<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 September 28, 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 September 28, 2001 was 22,116,016.

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




                                     Page 1
<PAGE>

                      NETWORK EQUIPMENT TECHNOLOGIES, INC.


                                      INDEX
                                      ------

<TABLE>
<CAPTION>

                                                                                       Page
                                                                                       Number
                                                                                       ------

PART I.     FINANCIAL INFORMATION


   Item 1.  Condensed Consolidated Financial Statements

                     Condensed Consolidated Balance Sheets -
<S>                                                                                     <C>
                     September 28, 2001 and March 30, 2001                                3


                     Condensed Consolidated Statements of Operations and
                     Statements of Comprehensive Loss- Quarter and Six Months ended
                     September 28, 2001 and September 29, 2000                            4


                     Condensed Consolidated Statements of Cash Flows -
                     Six months ended September 28, 2001 and September 29, 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 4.  Submission of Matters to a Vote of Security Holders                          19


   Item 5.  Other Information


   Item 6.  Exhibits and Reports on Form 8-K                                             20


SIGNATURES                                                                               21
</TABLE>




                                     Page 2

<PAGE>

                                     PART I
                              FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                      NETWORK EQUIPMENT TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                     (In thousands except par value amounts)


<TABLE>
<CAPTION>

                                                                                       SEP. 28,           MAR. 30,
                                                                                         2001               2001
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>
ASSETS                                                                                (unaudited)                (1)
    Current assets:
        Cash and cash equivalents                                                       $   9,531         $  20,471
        Restricted cash                                                                    11,160               540
        Temporary cash investments                                                         90,983           112,766
        Accounts receivable, net of allowances of $2,567 at September 28, 2001 and
           $2,127 at March 30, 2001                                                        21,460            29,825
        Inventories                                                                        19,447            20,122
        Prepaid expenses and other assets                                                   7,064             8,554
-------------------------------------------------------------------------------------------------------------------
            Total current assets                                                          159,645           192,278
-------------------------------------------------------------------------------------------------------------------

    Property and equipment, net                                                            28,201            25,565
    Software production costs, net                                                          1,167             2,102
    Goodwill and other intangible assets, net                                              11,314            13,036
    Other assets                                                                            2,182             2,365
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 202,509         $ 235,346
===================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
        Accounts payable                                                                $   7,269         $   8,478
        Accrued liabilities                                                                28,084            33,712
-------------------------------------------------------------------------------------------------------------------
           Total current liabilities                                                       35,353            42,190
-------------------------------------------------------------------------------------------------------------------

    Long-term liabilities:
        Capital leases                                                                          4                42
        71/4% redeemable convertible subordinated debentures                                24,706           24,706
        Other long term liabilities                                                           165               175
-------------------------------------------------------------------------------------------------------------------
            Total long term liabilities                                                    24,875            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: 22,116 shares at September 28, 2001 and
               21,840 shares at March 30, 2001                                                221               218
        Additional paid in capital                                                        180,876           182,335
        Treasury stock                                                                     (2,284)           (4,768)
        Cumulative comprehensive income                                                       322               174
        Accumulated deficit                                                               (36,854)           (9,726)
-------------------------------------------------------------------------------------------------------------------
           Total stockholders' equity                                                     142,281           168,233
-------------------------------------------------------------------------------------------------------------------
                                                                                        $ 202,509         $ 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.
      CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
              (In thousands, except per share amounts - unaudited)

