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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                 ---------------

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

                   FOR THE FISCAL YEAR ENDED JANUARY 31, 2000

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

                         COMMISSION FILE NUMBER: 0-21177

                                NETsilicon, Inc.
             (Exact name of registrant as specified in its charter)

          MASSACHUSETTS                                 04-2826579
(State or other jurisdiction of              (IRS Employer Identification No.)
 incorporation or organization)

   411 WAVERLEY OAKS ROAD, BLDG. 227
             WALTHAM, MA                                   02452
(Address of principal executive offices)                 (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 647-1234

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

  SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
                              VALUE $.01 PER SHARE

    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

    The aggregate market value of Common Stock held by non-affiliates of the
registrant at April 25, 2000 was approximately $233,746,800 based upon $17.30
per share, the last reported sale price of the Common Stock on the Nasdaq
National Market on that date.

    The number of shares of the registrant's Common Stock outstanding as of
April 25, 2000: 6,098,375 shares of voting common stock and 7,500,000 shares of
non-voting common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

    The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended January 31,
2000. Portions of such proxy statement are incorporated by reference into Part
III of this report.
================================================================================


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                                NETSILICON, INC.

                                    CONTENTS

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<S>              <C>                                                                              <C>
PART I:                                                                                           Page
Item 1           Business                                                                           2
Item 2           Properties                                                                        19
Item 3           Legal Proceedings                                                                 19
Item 4           Submission of Matters to a Vote of Security Holders                               19

PART II:
Item 5           Market for the Registrant's Common Stock and Related Shareholder Matters          20
Item 6           Selected Financial Data                                                           20
Item 7           Management's Discussion and Analysis of Financial Condition and Results of
                 Operations                                                                        21
Item 7a          Quantitative and Qualitative Disclosures About Market Risk                        27
Item 8           Financial Statements and Supplementary Data                                       27
Item 9           Changes in and Disagreements with Accountants on Accounting and Financial
                 Disclosure                                                                        27

PART III:
Item 10          Directors and Executive Officers of the Registrant                                28
Item 11          Executive Compensation                                                            28
Item 12          Security Ownership of Certain Beneficial Owners and Management                    28
Item 13          Certain Relationships and Related Transactions                                    28

PART IV:
Item 14          Exhibits, Financial Statement Schedules and Reports on Form 8-K                   28
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                                     PART I

ITEM 1.  BUSINESS:

COMPANY OVERVIEW

         We develop and market semiconductor devices and software designed to
meet the networking requirements of embedded systems. Our products provide
embedded systems with the ability to communicate over standards-based local-area
networks, or LANs, and the Internet, enabling the development of new embedded
systems applications. We believe we offer the first comprehensive solutions
that, in conjunction with a physical interface and memory, encompass all of the
hardware and software necessary to allow electronic devices incorporating
embedded systems to communicate with other devices. Our products are contained
in a broad array of imaging products, including printers, scanners, fax
machines, copiers and multi-function peripherals manufactured by over 20
manufacturers, including Minolta, NEC, Ricoh, Sharp and Xerox. Our products are
also in various stages of incorporation into the design of products in
additional embedded systems markets, such as industrial automation equipment,
communications devices, data acquisition and test equipment, Internet devices
and utility monitoring equipment.

         We were incorporated in Massachusetts in April, 1984 under the name of
Digital Products, Inc. In September 1996, Osicom Technologies, Inc. ("Osicom")
acquired sole ownership of the Company through a merger with a newly-formed
corporation in exchange for Osicom common stock in a transaction accounted for
as a pooling of interest. On September 15, 1999, we completed an initial public
offering of our common stock.

INDUSTRY BACKGROUND

         An embedded system is a computer that is part of a larger electronic
system and responds to external events by performing specific tasks quickly,
predictably and reliably. Some examples of products with embedded computers are:

         -    office products such as fax machines, laser printers and
              photocopiers;

         -    industrial automation equipment such as robots and process control
              equipment;

         -    building control equipment such as elevator and environmental
              control systems;

         -    consumer products such as camcorders and video games;

         -    medical instrumentation and imaging systems;

         -    vending machines and automated teller machines; and

         -    vehicle anti-lock brakes and navigation systems.


         Many electronic systems incorporating embedded systems run
automatically. They do not require an operator's constant presence and can be
candidates for network connectivity. Connection to a network affords the
operators of these devices the convenience of controlling or monitoring them
remotely. Device networking can be as simple as a home security company
receiving a message that a door in a subscriber's house is open, or as complex
as the control of a multi-step chemical process in a refinery. A small portion
of embedded systems are currently connected to a network, despite the many
benefits of networking, due to the high historic cost of developing network
connectivity solutions for these systems.

         The first extensive networking of devices arose from the connection of
personal computers, or PCs, in business environments across LANs and wide-area
networks, or WANs, and in home and mobile environments across the Internet. As
network connectivity for PCs became more prevalent, so too did the networking of
the imaging devices that printed out, scanned in, faxed and copied the documents
created by those PCs. The primary motivation for networking imaging devices was
cost. A single networked printer could serve an entire office whereas, without
networking, the same office would need a printer for every work station. Network
connectivity for imaging devices was facilitated by the emergence of networking
standards such as Ethernet and the Internet protocol, or IP. Imaging device
networking solutions, like those manufactured and sold by the us, incorporated
those common transmission protocols.

         In markets other than imaging, embedded systems manufacturers have
based their network connectivity upon unique or proprietary communication
protocols. Creating and upgrading networks based on these proprietary protocols
generally has been costly and time consuming for these manufacturers. In
addition, these proprietary networks generally have been restrictive for end
users because they have been unable to gain the benefits of new, standards-based
add-on products and software. These systems, because they are so difficult to
upgrade with standards-based products and software, often lose their
effectiveness and become out of date.


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         With the broad acceptance of common networking protocols, such as IP
and Ethernet, embedded systems developers have increasingly attempted to
incorporate standards-based networking into their products. This networking has
integrated multiple hardware and software sub-systems commercially available
from third-party vendors, each of which provide a part of the total solution.
Adding networking functionality with components from multiple sources requires
the engineering and integration of components, including:

         -    a microprocessor;

         -    an Ethernet chip;

         -    a direct memory access, or DMA, controller;

         -    a memory controller;

         -    a Web server;

         -    a Hypertext Transfer Protocol, or HTTP, server;

         -    a real-time operating system, or RTOS; and

         -    software drivers.

         These components must be compatible to promote full networking
functionality. Thus, while multi-sourced networking is, in some ways, superior
to proprietary solutions, developers of multi-sourced networking functionality
must hire dedicated network engineering teams, endure lengthy development and
integration cycles and incur substantial technology enhancement and maintenance
costs. As an alternative to a multi-sourced approach, developers have designed
standards-based networking designs in which the embedded system or systems to be
networked are connected to an off-the-shelf, microprocessor-based board. Such
designs are expensive, physically large and impractical for many users.

         We believe that historically there have not been cost-effective and
practical alternatives for networking embedded systems. Consequently, end users
of most non-imaging devices have not been able to connect them to networks.
Where developers have added network connectivity to their devices, they have
sacrificed time, effort and expense to create proprietary solutions assembled
from numerous and distinct vendors or board-based designs. As a result, end
users have purchased systems which were either not cost effective or contained
generally rudimentary network connectivity that they could not easily upgrade.

THE NETsilicon SOLUTION

         We develop and market semiconductor devices and software designed to
meet the networking requirements of embedded systems. We deliver standards-based
networking products for embedded systems comprised of our proprietary NET+Works
semiconductors and software. We also provide embedded systems developers with
software development licenses and application engineering services to enable
them to design products incorporating NET+Works technology. We design our
products to enable our customers to reduce the cost and improve the time to
market for their devices that incorporate networking functionality. We have 15
years of experience providing networking connectivity for a wide array of
electronic devices.

         We believe that our products offer embedded systems developers a
compelling solution because the products are:

         -    Standards-Based. Our products incorporate existing LAN, WAN and
              Internet networking standards. The standards make it possible for
              electronic devices incorporating embedded systems to communicate
              with other standards-based equipment, enabling the free exchange
              of information, distributed processing and remote maintenance.

         -    Comprehensive. We offer a comprehensive set of products that, in
              conjunction with a physical interface and memory, consolidates the
              hardware and software necessary to network electronic devices in a
              single solution. In addition, we offer embedded systems developers
              a package of development tools and application engineering
              services to further facilitate a shorter time-to-market for their
              network-ready products. Embedded systems developers that
              incorporate our products do not need to develop in-house
              networking expertise in order to offer advanced connectivity in
              their products. Furthermore, developers incorporating our products
              into their designs do not need to acquire networking hardware or
              software from multiple third-party vendors and perform the
              associated highly complex and lengthy integration and maintenance.


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         -    Scalable and Extensible. We based the NET+Works technology on a
              design platform that allows networking extensibility across a wide
              range of hardware platforms and performance levels. Our customers
              can achieve scalability through a design that allows us to offer
              pin-compatible semiconductor devices from 5 million instructions
              per second, or MIPS, to 40 MIPS performance levels. Consequently,
              developers can incorporate varying performance levels into their
              products without redesigning the hardware or reprogramming the
              software.

