operations.


WE SINGLE SOURCE OUR MANUFACTURING PROCESS SO THAT A FAILURE OR DELAY BY THAT
VENDOR COULD IMPACT OUR ABILITY TO TIMELY SHIP OUR PRODUCTS.

We currently subcontract some testing and all product manufacturing to one
company, Solectron. Final test and assembly is generally performed at our
Fremont, California facility. While subcontracting creates substantial cost
efficiencies in the manufacturing process, it also exposes us to delays in
product shipments should Solectron be unable to perform under our contract. In
addition, should Solectron in some future period decide not to renew our
contract with them, it would be difficult for us to quickly transfer our
manufacturing requirements to another vendor likely causing substantial delays
in customer product shipments and impacting revenue and our results of
operations.


OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATE TO PROTECT OUR BUSINESS.

Our future success depends upon our proprietary technology. Although we attempt
to protect our proprietary technology through patents, copyrights, and trade
secrets, we cannot predict whether such protection will be adequate, or whether
our competitors can develop similar technology independently without violating
our proprietary rights. As competition in the communications equipment industry
increases and the functionality of the products in this industry further
overlap, we believe that companies in the communications equipment industry may
become increasingly subject to infringement claims. We have received and may
continue to receive notice from third parties, including some of our
competitors, claiming that we are infringing their patents or their other
proprietary rights. We cannot predict whether we will prevail in any litigation
over third-party claims, or that we will be able to license any valid and
infringed patents on commercially reasonable terms. Any of these claims, whether
with or without merit, could result in costly litigation, divert our
management's time, attention and resources, delay our product shipments or
require us to enter into royalty or licensing agreements. In addition, a third
party may not be willing to enter into a royalty or licensing agreement on
acceptable terms, if at all. If a claim of product infringement against us is
successful and we fail to obtain a license or develop or license non-infringing
technology, it could have a material adverse affect on our business, results of
operations and financial condition.


WE NEED TO CONTINUE TO LICENSE PRODUCTS FROM THIRD PARTIES.

For our Promina, SHOUTIP and SCREAM products, we license some of our technology
from third party suppliers. If the relevant licensing agreement expires or is
terminated without our being able to renew that license, that failure to renew
the license could impact our ability to market the affected product and that, in
turn, could materially impact our results of operations and financial condition.

                                     Page 17

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WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATIONS AND
TARIFFS.

Changes in domestic and international telecommunications requirements could
affect the sales of our products. In the United States, our products must comply
with various Federal Communications Commission requirements and regulations. In
countries outside of the United States, our products must meet various
requirements of local telecommunications authorities. Changes in tariffs or
failure by us to obtain timely approval of products could have a material
adverse effect on our business, operating results, and financial condition.

In addition, there are currently few laws or regulations that govern access or
commerce on the Internet. If individual countries, or groups of countries,
acting in concert began to impose regulations or standards on Internet access or
commerce including voice over IP, this could materially impact our ability to
sell our new SCREAM and SHOUTIP products or other new products if the
regulations or standards resulted in decreased demand or increased costs for our
products. This, in turn, could have a material adverse effect on our business,
results of operations and financial condition.


WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY.

As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures have related to non-dollar denominated sales
in the United Kingdom, France, and Germany and non-dollar denominated operating
expenses in Europe, Latin America, and Asia where we sell primarily in United
States dollars. The increasing use of the Euro as a common currency for members
of the European Union could impact our foreign exchange exposure. We will
continue to monitor our exposure and may hedge against these or any other
emerging market currencies as necessary. We are currently not hedging our
exposure to the Euro or any other foreign currency but will continue to evaluate
the impact of foreign currency fluctuations on our future foreign exchange
exposure as well as our internal systems.


THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKE AND FLOODS.

Our corporate headquarters, including most of our research and development
operations and our manufacturing facilities, are located in the Silicon Valley
area of Northern California, a region known for seismic activity. Additionally,
these facilities are located near the San Francisco Bay where the water table is
quite close to the surface and where we have experienced water intrusion
problems. In particular, defects in the construction of our facilities combined
with the proximity to water will force us to move out of these facilities in the
first half of the 2002 calendar year. A significant natural disaster, such as an
earthquake or flood, could have a material adverse impact on our business,
operating results, and financial condition.


THE  COMPLETION  OF THE  ACTIVITIES  NECESSARY TO EFFECT THE MOVE TO OUR NEW
CAMPUS MAY CAUSE  INTERRUPTION  TO OUR BUSINESS

A new building campus is currently under construction and will become the new
corporate headquarters for net.com sometime in the first half of the 2002
calendar year. Moving substantially all of our R&D development activities
including the development labs, and all of our in-house manufacturing capability
represents significant risk as it exposes the company to potential disruptions
and delays in business, engineering, and manufacturing operations. While the
costs of construction, and the move will be substantially paid for out of
insurance proceeds, problems with the move could interrupt communications
preventing the company from processing orders, or it could impact engineering
development schedules, or prevent manufacturing operations from shipping
product. Any problems, interruptions or delays associated with the move could
have a material adverse impact on business, operating results, and financial
condition.


THE UPGRADE OF OUR INFORMATION TECHNOLOGY INFRASTRUCTURE MAY EXPOSE THE COMPANY
TO DISRUPTION OF OPERATIONS.

We are in the process of upgrading and consolidating our core business process
systems onto a new Oracle ERP platform and we are currently going live with this
system. We expect to incur significant costs relating to this upgrade. The scope
of this project includes our order management, financial, human resource,
quality, and manufacturing systems, and encompasses our global operations. The
purpose of the project is to consolidate several legacy systems into one, to
enable more effective decision support capabilities and to allow us to scale our
business

                                     Page 18
<PAGE>

more cost effectively. Any significant problems experienced with the turn-on of
the new systems could prevent us from timely processing orders and shipping
products. These problems could impact the quarter's revenue and customer
relations and could have a material adverse impact on business, operating
results, and financial condition.


Item 3.

                    QUANTITATIVE AND QUALITATIVE DISCLOSURES
                                ABOUT MARKET RISK


There has been no material change from the information as reported in the Form
10-K for the fiscal year ended March 30, 2001. Refer to the Quantitative and
Qualitative Disclosures section in the Form 10-K for fiscal year ended March 30,
2001 for information on the financial instruments.










                                     Page 19

<PAGE>


                                    PART II.
                                OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits
         None

(b)      Report on Form 8-K
         None








                                     Page 20

<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                          NETWORK EQUIPMENT
                                          TECHNOLOGIES, INC.









Dated:  August 13, 2001                   /s/ Hubert A.J. Whyte
                                          -------------------------------------
                                          Hubert A.J. Whyte
                                          President and Chief Executive Officer









                                          /s/ John C. Batty
                                          -------------------------------------
                                          John C. Batty
                                          Senior Vice President,
                                          Chief Operating Officer and
                                          Chief Financial Officer
                                          (Principal Financial and
                                          Accounting Officer)







                                     Page 21