<TABLE>
<CAPTION>

                                                               QUARTERS ENDED                  SIX MONTHS ENDED
                                                               --------------                  ----------------
                                                          SEP. 28,       SEP. 29,          SEP. 28,       SEP. 29,
                                                            2001           2000              2001           2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>              <C>             <C>
Revenue:
    Product revenue                                      $  18,360      $   20,622       $   34,693      $   43,135
    Service and other revenue                                6,491          21,935           14,027          42,825
-------------------------------------------------------------------------------------------------------------------
        Total revenue                                       24,851          42,557           48,720          85,960
-------------------------------------------------------------------------------------------------------------------
Cost of sales:
    Cost of product revenue                                 11,888          11,002           21,739          23,161
    Cost of service and other revenue                        6,208          13,556           13,430          27,378
-------------------------------------------------------------------------------------------------------------------
        Total cost of sales                                 18,096          24,558           35,169          50,539
-------------------------------------------------------------------------------------------------------------------
Gross margin                                                 6,755          17,999           13,551          35,421
Operating expenses:
    Sales and marketing                                      8,504          11,631           17,817          23,125
    Research and development                                 9,326           9,406           19,879          19,781
    General and administrative                               3,060           3,382            6,375           6,578
    Amortization of goodwill and other intangible assets       861             861            1,722           1,662
    Restructure costs (benefits)                                 -            (158)               -            (158)
-------------------------------------------------------------------------------------------------------------------
        Total operating costs                               21,751          25,122           45,793          50,988
-------------------------------------------------------------------------------------------------------------------

           Loss from operations                            (14,996)         (7,123)         (32,242)        (15,567)
Interest income                                              1,863           1,947            3,621           3,815
Interest expense                                              (459)           (575)            (927)         (1,114)
Other income (expense)                                         228            (442)           2,438             (10)
-------------------------------------------------------------------------------------------------------------------
           Loss before income taxes                        (13,364)         (6,193)         (27,110)        (12,876)
Income tax provision (benefit)                                  (9)              9               17              24
-------------------------------------------------------------------------------------------------------------------
           Net loss                                      $ (13,355)     $   (6,202)      $  (27,127)     $  (12,900)
===================================================================================================================

Loss per share:
    Basic and diluted                                    $   (0.61)     $    (0.29)      $    (1.23)     $   (0.60)
===================================================================================================================

Shares used in per share computation:
    Basic and diluted                                       22,016          21,619           21,996          21,574
===================================================================================================================

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
-------------------------------------------------------------------------------------------------------------------
Net loss                                                 $ (13,355)     $   (6,202)      $  (27,127)     $  (12,900)
Other comprehensive income (loss), net of tax:
    Cumulative translation adjustments                         (50)            211                -              49
    Net unrealized gains on securities,
        net of taxes of $0                                     362             226              148             421
-------------------------------------------------------------------------------------------------------------------

           Comprehensive loss                            $ (13,043)     $   (5,765)      $  (26,979)     $  (12,430)
===================================================================================================================
</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>

                                                                                     SIX MONTHS ENDED
                                                                                     ----------------
                                                                                 SEP. 28,         SEP. 29,
                                                                                  2001             2000
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>               <C>
Cash and cash equivalents at beginning of period                              $   20,471        $   14,880

Cash flows from operating activities:
    Net loss                                                                     (27,127)          (12,900)
    Adjustments required to reconcile net loss to net
        cash provided by (used for) operations:
           Depreciation and amortization                                           7,171             9,800
           Amortization of goodwill and intangibles                                1,722             1,662
           Gain on sale of Federal Services Business                              (2,500)                -
           Loss on disposition of property and equipment                             304               235
           Changes in assets and liabilities:
               Accounts receivable                                                 8,365            (2,311)
               Inventories                                                           675              (472)
               Prepaid expenses and other assets                                   1,527            (1,026)
               Accounts payable                                                   (1,221)           (1,697)
               Accrued liabilities                                                (5,736)           (2,175)
----------------------------------------------------------------------------------------------------------
        Net cash used in operating activities                                    (16,820)           (8,884)
----------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
    Purchases of temporary cash investments                                      (48,872)          (33,354)
    Proceeds from maturities of temporary cash investments                        70,803            27,752
    Purchases of property and equipment                                           (9,037)           (3,696)
    Proceeds from sale of Federal Services Business                                2,500                 -
    Cash paid for acquisition of company                                               -            (1,500)
    (Increase) decrease in restricted cash                                       (10,620)           11,368
    Other                                                                            192             2,379
----------------------------------------------------------------------------------------------------------
        Net cash provided by investing activities                                  4,966             2,949
----------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
    Sale of common stock                                                           1,045             2,211
    Repurchase of common stock                                                         -            (1,413)
    Insurance settlement proceeds                                                      -            10,000
----------------------------------------------------------------------------------------------------------
        Net cash provided by financing activities                                  1,045            10,798
----------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                             (131)            1,051