         -    Proven. Since our inception, we have focused our efforts on
              enabling the connection of electronic devices to networks. Our
              technology embodies refinements and enhancements developed during
              our years of service to embedded systems developers. Our
              semiconductor devices are incorporated into a broad array of
              imaging products, including printers, scanners, fax machines,
              copiers and multi-function peripherals manufactured by over 20
              manufacturers, including Minolta, NEC, Ricoh, Sharp and Xerox.

BUSINESS STRATEGY

         Our objective is to continue to expand our market position as a
developer and supplier of networking products for embedded systems. Key elements
of our strategy include the following:

         -    Expanding Existing Customer Relationships in the Imaging Industry.
              Over 20 manufacturers in the imaging industry have incorporated
              our networking products. Our customers have designed our products
              into a broad array of imaging products, including printers,
              scanners, fax machines, copiers and multi-function peripherals.
              Manufacturers currently are commercially shipping over 50 imaging
              products incorporating our semiconductor devices. In addition,
              many of these manufacturers are in various stages of designing
              other products that will incorporate our NET+Works products. We
              seek to leverage our existing relationships with manufacturers by
              working closely with them to understand their evolving
              requirements and to meet them. In addition, we focus our efforts
              on obtaining design wins with those companies in the imaging
              industry that do not currently incorporate our semiconductor
              devices.

         -    Identifying and Penetrating Additional Embedded Systems Markets.
              The overall addressable market for embedded networking systems is
              comprised of electronic devices in markets that each has its own
              combination of developers and end users. We target those embedded
              systems markets where we estimate that the demand for embedded
              networking has developed or will develop rapidly. For example, we
              have identified the industrial automation market as one in which
              manufacturers have demonstrated early demand for our networking
              products. Our ability to target multiple other markets results
              from the basic design of our semiconductor devices, specifically
              their suitability for incorporation into a very wide range of
              embedded systems with minimal additional research or product
              development expenses. We evaluate each new market opportunity
              based upon four criteria: significant potential sales of our
              products within three to five years; absence of a widely accepted
              network connectivity architecture; compatibility with our sales
              and marketing channels; and ease of adaptability to our existing
              technology.

         -    Leveraging Emerging Technologies. We believe that by adopting new
              technological developments in our industry we will be better
              positioned to take advantage of new market opportunities. We
              expect to continue to invest in new technological developments,
              such as gaining acceptance of the Java programming language and
              the Linux operating system in our customers markets. We believe
              that these Linux- and Java-based products will allow our customers
              to leverage the many resources available for these platforms.

         -    Developing Market-Specific Products and Features. We intend to
              bolster our competitive position within the markets we address by
              developing value-added versions and features for our products that
              we specifically tailor to the unique requirements of each market.
              We believe that this approach to product development increases the
              attractiveness of our NET+Works products over more generic, less
              function-rich alternatives.

         -    Expanding and Developing Strategic Relationships. To facilitate
              our penetration of new embedded systems markets, and to strengthen
              our position in the imaging industry, we intend to leverage the
              capabilities and market presence of our customers and strategic
              partners. In June 1998, we joined with industrial automation
              companies to create the Industrial Automation Open Network
              Alliance. The alliance was founded to promote a standards-based
              approach to networking for industrial automation, and to focus on
              overcoming obstacles to its rapid adoption. The alliance now has
              over 28 and 75 members in the United States and Europe,
              respectively, and we believe that by taking a leading role in the
              growth of the alliance we will further establish our


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              products in industrial automation markets. We have also
              established relationships with companies addressing both Linux and
              Java for embedded market applications to more rapidly address
              these technologies. In addition, we seek to establish
              relationships with developers that will be early adopters of
              networking technology because we anticipate that these developers
              will have significant influence in determining the network
              connectivity standards within that market. We plan to develop our
              products in conjunction with these early adopters, and to position
              our products as the networking products of choice for each
              embedded system market we choose to address.

PRODUCTS AND SERVICES

         Our technology solution is comprised of products and application
engineering services. Our NET+Works products are semiconductor devices
containing core microprocessors integrated with value-added software. Our
products are sold as a complete system and include both the hardware and a
license to use the full array of our software. We believe our NET+Works
products, in conjunction with a physical interface and memory, provides all of
the functionality needed to implement LAN and Internet connectivity.
Furthermore, we believe our products are designed to allow our customers to
develop their devices in significantly less time and at lower cost than some of
the alternative approaches, without sacrificing system performance or increasing
the amount of memory required.

  Hardware Products

         Our NET+Works products include our NET+ARM semiconductor device
containing core microprocessors from ARM. Customers incorporate our
semiconductor devices directly into their embedded systems or integrate them
into a network interface card, or NIC. A complete design also requires a
physical interface and memory. In our imaging markets, while many of our
customers are integrating our NET+Works products into their controllers, the
majority of our sales to imaging customers consists of NET+Works products
contained in network interface controllers.

         Our NET+ARM semiconductor devices operate at speeds of 5, 12, 15 and 40
MIPS. We believe that the price at which our NET+ARM semiconductor devices are
available to customers provides significant cost savings to currently available
components with comparable functionality. The product's processing speed is
enhanced by NET+DMA, an interface between the Ethernet MAC, or media access
controller, and the main memory bank. We have filed a patent application for
NET+DMA.

  Software

         Our NET+Works products include a suite of software integrated with the
NET+ARM semiconductor device. The software includes:

         -    NET+Drivers and RTOS. NET+Drivers and RTOS, or Real Time Operating
              System, components are the basic pieces that operate the hardware
              and software. We support two popular third-party commercial
              offerings: pSOS+ from Integrated Systems, Inc., or ISI, and
              VxWorks from Wind River. NETsilicon's drivers are fully integrated
              and supported by the RTOS and tools.

         -    NET+Protocols. NET+Protocols contain the open standard
              communications protocols such as the internet transmission
              protocols.

         -    NET+Services. NET+Services add the necessary internet standard
              networking services for Web server, email, data transfer,
              installation and management services.

         -    NET+APIs. NET+APIs provide the needed access to the RTOS and
              NET+Services for applications software engineers without having to
              attain networking engineering knowledge.

         An important component of our strategy is to leverage our NET+ARM
semiconductor devices by adding application-specific software that is focused on
the unique needs of vertical industry markets. Our first customized
vertical-market application is a set of embedded networking products designed
for imaging devices, such as printers, copiers, faxes, scanners and
multifunction peripherals. This product uses the same core technology found in
our NET+ARM semiconductor devices and adds NET+Applications software developed
by us specifically for use in imaging devices. Our NET+Works products for the
imaging market offer full networking operating system support, full print server
applications and management capabilities. The management capabilities enable
devices to report status messages, such as toner low or paper jam to network


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administrators via email cross a LAN, WAN or the Internet. It is available for
installation directly on the controller board, eliminating the need for a
separate NIC.

         For our imaging customers, we also offer software to enable connection
and communication with embedded controllers over a variety of interface
specifications. Our DPO interface specification is an open-architecture
specification designed by us and licensed to controller designers and imaging
device manufacturers. The DPO interface can function with networks comprised of
multiple protocols and operating systems, including Novell NetWare, AppleTalk,
UNIX, IP and Windows NT. In addition, the DPO interface meets the networking
functionality standard established by Hewlett-Packard, enabling our customer to
offer similar networking functionality to Hewlett-Packard. PSIO is an interface
specification that we license from Peerless Systems Corp. so that our products
can interface with controllers provided by Peerless. We also offer a PCI
interface specification to simplify and reduce the cost of PCI applications.

         We offer a software only version of our NET+Works products, called
NET+Software, to our imaging customers. NET+Software offers the same
functionality as the network interface card and embedded product. NET+Software
has been designed to run on the controller's processor, thus saving cost. We
provide a complete range of products by offering NET+Works as a network
interface card, semiconductor device with software or as a software-only
product.

         We are currently developing NET+Applications for the industrial
automation market. Our first product offering to our industrial automation
market is NET+FastIP. NET+FastIP is a software technology that allows NET+Works
based products to significantly reduce the time required to process and execute
commands over Ethernet networks. Reducing this time is one of the key factors in
making Ethernet a viable alternative to proprietary industrial automation
networking.

  Software Development Tools

         We sell our NET+ARM semiconductor devices to developers with a set of
integrated NET+Utilities and tools for hardware and software development, many
of which, we believe, are unique to us. These include our NET+Web, a Hypertext
Markup Language, or HTML-to-C compiler which customers can use to automate the
generation of HTML Web pages.

         We also provide customers with development boards, including schematics
and computer-aided design, or CAD. These boards assist hardware and software
application developers in debugging their product-specific applications they
port to and develop on NET+ARM semiconductor devices. Developers also receive an
embedded in-circuit emulator, or ICE, debugging tool to enable testing and
evaluation of hardware and their software after it has been ported to NET+ARM
semiconductor devices. Developers may, if desired, obtain cross-compilers,
linkers and symbolic debuggers from the RTOS vendor. Full documentation provided
to developers includes a guide to beginning the design cycle, hardware and
software reference manuals, development board jumpers and a components guide.

         The development tools also include additional cost options such as
ARM's development tools and ISI's pRISM+ or Wind River's Tornado open, graphical
development environments. ISI's pRISM+ and Wind River's Tornado support embedded
developers with tools that span the complete development process, from
conception to development and through life cycle support.

         Before customers incorporate our semiconductor devices into the design
of their product, they may purchase some sample semiconductor devices and the
software. They use the samples to create custom application programming
interfaces and other software components of the ultimate networking design of
their embedded systems.

  Application Engineering Services

         We believe our customers place significant emphasis on full product
support. Therefore, we provide design support for the first six months of the
customer's design cycle. Additionally, we provide full technical support for all
hardware, software and embedded products for the first 12 months after product
shipment. Our support and training services include:

         -    Consulting. Our field application engineering staff provides
              development process consulting services that range from answering
              questions to assisting in problem solving and performing design
              reviews of customer products.

         -    On-going Technical Support. Post-integration support typically
              includes beta test period support and assistance to the customer's
              support specialists.


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         -    Product Updates. We provide product updates on all releases of
              NET+Works products to developers initially under warranty and
              subsequently on an optional service and maintenance contract
              basis.

         -    Training. We provide hands-on training sessions during which we
              teach developers to install both our hardware and software
              products, set up and configure all network operating systems and
              protocols, and understand Ethernet topology. For our imaging
              customers, we also provide some training of their support staff.

         -    Joint Marketing Assistance. We make joint sales calls with our
              imaging customers and authorized developers, provide marketing
              materials, participate in the organization of press releases and
              tours, and create Web links to customer product pages.

         -    Project Management. We provide our imaging customers with
              assistance in interface specifications analysis, lead time
              planning, delivery scheduling, and product cycle planning.

         -    Product Integration Support. We provide our imaging customers with
              product testing and support during the customer's process of
              integrating our technology into their products.

         We receive revenue from our application engineering services for which
a customer may contract separately. We believe that such revenues are immaterial
to our overall financial results of operations.

PRODUCT DEVELOPMENT

         Our success depends upon our ability to enhance our products, and
develop and introduce new products to meet changing customer needs on a timely
basis. We focus our hardware development efforts on improving the performance of
our products, simplifying the integration process for our products and
introducing new products with a variety of speeds, capabilities and price
points. We focus our software development efforts on addressing industry needs,
developing industry-specific applications and integrating additional operating
systems and protocols into our products.

         We have made, and expect to continue to make, substantial investments
in product development. In particular, we are beginning to invest significant
resources to the development of products supporting the Linux operating system
and Java programming language. For the fiscal years ended January 31, 2000, 1999
and 1998, our engineering, research and development expenses were approximately
$3.5 million, $2.2 million and $1.5 million, respectively or 10.9%, 16.1% and
18.7% of net sales, respectively. As of January 31, 2000, we had 34 full-time
employees who have substantial networking and software driver development
experience engaged in research and development activities.

SALES AND MARKETING

         We market and sell our products to embedded systems developers through
a combination of
                  -        our direct sales and marketing staff;
                  -        strategic partner relationships and alliances;
                  -        manufacturers representatives; and
                  -        authorized developers.

  Direct Sales and Marketing

         As of January 31, 2000, we employed a total of 44 employees in our
direct sales and marketing efforts. We manage most of our sales efforts from our
headquarters in Waltham, Massachusetts and a sales office in Germany. Our direct
sales staff solicits prospective customers in North America, provides technical
advice and support with respect to our products, and works closely with our
partners, representatives and developers worldwide to secure new customer design
wins and provide support during their development of new products. The direct
sales and marketing staff participates in select industry trade shows and
conferences to promote our products and to generate new business leads.


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         We design our marketing programs to build awareness of NETsilicon and
NET+Works, and to generate new sales leads. Our primary marketing activities
include advertising, direct mail, customer communications, trade show
participation, and press, media and industry analyst relations.

  Partnership Relationships and Alliances

         We augment our direct sales efforts through various strategic marketing
alliances. These include, in the imaging market, alliances with the makers of
printer controllers, and in other markets, alliances with our vendors and
suppliers, such as ARM, Atmel Corporation, Integrated Systems, Inc. and Wind
River Systems, Inc. Our strategy for making sales to imaging manufacturers is to
have our DPO interface specification incorporated into the controllers that
those manufacturers purchase from controller designers. We encourage the use of
our interface because every imaging device that uses a controller incorporating
it will also use our networking connectivity products. The printer controller
designers which have incorporated our DPO interface specification include Adobe
Systems, Advanced HiTech, Destiny Technology, Imaging Technologies and Xionics
Document Technologies.

         In June 1998, we joined with industrial automation companies to create
the Industrial Automation Open Network Alliance. The alliance was founded to
promote a standards-based approach to networking for industrial automation, and
to focus on overcoming obstacles to its rapid adoption. The alliance now has
over 28 and 75 members in the United States and Europe, respectively, and we
believe that by taking a leading role in the growth of the alliance we will
further establish our products in industrial automation markets. We have also
established relationships with companies addressing both Linux and Java for
embedded market applications to more rapidly address these technologies.

         We and our printer controller partners engage in joint marketing
efforts, presenting their individual products as a fully compatible,
comprehensive imaging and networking solution to imaging manufacturers.

  Manufacturers Representatives

         Manufacturers representatives act as local sales agents for us and work
on a commission basis. As of January 31, 2000, there were 10 manufacturers
representatives in North America, four in Europe and Israel, and two in Asia.
Our direct sales staff supports and works closely with these representatives,
who have extensive relationships with the current and potential customers in
their territories.

  Authorized Developers

         We also market and sell our products in coordination with independent
product development consulting firms. These firms have hardware and software
engineering staffs ranging from five to 100 engineers. They consult with large
manufacturers, recommending new products for development and offering their
expertise to manufacturers during the design cycle of those products. Where
network connectivity is contemplated for such products, we provide incentives to
these developers to recommend our products by paying the developers a commission
on our sales to manufacturers that result from these recommendations. As of
January 31, 2000, we had approved 17 consulting firms as authorized developers
of our products.

CUSTOMER PRODUCT CYCLE

         Our products are sold to manufacturers, which incorporate them into
devices that are sold to end users. The timing and magnitude of our revenues are
highly dependent upon our achievement of design wins, the timing and success of
our customers' development cycles, and our customers' product sales.

         We initially target manufacturers that are developing embedded systems
products and are seeking to incorporate networking capability into their
products. Developers typically select core components, such as our semiconductor
devices, early in the device design process. Before the selection of core
components, developers typically purchase development tools and receive
application engineering services from us to facilitate the integration of
NET+Works products into their design. When we have received notification from a
customer that they have selected our devices and software for incorporation into
their final product, we achieve what is known as a design win. The revenue we
receive from these qualification stage purchases is an immaterial portion of our
total revenue. Once a customer selects the components it will use for our
product, it generally does not substitute an alternative component, as the
change typically requires significant cost or development time. Therefore, we
are generally the sole supplier of networking technology throughout the life
cycle of an embedded system once our products have been selected for inclusion
in the product design. Even if we are successful in our


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efforts to market our products to manufacturers and achieve a design win, there
can be no assurance that we will ever achieve revenue from the sale of products.
Even if we do achieve revenues from the sales, there can be no assurance that
the revenues will be sustainable.

         The length of the product development process can vary greatly among
our customers, ranging from six to more than 24 months, with no certainty that
any given design will result in a commercial product. When the customer's
product development cycle nears successful completion, customers typically begin
purchasing our products to supply their initial manufacturing efforts. Only upon
the commencement of product shipment do we achieve significant revenues.
Customers then typically purchase quantities of our products periodically to
match their ongoing manufacturing needs, based on their demand requirements.
Sales of our products are therefore dependent upon the sales of the customers'
products into which customers have designed them.

         The following is a summary of our shipping customer activity over the
prior eight quarters:

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                                                      Three Months Ended
                                                      ------------------

                                 Apr. 30,   July 31,   Oct. 31,   Jan. 31,   Apr. 30,   July 31,   Oct. 31,   Jan. 31,
                                 1998       1998       1998       1999       1999       1999       1999       2000
                                 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

<S>                                 <C>        <C>        <C>        <C>        <C>        <C>       <C>        <C>
        Shipping customers
        during the period(1):

        Imaging market              11         14         18         19         22         22         22         22

        Additional embedded
        systems markets             --         --         --          1          5          8          8         21
                                    --         --         --         --         --         --         --         --

        Total                       11         14         18         20         27         30         30         43
                                    ==         ==         ==         ==         ==         ==         ==         ==
</TABLE>


---------------------

(1)      Represents the number of customers to which we shipped products during
         the period indicated.

IMAGING CUSTOMERS

         We sell our products for incorporation into manufacturers' devices.
Representative customers from our 22 imaging manufacturers who incorporated our
products into their devices include:

         Kyocera Communications     Ricoh Electronics
         Konica Business Systems    Sharp Electronics Corporation
         Minolta Corporation        Xerox Corporation
         NEC Corporation

         Our 22 imaging customers have designed our products into 50 imaging
products available for sale as of January 31, 2000. 95% of our net sales for the
fiscal year ended January 31, 2000, 95% of net sales for the fiscal year ended
January 31, 1999, and all of our net sales for the fiscal year ended January 31,
1998, were derived from the imaging device market. Sales to Ricoh, Dimatech and
Minolta each represented greater than 10% of our net sales for the fiscal year
ended January 31, 2000.

MANUFACTURING

         We do not maintain our own manufacturing capabilities for our
semiconductor devices, but rely on third parties to provide foundry
capabilities. We engage Atmel Corporation to manufacture the NET+ARM
semiconductor device. Shipments of the semiconductor device are first delivered
to us, where we perform quality assurance testing. We purchase tested, packaged
chips from Atmel. We do not have a written agreement with Atmel regarding
production, relying instead upon standard purchase orders. We have


                                       9
<PAGE>   11

selected an additional manufacturer to supply new NET+ARM devices. Additionally,
we obtain price quotes from possible second sources for semiconductor devices in
order to ensure that we are receiving competitive price terms from our current
manufacturer.