----------------------------------------------------------------------------------------------------------
        Net increase (decrease) in cash and cash equivalents                     (10,940)            5,914
----------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                                    $    9,531        $   20,794
==========================================================================================================

Other cash flow information: Cash paid (refunded) during the period:
        Interest                                                              $      905        $      906
        Income taxes                                                          $   (1,379)       $        -
    Non-cash investing and financing activities:
        Unrealized gain (loss) on available-for-sale securities               $      148        $      226
</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 September 28, 2001, the results of operations for the quarters
ended September 28, 2001 and September 29, 2000, and the results of operations
and cash flows for the six months ended September 28, 2001 and September 29,
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 and six months ended September 28, 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
September 28, 2001 and March 30, 2001 consisted of the following:

(Dollars in thousands)               September 28, 2001           March 30, 2001
--------------------------------------------------------------------------------

Purchased components                           $  4,590                 $  4,198

Work-in-process                                  12,975                   14,860

Finished goods                                    1,882                    1,064
-------------------------------------------------------------------------------
                                               $ 19,447                 $ 20,122
================================================================================

3. LOSS PER SHARE

Basic 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 32,000 and 363,000 for the quarters ended September 28, 2001 and
September 29, 2000, respectively. The shares for the quarters ended September
28, 2001 and September 29, 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 quarters ended September
28, 2001 and September 29, 2000, as their inclusion would have been antidilutive
in both periods.

4. COMPREHENSIVE LOSS

Cumulative comprehensive loss at September 28, 2001 and March 30, 2001 is
comprised of cumulative foreign translation adjustments of ($707,000) and
($707,000), respectively, and cumulative net unrealized gains on
available-for-sale securities of $1,029,000 and $881,000 million, 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 September 28, 2001, net.com made payments in connection with its plan of
business reorganization for severance, outplacement and office closure costs in
the amount of $18.1 million. During fiscal 2001, net.com evaluated the adequacy
of the remaining liability for restructure charges. This evaluation resulted in
a credit to operating expenses of $1.4 million.

                                     Page 6
<PAGE>

The remaining liability for restructure charges is $753,000. 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.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of APB No. 30, REPORTING THE RESULTS OF OPERATIONS -
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY,
UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of
a segment of a business. However, it retains the requirement in APB No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on its consolidated financial statements.

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 until adoption of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.

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 to CACI
International, Inc. ("CACI"). The operating results of the Federal Services
Business 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 and six months ended September 29, 2000 (in thousands except for per
share data):
<TABLE>
<CAPTION>
                                                     Quarter ended                       Six months ended
                                             SEP. 28, 2001    SEP. 29, 2000       SEP. 28, 2001    SEP. 29, 2000
                                             -------------------------------------------------------------------
<S>                                            <C>              <C>                 <C>               <C>
         Net revenues                          $ 24,851         $  30,208           $  48,720         $ 61,445
         Net  loss                              (13,355)          (10,424)            (27,127)         (20,925)
         Basic and diluted loss per share         (0.61)            (0.48)              (1.23)           (0.97)
</TABLE>

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 Federal
Services Business 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           Six Months Ended
                                                -------------           ----------------

                                             Sept. 28,   Sept. 29,    Sept. 28,   Sept. 29,

PERCENT OF REVENUE                             2001        2000         2001        2000
---------------------------------------------------------------------------------------------