         We contract with domestic qualified assemblers and with Uni-Precision
Industrial, Ltd., a Hong Kong-based subsidiary of Osicom, to assemble printed
circuit boards for our NICs. We perform some final assembly of printed circuit
boards and, for quality assurance purposes, randomly test boards assembled by
third parties. We believe that the terms of our arrangement with Uni-Precision
are comparable with those we could receive from an unrelated third party
providing the same services and are more favorable than we receive from our
domestic assemblers. We have no obligation to use the services of Uni-Precision.
We have qualified an additional supplier of printed circuit boards to ensure the
availability of our NICs.

         As of January 31, 2000, we had 33 full-time employees in Waltham,
Massachusetts performing manufacturing-related activities, including purchasing,
final assembly, testing, quality assurance, packaging and shipping.

PRODUCT BACKLOG

         Our business is characterized by short-term shipment schedules. Our
backlog at the beginning of each quarter typically is not sufficient to achieve
expected sales for the quarter. To achieve our sales objectives, we are
dependent upon obtaining orders during each quarter for shipment that quarter.
Furthermore, our agreements with our customers typically provide that they may
change delivery schedules. Non-imaging customers can cancel orders within
specified time frames, typically 30 days or more prior to the scheduled shipment
date under our policies, without significant penalty. In the past, our customers
have built, and may in the future build, significant inventory in order to
facilitate more rapid deployment of anticipated major products, or for other
reasons. Decisions by these customers to reduce their inventory levels have led,
and in the future could lead, to reductions in purchases from us. These
reductions, in turn, have caused and could cause fluctuations in our operating
results, which could have a material adverse effect on our business, results of
operations and financial condition in periods in which the inventory is reduced.

         As of January 31, 2000, our backlog was approximately $6.0 million, as
compared to $7.8 million as of January 31, 1999. We include all firm purchase
orders scheduled for delivery within the subsequent 12 months in our backlog. We
anticipate that we will ship all of our backlog to customers within the next 12
months.

COMPETITION

         The markets in which we operate are intensely competitive, and
characterized by rapidly changing technology, evolving industry standards,
declining average selling prices and frequent new product introductions. A
number of companies offer products that compete with one or more elements of our
solution. We believe that the competitive factors affecting the market for our
products include:

         -    product performance, price and quality;
         -    product functionality and features;
         -    the availability of products for existing and future platforms;
         -    the ease of integration with other hardware and software
              components of the customer's products; and
         -    the quality of support services, product documentation and
              training.

         The relative importance of each of these factors depends upon the
specific customer involved. There can be no assurance that we will be able to
compete successfully against current and future competitors, or that competitive
factors we face will not have a material adverse effect on us.

INTELLECTUAL PROPERTY, TRADEMARKS AND PROPRIETARY RIGHTS

         Our ability to compete is dependent in part on our proprietary rights
and technology. We have no patents and rely primarily on a combination of
copyright, trademark laws, trade secrets, confidentiality procedures and
contract provisions to protect our proprietary rights. We generally enter into
confidentiality agreements with our employees, and sometimes with our customers
and potential customers and limit access to the distribution of our software,
hardware designs, documentation and other proprietary information. There can be
no assurance that the steps we take in this regard will be adequate to prevent
the misappropriation of our technology. While we have filed two patent


                                       10
<PAGE>   12


applications and plan to file various additional applications, such
applications may be denied. Any patents, once issued, may be circumvented by
our competitors. Furthermore, there can be no assurance that others will not
develop technologies that are superior to ours. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. There can be no assurance
that our means of protecting our proprietary rights in the United States or
abroad will be adequate or that competing companies will not independently
develop similar technology. Our failure to protect our proprietary rights
adequately could have a material adverse effect on our business, results of
operations and financial condition.

         Under our intercompany agreement with Osicom, we granted Osicom
co-ownership rights to certain of our existing intellectual property in
connection with our transfer of our stand-alone print server line of business to
Osicom. Osicom's rights to such intellectual property are limited to use in
products manufactured by Osicom related to the stand-alone print server line of
business.

         We also rely on certain software that we license from third parties,
including software that we integrate with internally developed software and use
in our products to perform important functions. Our material software license
agreements are with:

         - Integrated Systems, Inc., which terminates only if we default under
           the agreement;
         - Novell, Inc., which is renewable annually at the option of both
           parties; and
         - Peerless Systems Corporation, which expires in 2004 subject to year-
           to-year renewals thereafter until terminated by either party.

         These third-party software licenses may not continue to be available to
us on commercially reasonable terms, and the licensors may not continue to
support, maintain or enhance the software appropriately. The loss of licenses to
use, or the inability of licensors to support, maintain and enhance any of such
software, could result in increased costs, delays or reductions in product
shipments until equivalent software is developed or licensed, if it can be, and
integrated.

         We exclusively license the right to use the NET+ARM trademark from ARM
Limited according to a royalty-free agreement expiring in 2008. We depend on ARM
to enforce our rights to the trademark against third-party infringement. There
can be no assurance that ARM will promptly and adequately enforce the rights,
which could have a material adverse effect on our business, results of
operations and financial condition.

EMPLOYEES

         As of January 31, 2000, we had 127 full-time employees, which included
67 engaged in product development and manufacturing-related duties and 44 in
sales and marketing. We believe our future success will depend, in part, on our
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software engineers, chip
designers and sales and marketing personnel. None of our employees are
represented by a labor union or subject to a collective bargaining agreement. We
believe that our relations with employees are good.

RISK FACTORS

         You should carefully consider the following risks before investing in
our common stock. These are not the only risks facing our company. Additional
risks may also impair our business operations. If any of the following risks
come to fruition, our business, results of operations or financial condition
could be materially adversely affected. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You
should also refer to the other information set forth in this report, and
incorporated by reference, including our financial statements and the
accompanying notes.

         This report contains certain "forward-looking statements" (statements
that are not historical fact) based on our current expectations, assumptions,
estimates and projections about our company and our industry. These
forward-looking statements involve risks and uncertainties. Our actual results
could differ materially from those anticipated in those forward-looking
statements as a result of many factors, as more fully described in this section
and elsewhere in this report.

                                       11

<PAGE>   13
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT MAKE FUTURE
OPERATING RESULTS AND PROFITABILITY DIFFICULT TO PREDICT.

         We incurred net losses from continuing operations for the fiscal years
ended January 31, 1997, 1998 and 1999. At January 31, 2000, we had an
accumulated deficit of $2.4 million. Although we were profitable in fiscal year
2000, there can be no assurance that we will be able to maintain profitability
on a quarterly or annual basis in the future. In addition, revenue growth is
not necessarily indicative of future  operating results and there can be no
assurance that we will be able to sustain revenue growth. We continue to
invest significant financial resources in product development, marketing and
sales, and a failure of such expenditures to result in significant increases
in revenue could have a material adverse effect on us. Due to the limited
history and undetermined market acceptance of our new products, the rapidly
evolving nature of our business and markets, potential changes in product
standards that significantly influence many of the markets for our products,
the high level of competition in the industries in which we operate and the
other factors described elsewhere in Risk Factors, there can be no assurance
that our investment in these areas will result in increases in revenue or that
any revenue growth that is achieved can be sustained. Our history of losses,
coupled with the factors described below, make future operating results
difficult to predict. We and our future prospects must be considered in light of
the risks, costs and difficulties frequently encountered by emerging companies.
As a result, there can be no assurance that we will be profitable in any future
period.

THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK.

         Our net sales and operating results have in the past and may in the
future fluctuate substantially from quarter to quarter and from year to year.
These results have varied significantly due to a number of factors, including:

         -    market acceptance of and demand for our products and those of our
              customers;

         -    unanticipated delays or problems in the introduction of our
              products;

         -    the timing of large customer orders;

         -    the timing and success of our customers' development cycles;

         -    our ability to introduce new products in accordance with customer
              design requirements and design cycles;

         -    new product announcements or product introductions by us and our
              competitors;

         -    availability and cost of manufacturing sources for our products;

         -    the volume of orders that are received and can be filled in a
              quarter;

         -    the rescheduling or cancellation of orders by customers;

         -    changes in product mix;

         -    timing of "design wins" with our customers and related revenue;
              and

         -    changes in currency exchange rates.

Our operating results could also be harmed by:

         -    the growth rate of markets into which we sell our products;

         -    changes in the mix of sales to customers and sales
              representatives;

         -    costs associated with protecting our intellectual property; and

         -    changes in product costs and pricing by us and our competitors.


         We budget expenses based in part on future revenue projections. We may
be unable to adjust spending in a timely manner in response to any unanticipated
declines in revenues.

         Delays or lost sales have been and could be caused by other factors
beyond our control, including late deliveries by vendors of components. In the
three months ended October 31, 1998, we experienced delays in the delivery of
our product from Atmel Corporation.

                                       12
<PAGE>   14

         As a result of these and other factors, investors should not rely
solely upon period-to-period comparisons of our operating results as an
indication of future performance. It is likely that in some future period our
operating results or business outlook will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price of the shares of common stock.

OUR FAILURE TO INCREASE SALES TO EMBEDDED SYSTEMS MANUFACTURERS WILL ADVERSELY
AFFECT OUR FINANCIAL RESULTS.