<S>                                           <C>         <C>          <C>         <C>
Product revenue                                 73.9        48.5         71.2        50.2

Service and other revenue                       26.1        51.5         28.8        49.8
                                               -----       -----        -----       -----

     Total revenue                             100.0       100.0        100.0       100.0
                                               -----       -----        -----       -----


Product gross margin                            35.3        46.6         37.3        46.3

Service and other revenue gross margin           4.4        38.2          4.3        36.1
                                               -----      ------        -----      ------

     Total gross margin                         27.2        42.3         27.8        41.2
                                              ------      ------       ------      ------


Sales and marketing                             34.2        27.3         36.6        26.9

Research and development                        37.5        22.1         40.8        23.0

General and administrative                      12.3         7.9         13.1         7.7

Amortization of intangibles                      3.5         2.0          3.5         1.9

Reorganization expense                          (0.0)       (0.4)        (0.0)       (0.2)
                                             --------   ---------     --------    --------

     Total operating expenses                   87.5        59.0         94.0        59.3
                                              ------      ------       ------      ------


Income (loss) from operations                  (60.3)      (16.7)       (66.2)      (18.1)
                                            --------    ---------    --------    ---------


Net income (loss)                              (53.7)      (14.6)       (55.7)      (15.0)
                                            ========    =========    =========   =========
-------------------------------------------------------------------------------------------------
</TABLE>


                                     Page 8
<PAGE>
REVENUE
-------

Total revenue for the second quarter of fiscal 2002 decreased $17.7 million to
$24.9 million, or 41.6% from the second quarter of fiscal 2001, and decreased
$37.2 million to $48.7 million, or 43.3%, on a fiscal year to date basis.
Product revenue for the second quarter of fiscal 2002 decreased $2.3 million to
$18.4 million, or 11.0% from the second quarter of fiscal 2001, and decreased
$8.4 million to $34.7 million, or 19.6%, on a fiscal year to date basis. 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 "Sonet
Transmission Manager", ("STM"), product line at the end of fiscal year 2001.
Product revenue for the STM product line in the second quarter of fiscal 2002
was zero compared to $1.9 million in the second quarter of fiscal 2002 and
$37,500 for the first six months of fiscal 2002 compared to $3.3 million for the
first six months of fiscal 2001. We are currently developing and marketing new
products for the broadband equipment market, which are intended to offset the
decline in revenue of our Promina product line. Although broadband product
revenue in the second quarter and first six months of fiscal 2002 was
immaterial, we expect broadband product revenue to be more significant in the
second half of fiscal 2002.

Service and other revenue for the second quarter of fiscal 2002 decreased $15.4
million, or 70.4% from the second quarter of fiscal 2001 and decreased $28.8
million, or 67.2% on a fiscal year to date basis. The decrease in service and
other revenue is primarily the result of our sale of the Federal Services
Business to CACI International Inc. ("CACI") in the third quarter of fiscal
2001. Service and other revenue from the Federal Service Channel in the second
quarter and first six months of fiscal 2002 was $515,000 and $1.1 million,
respectively, compared to $12.4 million and $24.6 million in the comparable
periods from fiscal 2001. In addition, service and other revenue declined in the
second 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 27.2% and 27.8% in the second quarter and first
six months of fiscal 2002, respectively, compared to 42.3% and 41.2% for both
comparable periods in fiscal 2001. Total gross margins declined primarily as a
result of significantly lower service and other revenue. Product revenue gross
margins declined to 35.3% and 37.3% in the second quarter and first six months
of fiscal 2002, respectively, compared to 46.6% and 46.3% for both comparable
periods in fiscal 2001. The decline in product gross margins was caused
primarily by unfavorable manufacturing variances that resulted from lower
product revenue. In addition, we recorded charges for excess and obsolete
inventory of $1.3 million in the second quarter and $690,000 in the first
quarter of fiscal 2002 compared to no additional charges for excess and obsolete
inventory for both comparable periods in fiscal 2001.