         Our financial performance and future growth is dependent upon our
ability to sell our products to embedded systems developers in various markets,
including markets in which networking solutions for embedded systems have not
historically been sold, such as the industrial automation equipment, data
acquisition and test equipment, Internet devices and security equipment markets.
A substantial portion of our recent development efforts have been directed
toward the development of new products for markets that are new and rapidly
evolving. There can be no assurance that

         -    the additional embedded systems markets targeted by us for our
              products and services will develop;

         -    developers within each market targeted by us will choose our
              products and services to meet their needs;

         -    we will successfully develop products to meet the
              industry-specific requirements of developers in our targeted
              markets or that design wins will result in significant sales; or

         -    developers in our targeted markets will gain market acceptance for
              their devices which incorporate our products.

         We have limited experience in designing our products to meet the
requirements of developers in these industries. Moreover, our products and
services have, to date, achieved limited acceptance in these industries.

WE ARE DEPENDENT ON THE IMAGING MARKET FOR A LARGE PORTION OF OUR REVENUES.

         The imaging market has historically accounted for substantially all of
our revenues. In the fiscal years ended January 31, 2000, 1999 and 1998, 95%,
95% and 100%, respectively, of our revenues were generated from customers in the
imaging market. Our success has been and continues to be dependent on the
continued growth and success of the imaging market. Many of our customers face
competition from larger, more established companies which may exert competitive
or other pressures on them. Any decline in sales to the imaging market would
have a material adverse effect on our business, results of operations and
financial condition.

         The imaging market is characterized by declining prices of existing
products. Therefore, continual improvements in manufacturing efficiencies and
the introduction of new products and enhancements to existing products are
required for us to maintain our gross margins. In response to customer demands
or competitive pressures, or to pursue new product or market opportunities, we
may take certain pricing or marketing actions, such as price reductions or
volume discounts. These actions could have a material adverse effect on us.

         A significant amount of our customers in the imaging market are
headquartered in Japan. Our customers are subject to declines in their local
economies, which have affected them from time to time in the past and may affect
them in the future. The success of our customers affects their purchases from
us.

OUR HIGHLY CONCENTRATED CUSTOMER BASE INCREASES THE POTENTIAL ADVERSE EFFECT ON
US FROM THE LOSS OF ONE OR MORE CUSTOMERS.

         Our products have historically been sold into the imaging markets for
use in products such as printers, scanners, fax machines, copiers and
multi-function peripherals. This market is highly concentrated. Accordingly, our
sales are derived from a limited number of customers, with the top five OEM
customers accounting for 72% and 52% of total revenues for the fiscal years
ended 2000 and 1999, respectively. In particular, sales to Ricoh, Dimatech and
Minolta each accounted for 26%, 24% and 13% of total revenues, respectively,
for the fiscal year ended January 31, 2000. Sales to Minolta, Kyocera and
Konica accounted for 12%, 12% and 11% of total revenues, respectively, for the
fiscal year ended January 31, 1999. We expect that a small number of customers
will continue to account for a substantial portion of our total revenues for
the foreseeable future. All of our sales are made on the basis of purchase
orders rather than under long-term agreements, and therefore, any customer
could cease purchasing our products at any time without penalty. The decision
of any key customer to cease using our products or a material decline in the
number of units purchased by a significant customer would have a material
adverse effect on us.




                                       13

<PAGE>   15
THE LONG AND VARIABLE SALES CYCLE FOR OUR PRODUCTS MAKE IT MORE DIFFICULT FOR US
TO PREDICT OUR OPERATING RESULTS AND MANAGE OUR BUSINESS.

         The sale of our products typically involves a significant technical
evaluation and commitment of capital and other resources by potential customers,
as well as delays frequently associated with customers' internal procedures to
deploy new technologies within their products and to test and accept new
technologies. For these and other reasons, the sales cycle associated with our
products is typically lengthy, lasting nine months or longer, and is subject to
a number of significant risks, including customers' internal acceptance reviews,
that are beyond our control. Because of the lengthy sales cycle and the large
size of customer orders, if orders forecasted for a specific customer for a
particular quarter are not realized in that quarter, our operating results for
that quarter could be materially adversely affected.

OUR RELATIVELY LOW LEVEL OF BACKLOG INCREASES THE POTENTIAL VARIABILITY OF OUR
QUARTERLY OPERATING RESULTS.

         Our backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for the quarter. To achieve our sales
objectives, we are dependent upon obtaining orders during each quarter for
shipment during that quarter. Furthermore, our agreements with our customers
typically permit them to change delivery schedules. Non-imaging customers may
cancel orders within specified time frames (typically 30 days or more prior to
the scheduled shipment date under our policies) without significant penalty. Our
customers have in the past built, and may in the future build, significant
inventory in order to facilitate more rapid deployment of anticipated major
products or for other reasons. Decisions by such customers to reduce their
inventory levels have led and could lead to reductions in their purchases from
us. These reductions, in turn, have caused and could cause adverse fluctuations
in our operating results.

OUR DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND THE RAPID TECHNOLOGICAL CHANGE
THAT CHARACTERIZES OUR INDUSTRY MAKE US SUSCEPTIBLE TO LOSS OF MARKET SHARE
RESULTING FROM COMPETITORS' PRODUCT INTRODUCTIONS AND SIMILAR RISKS.

         The semiconductor and networking industries are characterized by
rapidly changing technologies, evolving industry standards, frequent new product
introductions, short product life cycles and rapidly changing customer
requirements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. Our future success will depend on our ability to enhance our
existing products, to introduce new products to meet changing customer
requirements and emerging technologies, and to demonstrate the performance
advantages and cost-effectiveness of our products over competing products. Any
failure by us to modify our products to support new local-area network, or LAN,
wide-area network, or WAN, and Internet technologies, or alternative
technologies, or any failure to achieve widespread customer acceptance of such
modified products could have a material adverse effect on us. In particular, we
have dedicated significant resources to developing products based on the Linux
operating system and on the Java programming language, and the failure of these
products to achieve widespread acceptance could have a material adverse effect
on us.

         We have in the past and may in the future experience delays in
developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements. There can be no assurance that we will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or product enhancements, or that our new products
and product enhancements will adequately meet the requirements of the
marketplace and achieve any significant or sustainable degree of market
acceptance in existing or additional markets. Failure by us, for technological
or other reasons, to develop and introduce new products and product enhancements
in a timely and cost-effective manner would have a material adverse effect on
us. In addition, the future introductions or announcements of products by us or
one of our competitors embodying new technologies or changes in industry
standards or customer requirements could render our then-existing products
obsolete or unmarketable. There can be no assurance that the introduction or
announcement of new product offerings by us or one or more of our competitors
will not cause customers to defer the purchase of existing Company products.
Such deferment of purchases could have a material adverse effect on us.



                                       14
<PAGE>   16
OUR FAILURE TO EFFECTIVELY MANAGE PRODUCT TRANSITIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON US.

         From time to time, we or our competitors may announce new products,
capabilities or technologies that may replace or shorten the life cycles of our
existing products. Announcements of currently planned or other new products may
cause customers to defer or stop purchasing our products until new products
become available. Furthermore, the introduction of new or enhanced products
requires us to manage the transition from older product inventories and ensure
that adequate supplies of new products can be delivered to meet customer demand.
Our failure to effectively manage transitions from older products could have a
material adverse effect on our business, results of operations and financial
condition.

OUR FAILURE TO COMPETE SUCCESSFULLY IN OUR HIGHLY COMPETITIVE MARKET COULD
RESULT IN REDUCED PRICES AND LOSS OF MARKET SHARE.

         The markets in which we operate are intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
declining average selling prices and frequent new product introductions. A
number of companies offer products that compete with one or more elements of our
products. We believe that the competitive factors affecting the market for our
products include product performance, price and quality, product functionality
and features, the availability of products for existing and future platforms,
the ease of integration with other hardware and software components of the
customer's products, and the quality of support services, product documentation
and training. The relative importance of each of these factors depends upon the
specific customer involved. There can be no assurance that we will be able to
compete successfully against current and future competitors, or that competitive
factors faced by us will not have a material adverse effect on us.

         We primarily compete with the internal development departments of large
manufacturing companies that have developed their own networking solutions, as
well as established developers of embedded systems software and chips such as
Axis Communications, Echelon, Emulex, Hitachi, Integrated Systems, Intel, Milan
Technology, a division of Digi International, Motorola, Peerless Systems,
Samsung and Wind River. In addition, we are aware of certain companies which
have recently introduced products that address the markets targeted by us. We
have experienced and expect to continue to experience increased competition from
current and potential competitors, many of which have substantially greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and larger customer bases than ours. In particular, established
companies in the networking or semiconductor industries may seek to expand their
product offerings by designing and selling products using competitive technology
that could render our products obsolete or have a material adverse effect on our
sales. Increased competition may result in further price reductions, reduced
gross margins and loss of market share.

WE DEPEND ON THIRD-PARTY SOFTWARE THAT WE USE UNDER LICENSES THAT MAY EXPIRE.

         We rely on certain software that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. Our material software license
agreements are with Integrated Systems, which terminates only if we default
under the agreement; with Novell, which is renewable annually at the option of
both parties, and with Peerless Systems, which expires in 2004 and is subject to
year-to-year renewals thereafter at the option of both parties. These
third-party software licenses may not continue to be available to us on
commercially reasonable terms, and the related software may not continue to be
appropriately supported, maintained or enhanced by the licensors. The loss of
licenses to use, or the inability of licensors to support, maintain, and enhance
any of such software, could result in increased costs, delays or reductions in
product shipments until equivalent software is developed or licensed, if at all,
and integrated.

WE DEPEND ON MANUFACTURING, ASSEMBLING AND PRODUCT TESTING RELATIONSHIPS AND ON
LIMITED SOURCE SUPPLIERS, AND ANY DISRUPTIONS IN THESE RELATIONSHIPS MAY CAUSE
DAMAGE TO OUR CUSTOMER RELATIONSHIPS.

         We do not have our own semiconductor fabrication assembly or testing
operations or contract manufacturing capabilities. Instead, we rely upon
independent contractors to manufacture our components, subassemblies, systems
and products. Currently, all of our semiconductor devices are being
manufactured, assembled and tested by Atmel Corporation in the United States,
and we expect that we will continue to rely upon Atmel to manufacture, assemble
and test a significant portion of our semiconductor devices in the future. We
experienced delays in the receipt of semiconductor devices from Atmel which
adversely affected our operating results in the three months ended October 31,
1998. In addition, we recently experienced a delay in the introduction of one of
our products due to a problem with Atmel's design tools. While we are in the
process of qualifying other suppliers, any qualification and pre-production
periods could be lengthy and may cause delays in providing products to customers
in the event that the sole source supplier of the semiconductor devices fails to
meet our requirements. For example, Atmel uses its manufacturing facilities for
its own products as well as those it manufactures on a contract basis. There is
no assurance that Atmel will have adequate capacity to meet the needs of its
contract manufacturing customers. In addition, semiconductor manufacturers
generally experience periodic constraints on their manufacturing capacity.

                                       15
<PAGE>   17

         We also rely upon limited-source suppliers for a number of other
components used in our products. There can be no assurance that these
independent contractors and suppliers will be able to meet our future
requirements for manufactured products, components and subassemblies in a timely
fashion. We generally purchase limited-source components under purchase orders
and have no guaranteed supply arrangements with these suppliers. In addition,
the availability of many of these components to us is dependent in part on our
ability to provide our suppliers with accurate forecasts of our future
requirements. Any extended interruption in the supply of any of the key
components currently obtained from limited sources would disrupt our operations
and have a material adverse effect on our business, results of operations and
financial condition.

         Delays or lost sales have been and could be caused by other factors
beyond our control, including late deliveries by vendors of components, changes
in implementation priorities or slower than anticipated growth in the market for
networking solutions for embedded systems. During the three months ended October
31, 1998, we experienced delays in the delivery of our product from Atmel
Corporation. Such delays affected our ability to fill our orders to customers,
negatively impacting our third quarter financial results. Operating results in
the past have also been adversely affected by delays in receipt of significant
purchase orders from customers. In addition, we have experienced delays as a
result of the need to modify our products to comply with unique customer
specifications. In general, the timing and magnitude of our revenues are highly
dependent upon our achievement of design wins, the timing and success of our
customers' development cycles, and our customers' product sales. Any of these
factors could have a material adverse effect on our business, results of
operations and financial condition.

THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY RESULT IN SUBSTANTIAL
PERIOD-TO-PERIOD FLUCTUATIONS.

         Our semiconductor devices provide networking capabilities for embedded
systems. The semiconductor industry is highly cyclical and subject to rapid
technological change and has been subject to significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. The semiconductor
industry also periodically experiences increased demand and production capacity
constraints. As a result, we may experience substantial period-to-period
fluctuations in future operating results due to general semiconductor industry
conditions, overall economic conditions or other factors.

OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS.

         Our ability to compete depends in part on our proprietary rights and
technology. We have no patents and rely primarily on a combination of copyright
and trademark laws, trade secrets, confidentiality procedures and contract
provisions to protect our proprietary rights. We generally enter into
confidentiality agreements with our employees, and sometimes with our customers
and potential customers and limit access to the distribution of our software,
hardware designs, documentation and other proprietary information. There can be
no assurance that the steps taken by us in this regard will be adequate to
prevent the misappropriation of our technology. While we have filed one patent
application and plan to file various additional applications, such applications
may be denied. Any patents, once issued, may be circumvented by our competitors.
Furthermore, there can be no assurance that others will not develop technologies
that are superior to ours. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. In addition, the laws
of some foreign countries do not protect our proprietary rights as fully as do
the laws of the United States. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology. Our failure to adequately protect our proprietary rights could have
a material adverse effect on our business, results of operations and financial
condition.

         We exclusively license the right to use the NET+ARM trademark from ARM
Limited according to a royalty-free agreement expiring in 2008. We depend on ARM
to enforce its rights to the trademark against third-party infringement. There
can be no assurance that ARM will promptly and adequately enforce these rights
which could have a material adverse effect on our business, results of
operations and financial condition.

WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD SERIOUSLY HARM US AND REQUIRE US TO INCUR SIGNIFICANT COSTS.

         The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although we have not
been notified that our products infringe any third-party intellectual property
rights, there can be no assurance that we will not receive such notification in
the future. Any litigation to determine the validity of third-party infringement
claims, whether or not determined in our favor or settled by us, would at a
minimum be costly and divert the efforts and attention of our management and
technical personnel from productive tasks, which could have a material adverse
effect on our business, results of operations and financial condition. There can
be no assurance that any infringement claims by third parties or any claims for

                                       16
<PAGE>   18


indemnification by customers or end users of our products resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to have merit, will not materially adversely affect our business,
results of operations or financial condition. In the event of an adverse ruling
in any such matter, we would be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, discontinue the use of certain
processes or be required to obtain a license under the intellectual property
rights of the third party claiming infringement. There can be no assurance that
a license would be available on reasonable terms or at all. Any limitations on
our ability to market our products, or delays and costs associated with
redesigning our products or payments of license fees to third parties, or any
failure by us to develop or license a substitute technology on commercially
reasonable terms could have a material adverse effect on our business, results
of operations and financial condition.

WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND EXPANSION THAT
COULD IMPAIR OUR ABILITY TO GROW OUR REVENUES ABROAD.

         In the fiscal years ended January 31, 2000, 1999 and 1998,
international sales constituted approximately 50%, 51% and 30% of our net sales,
respectively, and approximately 77%, 46% and 31% of our domestic sales,
respectively, were to customers headquartered in Asia. We believe that our
future growth is dependent in part upon our ability to increase sales in
international markets, and particularly to manufacturers located in Japan, which
sell their products worldwide. These sales are subject to a variety of risks,
including fluctuations in currency exchange rates, tariffs, import restrictions
and other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles and potentially adverse tax consequences and
export license requirements. In addition, we are subject to the risks inherent
in conducting business internationally, including political and economic
instability and unexpected changes in diplomatic and trade relationships. In
particular, the economies of certain countries in the Asia-Pacific region are
experiencing considerable economic instability and downturns. Because our sales
to date have been denominated in United States dollars, increases in the value
of the United States dollar could increase the price in local currencies of our
products in non-US markets and make our products more expensive than
competitors' products denominated in local currencies. In addition, an integral
part of our business strategy is to form strategic alliances for the manufacture
and distribution of our products with third parties, including foreign
corporations. There can be no assurance that one or more of the factors
described above will not have a material adverse effect on our business, results
of operations and financial condition.

         We intend to expand our presence in Europe to address new markets. One
change resulting from the formation of a European Economic and Monetary Union
("EMU") required EMU member states to irrevocably fix their respective
currencies to a new currency, the euro, as of January 1, 1999. During the next
three years, business in the EMU member states will be conducted in both the
existing national currency such as the French franc or the Deutsche mark, and
the euro. As a result, companies operating or conducting business in EMU member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling these currencies,
including the euro. There can be no assurance that the conversion to the euro
will not have a material adverse effect on our business, results of operations
and financial condition.

IF WE LOSE KEY PERSONNEL IT COULD PREVENT US FROM EXECUTING OUR BUSINESS
STRATEGY.

         Our business and prospects depend to a significant degree upon the
continuing contributions of our executive officers and our key technical
personnel. We do not have employment contracts with any of our key personnel,
with the exception of our Vice President, Industrial Automation, Embedded
Markets Europe; Vice President, Finance, and Chief Financial Officer; and the
Chairman, Chief Executive Officer and President, and we do not maintain any
key-man life insurance policies. Competition for such personnel is intense, and
there can be no assurance that we will be successful in attracting and retaining
qualified personnel. Failure to attract and retain key personnel could result in
our failure to execute our business strategy and have a material adverse effect
on us.

ANY FAILURE TO COMPLY WITH SIGNIFICANT REGULATIONS AND EVOLVING INDUSTRY
STANDARDS COULD DELAY INTRODUCTION OF OUR PRODUCTS, WHICH COULD HURT OUR
BUSINESS.

         The market for our products is subject to a significant number of
communications regulations and industry standards, some of which are evolving as
new technologies are deployed. In the United States, our products must comply
with various regulations defined by the Federal Communications Commission and
standards established by Underwriters' Laboratories. Some of our products may
not comply with current industry standards, and this noncompliance must be
addressed in the design of those products. Standards for networking are still
evolving. As the standards evolve, we may be required to modify our products or
develop and support new versions of our products. The failure of our products to
comply or delays in compliance, with the various existing and evolving industry
standards could delay introduction of our products, which could have a material
adverse effect on our business, results of operations and financial condition.