Service and other revenue gross margins decreased to 4.4% and 4.3% in the second
quarter and first six months of fiscal 2002, respectively, compared to 38.2% and
36.1% for both comparable periods in fiscal 2001. The decline in service and
other revenue gross margins is primarily the result of significantly lower
service and other revenue as a result of the sale of the Federal Services
Business to CACI and a decline in non Federal Services Business related service
contract revenues. We continue to focus on lowering service support costs to
improve the service and other revenue gross margins.

OPERATING EXPENSES
------------------

Operating expenses in the second quarter and first six months of fiscal 2002
decreased $3.4 million to $21.8 million, and $5.2 million to $45.8 million,
respectively, from the comparable periods in fiscal 2001. Operating expenses as
a percentage of total revenue increased to 87.5% and 94.0 % in the second
quarter and first six months of 2002, respectively, compared to 59.0% and 59.3%
in the second quarter and first six months of fiscal 2001. The lower operating
expenses are primarily a result of less sales and marketing expenses. The
increase in operating expenses as a percentage of total revenue for all
operating expenses is primarily the result of lower revenues.

Sales and marketing expenses in the second quarter and first six months of
fiscal 2002 decreased $3.1 million to $8.5 million and $5.3 million to $17.8
million, respectively, from the comparable periods of fiscal 2001. The
                                     Page 9
<PAGE>

decline in spending is primarily the result of lower spending for trade shows,
sales meetings, and travel expenses. 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 second quarter and first six months of
fiscal 2002 decreased $80,000 to $9.3 million and increased $98,000 to $19.9
million, respectively, from the comparable periods of fiscal 2001. We continue
to invest in the development our new Broadband Products and as a result our
research and development spending has remained relatively constant in
quarter-over-quarter and year-over year comparisons. We expect research and
development spending in future periods to decrease slightly compared to the
second 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 second quarter and first six months of
fiscal 2002 decreased $322,000 to $3.1 million and $203,000 to $6.4 million,
respectively, from the comparable periods of fiscal 2001. The decline in
spending is primarily from lower third party legal costs and lower consulting
related expenses. We expect general and administrative spending in the future
periods to remain constant or to decrease slightly compared to the second
quarter of fiscal 2002.

Amortization of goodwill and other intangibles in the second quarter and first
six months of fiscal 2002 was $861,000 and $1.7 million, respectively, compared
to $861,000 and $1.7 million in the second quarter and first six months 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. We are
amortizing the Goodwill and other intangibles on a straight-line basis based on
a five year life, subject to our adoption of SFAS 142 for fiscal year 2003.


NON-OPERATING ITEMS
-------------------

Interest income, primarily related to cash investments, decreased $84,000 to
$1.9 million and $194,000 to $3.6 million in the second quarter and first six
months of fiscal 2002, respectively, from the comparable periods 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 and lower cash balances earning
interest income. Partially offsetting the decrease from lower yields was
$456,000 of interest income associated with a fiscal 1996 tax refund.

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 $116,000 to $459,000 and $187,000 to $927,000, respectively, from the
comparable periods in fiscal 2001. The decrease is primarily related to the
reduction in principal for debt obligations.

Other income in the second quarter and the first six months of fiscal 2002 was
$228,000 and $2.4 million, respectively, compared to other expense of $442,000
and $10,000, respectively, in the second quarter and first six months of fiscal
2001. Other income in the second quarter of fiscal 2002 was primarily from
income derived from administrative fees billed as part of the sale of the
Federal Services Business to CACI. Other income in the first six months of
fiscal 2002 included 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. Partially offsetting the other income was $301,000 of other
expense for the write-off of an application software asset no longer in service.


SUBSEQUENT EVENT
----------------

Management announced it would take additional measures in the third quarter of
fiscal 2002 to bring expenses into line to achieve its financial model,
including a reduction in the workforce of approximately ten percent. The result
of this action will reduce quarterly expenses by approximately $1.5 million. In
addition, an evaluation of inventory and other under-utilized assets will be
conducted and we expect to record a one time charge of approximately $3.0 to
$5.0 million dollars in the third quarter of fiscal 2002.