ANY MATERIAL PRODUCT DEFECTS COULD RESULT IN LOSS OF MARKET SHARE, DELAY OF
MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS OR LOSSES.

         Complex products such as those offered by us may contain undetected or
unresolved defects when first introduced or as new versions are released. The
occurrence of material errors in the future could, and the failure or inability
to correct such errors would, result in the loss of market share, the delay or
loss of market acceptance of our products, material warranty expense,
diversion of engineering and other resources from our product development
efforts, the loss of credibility with our customers or product recall. The use
of our products for applications in devices that interact directly with the
general public, where the failure of the embedded system could cause property
damage or personal injury, could expose us to significant product liability
claims. Although we have not experienced any product liability or economic loss
claims to date, the sale and support of our products may entail the risk of
such claims. Any of such occurrences could have a material adverse effect upon
our business, results of operations and financial condition.

                                       17
<PAGE>   19

IF WE DO NOT SUCCESSFULLY MANAGE OUR GROWTH, IT COULD HAVE A MATERIAL ADVERSE
EFFECT ON US.

         We have limited internal infrastructure and any significant growth
would place a substantial strain on our financial and management personnel and
information systems and controls. Such growth would require us to implement new
and enhance existing financial and management information systems and controls
and add and train personnel to operate such systems effectively. Our intention
to continue to pursue our growth strategy through efforts to increase sales of
existing products and new products can be expected to place even greater
pressure on our existing personnel and compound the need for increased
personnel, expanded information systems, and additional financial and
administrative control procedures. There can be no assurance that we will be
able to successfully manage expanding operations. Our inability to manage our
expanded operations effectively could have a material adverse effect on our
business, results of operations and financial condition.

A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD INTO THE PUBLIC
MARKET, WHICH COULD DEPRESS OUR STOCK PRICE.

         Sales of a substantial number of shares of common stock in the public
market could adversely affect the market price for our common stock and reported
earnings per share and could make it more difficult for us to raise funds
through equity offerings in the future.

         Subject to applicable federal and securities laws and the restrictions
set forth below, Osicom may sell any and all of the shares of common stock
beneficially owned by it or distribute any or all such shares of common stock to
its stockholders. Sales or distributions by Osicom of substantial amounts of
common stock in the public market or to its stockholders, or the perception that
such sales or distribution could occur, could adversely affect the prevailing
market prices for the common stock. Osicom is not subject to any obligation to
retain its shares in NETsilicon, except that in connection with our initial
public offering, Osicom agreed not to sell or otherwise dispose of any shares of
common stock for a period of 365 days after September 15, 1999, without the
prior written consent of CIBC World Markets Corp. As a result, there can be no
assurance concerning the period of time during which Osicom will maintain its
beneficial ownership of our common stock. Moreover, there can be no assurance
that, in any transfer by Osicom of a controlling interest in us, any holders
of common stock will be able to participate in such transaction or will realize
any premium with respect to their shares of common stock.

         At January 31, 2000, options to purchase an aggregate of
3,315,453 shares of our common stock were outstanding and held by approximately
136 persons. Of these options, 379,116 were exercisable as of January 31, 2000,
with additional vesting to occur from time to time.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR
FINANCIAL CONDITION.

         We intend to consider investments in complementary companies, products
or technologies. While we have no current agreements to do so, we may buy
businesses, products or technologies in the future. In the event of any future
purchases, we could:

         -    issue stock that would dilute our current stockholders' percentage
              ownership;

         -    incur debt;

         -    assume liabilities;

         -    incur amortization expenses related to goodwill and other
              intangible assets; or

         -    incur large and immediate write-offs.


OUR OPERATION OF ANY ACQUIRED BUSINESS WILL ALSO INVOLVE NUMEROUS RISKS,
INCLUDING:

         -    problems combining the purchased operations, technologies or
              products;

         -    unanticipated costs;

         -    diversion of management's attention from our core business;

         -    adverse effects on existing business relationships with suppliers
              and customers;

         -    risks associated with entering markets in which we have no or
              limited prior experience; and

         -    potential loss of key employees, particularly those of the
              purchased organizations.

         We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future and any failure to do so could disrupt our business and seriously harm
our financial condition.

                                       18
<PAGE>   20
BECAUSE THE NASDAQ NATIONAL MARKET IS LIKELY TO EXPERIENCE EXTREME PRICE AND
VOLUME FLUCTUATIONS, THE PRICE OF OUR COMMON STOCK MAY DECLINE.

         The market price of our shares is likely to be highly volatile and
could be subject to wide fluctuations in response to numerous factors, including
the following:

         -    actual or anticipated variations in our quarterly operating
              results or those of our competitors;

         -    announcements by us or our competitors of new products or
              technological innovations;

         -    introduction and adoption of new industry standards;

         -    changes in financial estimates or recommendations by securities
              analysts;

         -    changes in the market valuations of our competitors;

         -    announcements by us or our competitors of significant acquisitions
              or partnerships; and

         -    sales of our common stock.


         Many of these factors are beyond our control and may negatively impact
the market price of our common stock, regardless of our performance. In
addition, the stock market in general, and the market for technology companies
in particular, has been highly volatile. Our common stock may not trade at the
same levels of shares as that of other technology companies and shares of
technology companies, in general, may not sustain their current market prices.
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating results.

PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE OF CONTROL.

         Provisions of our amended and restated certificate of incorporation and
bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders.

ITEM 2.  PROPERTIES:

         We lease approximately 36,000 square feet of office space in Waltham,
Massachusetts, and will lease an addition 8,500 square feet in June 2000, for
our corporate headquarters. Activities at our Waltham headquarters include
administration, sales, product development, assembly, test and support. Our
lease provides for base rent of $34,175 per month through February 28, 2003. We
believe that our current facilities are adequate to meet our current needs.

ITEM 3.  LEGAL PROCEEDINGS:

         NETsilicon may become involved in various legal actions from time to
time arising in the ordinary course of business. The Company is not a party to
any litigation that it believes could have a material adverse effect on the
business, results of operations and financial condition of the Company.

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

         No matters were submitted to a vote of NETsilicon's security holders
during the fourth quarter of the fiscal year ended January 31, 2000.


                                       19
<PAGE>   21
                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
         MATTERS:

         We effected our initial public offering on September 15, 1999 at a
price of $7.00 per share. Since that date, our Common Stock has traded on the
Nasdaq National Market under the symbol NSIL. The following table sets forth,
for the period indicated, the high and low closing sales prices for the Common
Stock, all as reported by the Nasdaq National Market.

                           QUARTERLY STOCK MARKET DATA

                FISCAL 2000                Stock price range per share:
                                             High                 Low
                                             ----                 ---
               Quarter Ended:
               Oct. 31, 1999                $15.88              $ 9.38
               Jan. 31, 2000                $26.56              $11.81

         On January 31, 2000, there were approximately 15 shareholders of
record. We believe that shares of our Common Stock held in bank, money
management, institution and brokerage house "nominee" names may account for at
least an estimated 3,942 additional beneficial holders. The last reported sale
price of the Common Stock on April 25, 2000 was $17.30 per share.

         We currently intend to retain all of our earnings to finance future
growth and therefore, do not anticipate paying any cash dividends on our common
stock in the foreseeable future.

       CHANGES IN SECURITIES AND USE OF PROCEEDS:

       On September 15, 1999 we completed a public offering of our Common Stock
$0.01 par value. The managing underwriters in the offering were CIBC World
Markets and U.S. Bancorp Piper Jaffray (the "Underwriters"). The shares of
Common Stock sold in the offering were registered under the Securities Act of
1933 on a Registration Statement on From S-1 (Reg. No. 333-62231) that was
declared effective by the SEC on September 15, 1999. The offering commenced on
September 15, 1999 after all 5,250,000 shares (of which 3,250,000 shares were
offered by us and 2,000,000 were offered by our former sole shareholder, Osicom
Technologies, Inc.) of Common Stock registered under the Registration Statement
were sold at a price of $7.00 per share. The aggregate price of the offering
amount registered was $36,750,000. We did not receive any of the proceeds from
the sale of shares being offered by Osicom. In connection with the offering, the
Company and Osicom paid an aggregate of approximately $2.6 million in
underwriting discounts and commissions to the Underwriters. In addition, the
following table sets forth an estimate of all expenses incurred in connection
with the offering, other than underwriting discounts and commissions.

<TABLE>
<CAPTION>
<S>                                                                  <C>
       SEC Registration fee                                             $15,000
       NASD filing fee                                                    5,000
       Nasdaq National Market listing fee                                87,000
       Printing expenses                                                433,000
       Legal and accounting fees and expenses                           481,000
       Other                                                            314,000
                                                                     ----------
       Total                                                         $1,335,000
                                                                     ==========
</TABLE>

       All expenses incurred in connection with the offering were allocated
between us and Osicom based on the ratio of total shares sold by each to the
total number of shares sold. We received proceeds from the offering of
approximately $22.2 million which were net of our share of offering costs and
included proceeds from the sale of 287,000 over-allotment shares sold by the
Underwriters in connection with an over-allotment option that we granted. As of
January 31, 2000, we had used $2.7 million and $1.95 million of the proceeds
from our public offering to repay amounts due to Coast Business Credit under our
line of credit and our indebtedness to Osicom, respectively. In addition, we
have used the net proceeds to invest in short-term, interest bearing, investment
grade securities. The remainder of the net proceeds will be used for product
development and marketing, capital expenditures, working capital and general
corporate purposes. We may also use a portion of the net proceeds to expand our
business through acquisition or to invest in complementary business or products.
We do not currently have any acquisition commitments. None of the net proceeds
were paid directly or indirectly to any director, officer or general partner of
the Company, persons owning 10% or more of any class of equity securities of the
Company, or to an affiliate of ours.