LIQUIDITY AND CAPITAL RESOURCES

As of September 28, 2001, we had cash and cash equivalents of $9.5 million,
restricted cash of $11.2 million and short-term investments of $91.0 million for
a total of $111.7 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.
                                    Page 10
<PAGE>

Net cash used in operating activities in the first six months of fiscal 2002 was
$16.8 million compared to net cash used in operating activities of $8.9 million
in the first six months of fiscal 2001. The net increase in cash used by
operations in the second quarter of fiscal 2002 resulted primarily from a net
loss of $27.1 million and a decrease in accrued liabilities of $5.7 million.
Partially offsetting the increase in cash used by operations in the second
quarter of fiscal 2002 was a decrease in accounts receivable of $8.4 million and
the adjustment for depreciation and amortization of $7.2 million.

Net cash provided from investing activities was $5.0 million in the first six
months of fiscal 2002 compared to net cash provided from investing activities of
$2.9 million in the first six months of fiscal 2001. Net cash provided from
investing activities in the first six months of fiscal 2002 consisted primarily
from the proceeds from maturing temporary cash investments of $70.8 million and
proceeds from the sale of the Federal Services Business of $2.5 million.
Partially offsetting the net cash provided from investing activities was cash
used for purchases of temporary cash investments of $48.9 million, purchases of
property and equipment of $9.0 million and an increase in restricted cash of
$10.6 million. The increase in restricted cash in the second quarter of fiscal
2002 is primarily the result of a $9.5 million letter of credit that is required
for tenant improvements related to our new facility construction.

Net cash provided by financing activities in the first six months of fiscal 2002
was $1.0 million compared to $10.8 million in the first six months of fiscal
2001. The $1.0 million in the first six months of fiscal 2002 resulted from the
sale of common stock from the employee stock purchase plan, whereas the $10.8
million in the first six months 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.


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(TM) 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;

                                    Page 11
<PAGE>

     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 specific, and political conditions, including the events of
September 11, 2001 and their aftermath, 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, Verizon, Quest, 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
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 ("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 decline
extend into our international and Federal Government markets in a similar
fashion

                                    Page 12
<PAGE>

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 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 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 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 Equipment Company in April 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 original
equipment manufacturers ("OEM") 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
                                    Page 13
<PAGE>

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 the 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 affect 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 AND THE AFTERMATH OF THE
EVENTS OF SEPTEMBER 11 COULD MATERIALLY IMPACT OUR REVENUE, AND AS A RESULT, OUR
EARNINGS AND 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 this slow down.
Telecommunications and other technology related markets in particular have seen
growth slow significantly. In addition, the tragic events of September 11 have
resulted in economic uncertainties and continuing threats to the health and
safety of the United States. This combined with slow growth has led to continued
decreases in revenue or earnings, which in turn have led to declines in the
stock prices for the technology sector as a whole. We have seen our stock price
decrease along with that of our competitors and others in the technology sector.
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 eighteen 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 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, are 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 to expand their 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, WHICH COULD NEGATIVELY
IMPACT OUR PRODUCT MARGINS AND OVERALL GROSS MARGINS.

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. The new products we introduced recently have
lower gross margins than our Promina product line. In addition, if product sales
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. 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 manufacturers or that one of our subcontractors may not increase our
material costs in the future. Any one of these factors by themselves or all of
them in combination may decrease our product margins and our overall gross
margins.

                                    Page 14
<PAGE>

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. The events of September 11 and their
aftermath combined with 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 THE DIVESTITURE OF OUR FEDERAL SERVICES BUSINESS WILL
PROVE SUCCESSFUL.

On December 1, 2000, we closed the sale of our Federal Services Business to
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 Federal
Services Business 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 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, Unisphere,
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. As a result of the flexibility
of their market strategies, our competitors may be able to 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 must continue to evolve
our SCREAM and SHOUTIP product lines to meet the ever-changing technology needs
of the networking market while ensuring that they can be sold at a competitive
price. We also must enhance our Promina product line 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 Promina product offerings as well as the competitive pressure being
exerted on our SCREAM and SHOUTIP technologies, we may not be able to maintain
prices for them 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.

                                    Page 15
<PAGE>

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 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 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
continue to be insufficient 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 and is for
companies based in the United States only. As of September 28, 2001 we had $3.4
million of outstanding lease financing that may be subject to limited recourse
provisions. We have experienced losses due to customers failing to meet their
obligations and demands by lessors

                                    Page 16
<PAGE>

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 RETAIN EXISTING EMPLOYEES AND ATTRACT, RECRUIT AND RETAIN
KEY PERSONNEL, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS.

Our success continues to be dependent on our being able to attract and retain
highly skilled engineers, managers and other key employees. Until the end of the
first quarter fiscal 2002, the tight job market made competition for employees
very intense for all employers. This has recently changed with the sharp
downturn in the economy, especially in the telecommunications industry and our
concerns over retention and recruitment have abated. Nevertheless, if we are not
able to continue to attract, recruit and retain key personnel, particularly
engineers and sales and marketing employees, this 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 longer able to supply a required component it could
result in our having to significantly reengineer the affected product. Further,
variability in demand and cyclical shortages of capacity in the semiconductor
industry, have caused lead times for ordering parts to increase 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.

During the first quarter fiscal 2002, the public electric utility that provides
power to our facilities and many of our suppliers' facilities were subject to
shortages of electric power. These shortages led to dramatic increases in
operating costs and subjected us to unpredictable rolling blackouts where power
was completely interrupted for extended periods of time. While this power
shortage no longer persists, it may recur and make it more difficult for our
subcontract manufacturers and other suppliers to meet delivery commitments. Any
future interruptions of power may impact our ability to deliver new products to
the market place on a timely basis. Insufficient power supplies in the future
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

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<PAGE>

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, SCREAM and SHOUTIP 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.


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 been 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 at the
end of the 2001 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.




                                    Page 18
<PAGE>

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 soon after the beginning of calendar year
2002. 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 NOT BE FULLY
SUCCESSFUL.

We completed the upgrade and consolidation of our core business process systems
onto a new Oracle ERP platform and we have gone live with this system. The scope
of this project included our order management, financial, human resource,
quality, and manufacturing systems, and encompassed our global operations. The
purpose of the project was to consolidate several legacy systems into one, to
enable more effective decision support capabilities and to allow us to scale our
business more cost effectively. We experienced no significant problems with the
turn-on of the new systems. If the implementation of this new platform is not
fully successful, this could have a material adverse impact on our 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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 14, 2001, the Company held its Annual Meeting of Stockholders. At this
meeting, the stockholders voted to elect Dixon R. Doll, Peter Sommerer and Hans
A. Wolf as directors. Dixon R. Doll received 17,956,376 votes in favor and
129,379 votes withheld. Peter Sommerer received 17,956,167 votes in favor and
129,588 votes withheld. Hans A. Wolf received 17,954,010 votes in favor and
131,745 votes withheld. Continuing as directors are David R. Laube, Thomas
Rambold and Hubert A. J. Whyte. At the meeting, the stockholders also voted to
ratify the appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the fiscal year ending March 29, 2002 as follows:
18,060,725 votes in favor, 11,717 against, and 13,313 votes abstaining.


ITEM 5.  OTHER INFORMATION.

Director James K. Dutton resigned as a member of the Board of Directors of the
Company, effective close of business on August 14, 2001, leaving a vacancy on
the Board.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits
         10.25     Employment Continuation Agreement between the Registrant and
                   Andrew G. Sceats

(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:  November 9, 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)










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