ITEM 6.  SELECTED FINANCIAL DATA:

         The following selected financial data of the Company for the five years
ended January 31, 2000 are derived from the audited financial statements of the
Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 7 and the financial statements and related
footnotes included as Item 8 in this Form 10-K.

<TABLE>
<CAPTION>
                                                                               Fiscal Years Ended January 31,
                                                               ------------------------------------------------------------
                                                                    2000        1999       1998       1997        1996
                                                                    ----        ----       ----       ----        ----

STATEMENT OF OPERATIONS DATA:
<S>                                                            <C>         <C>         <C>        <C>         <C>
          Net sales..................................            $31,841     $13,373    $ 7,920    $ 7,445     $ 4,598
          Cost of sales..............................             15,040       7,271      4,060      4,294       2,662
                                                                 -------     -------    -------    -------     -------
          Gross profit...............................             16,801       6,102      3,860      3,151       1,936
                                                                 -------     -------    -------    -------     -------
          Operating expenses:
            Selling and marketing....................              7,560       3,336      1,810      1,563         914
            Engineering, research and development....              3,466       2,153      1,483      1,028       1,698
            General and administrative...............              3,551       2,194      1,795      1,502       2,294
                                                                 -------     -------    -------    -------     -------
          Total operating expenses...................             14,577       7,683      5,088      4,093       4,906
                                                                 -------     -------    -------    -------     -------
          Operating income (loss) from
            continuing operations....................              2,224      (1,581)    (1,228)      (942)     (2,970)
          Interest expense, net......................               (206)       (551)      (118)      (136)        (99)
                                                                 -------     -------    -------    -------     -------
          Income (loss) from continuing operations
            before income tax benefit................              2,018      (2,132)    (1,346)    (1,078)     (3,069)
          Income tax benefit.........................                 --          --        493        969         643
                                                                 -------     -------    -------    -------     -------
          Income (loss) from continuing operations...            $ 2,018     $(2,132)   $  (853)   $  (109)    $(2,426)
                                                                 =======     =======    =======    =======     =======
          Income (loss) from continuing operations per share:
            Basic....................................            $  0.18     $ (0.21)   $ (0.09)   $ (0.01)    $ (0.34)
            Diluted..................................            $  0.17     $ (0.21)   $ (0.09)   $ (0.01)    $ (0.34)
          Weighted average number of shares outstanding:
</TABLE>


                                       20
<PAGE>   22
<TABLE>
<CAPTION>
<S>                                                           <C>          <C>         <C>          <C>          <C>
            Basic....................................        11,327       10,000      10,000       8,285        7,176
            Diluted..................................        11,978       10,000      10,000       8,285        7,176

                                                                                  January 31,
                                                              ---------------------------------------------------------
                                                               2000        1999         1998        1997        1996
                                                               ----        ----         ----        ----        ----

BALANCE SHEET DATA:
          Cash and cash equivalents..................       $11,097     $   583      $   185     $   394     $    19
          Working capital (deficit)..................        19,515      (3,471)        (787)       (241)     (1,261)
          Total assets...............................        29,781      11,648        7,933       7,615       7,033
          Due to Osicom..............................            57       5,885        1,812         948          -
          Total debt (including short-term debt).....           983       3,191        3,005       3,338       2,863
          Stockholders' equity (deficit).............        22,483      (1,836)         586         763        (458)
</TABLE>

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

         Some of the information in this report contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, the following: future product development plans,
projected capital expenditures, and liquidity and business strategy. These
statements may be found under Business and Management's Discussion and Analysis
of Financial Condition and Results of Operations. Forward-looking statements
typically are identified by use of terms such as may, will, expect, anticipate,
estimate and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors, including delays in product introductions, interruptions in
supply and competitive product introductions. You should also consider carefully
the statements under Business and Risk Factors and other sections of this
report, which address additional factors that could cause our actual results to
differ from those set forth in the forward-looking statements.

          You should read this discussion together with the financial statements
and other financial information included in this document.

OVERVIEW

          We develop and market semiconductor devices and software products
designed to meet the networking requirements of embedded systems. We commenced
our operations in 1984 as Digital Products, Inc. From our inception, we have
developed and marketed networking products for embedded systems that enable the
connection of electronic devices to networks. In 1994, we introduced the Digital
Products Option, or DPO, Interface Specification and our network interface card,
or NIC, two network connectivity products used by printer controller designers
and manufacturers of imaging devices. DPO was designed using the same networking
technology found in our previous products.

          In 1996, we began developing our NET+Works family of semiconductor
devices designed to network-enable a broad array of embedded systems in a
variety of markets. In September 1996, Osicom acquired all of our outstanding
capital stock from our stockholders for $5.0 million of Osicom common stock.
Supported by Osicom's funding of working capital, we completed the development
of our NET+Works family of products and began shipping that family of products
in March 1998. We were a wholly-owned subsidiary of Osicom from the date of the
acquisition through our initial public offering in September of 1999.

          As of May 1, 1998, according to our intercompany agreement with
Osicom, we transferred our stand-alone print server line of business to Osicom.
Therefore, we treat the stand-alone print server line of business as a
discontinued operation, and Osicom now manufactures, sells and supports the
stand-alone print server and other products. The financial data discussed below
do not include the operations of the stand-alone print server line of business.

          We generate revenues from the sales of network semiconductor devices,
NICs and software products, development tools and application engineering
services to embedded systems manufacturers. Our networking products are sold to
manufacturers which incorporate them into electronic devices incorporating
embedded systems that are sold to end users. We generally recognize product and
software license revenue upon shipment to our customers. Revenue recognition is
not dependent upon the customers of those manufacturers accepting the
manufacturer's products into which our products are incorporated. Revenue from
service obligations is deferred and recognized over the lives of the contracts.
Our standard warranty period is 27 months from date of shipment and our standard
product return policy does not allow the customer to return product other than
for warranty. We accrue warranty costs and other allowances at the time of

                                       21
<PAGE>   23

shipment. In general, the timing and magnitude of our revenues are dependent
upon our achievement of design wins, the timing and success of our customers'
development cycles and our customers' product sales. In addition to revenues
from actual sales of the hardware products, NETsilicon also receives immaterial
amounts of revenue that are earned from the sales of support services provided
to developers during their design stage, and also from post-sale support
contracts. The contracts generally cover the 12 month period following date of
actual shipment of product to the customer. The sale of our products typically
involves a significant technical evaluation and commitment of capital and other
resources by customers, as well as delays frequently associated with
customers' internal procedures to deploy new technologies within their products
and to accept and test new technologies. For these and other reasons, the sales
cycles associated with our products is typically lengthy, lasting nine months
or longer.

          In the fiscal years ended January 31, 2000, 1999 and 1998,
international sales constituted approximately 50%, 51% and 30% of our net sales,
respectively, and approximately 77%, 46% and 31% of our domestic sales were to
customers headquartered in Asia during the fiscal years ended January 31, 2000,
1999 and 1998, respectively. Approximately 95%, 95% and 100% of our net sales in
the fiscal years ended January 31, 2000, 1999 and 1998, respectively, were made
to customers in the imaging market, many of which are headquartered in Japan.

RESULTS OF OPERATIONS

          The following table sets forth information derived from our Statement
of Operations expressed as a percentage of net sales for the fiscal years ended
January 31, 2000, 1999 and 1998.

<TABLE>
<CAPTION>
                                                                        FISCAL YEARS ENDED JANUARY 31,
                                                                    2000             1999              1998
                                                                ------------     -------------    -------------
<S>                                                                <C>              <C>               <C>
Net sales....................................................      100.0%           100.0%            100.0%
Cost of sales................................................       47.2             54.4              51.3
                                                                ------------     -------------    -------------
Gross profit.................................................       52.8             45.6              48.7
                                                                ------------     -------------    -------------
Operating expenses:
   Selling and marketing.....................................       23.7             24.9              22.9
   Engineering, research and development.....................       10.9             16.1              18.7
   General and administrative................................       11.2             16.4              22.6
                                                                ------------     -------------    -------------
Total operating expenses.....................................       45.8             57.4              64.2
                                                                ------------     -------------    -------------
Operating income (loss) from continuing operations...........        7.0            (11.8)            (15.5)
Interest expense, net........................................       (0.6)            (4.1)             (1.5)
                                                                ------------     -------------    -------------
Income  (loss)  from  continuing   operations  before  income
tax benefit..................................................        6.4            (15.9)            (17.0)
Income tax benefit...........................................         --               --               6.2
                                                                ------------     -------------    -------------
Income (loss) from continuing operations.....................        6.4%           (15.9)%           (10.8)%
                                                                ============     =============    =============
</TABLE>


FISCAL YEAR ENDED JANUARY 31, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1999

Net sales. Net sales increased to $31.8 million in the fiscal year ended January
31, 2000 from $13.4 million in the fiscal year ended January 31, 1999,
representing an increase of 138.1%. The increase in net sales was due primarily
to an increase in OEM customers to which the Company shipped product from 20 in
fiscal year 1999 to 43 in fiscal year 2000 and increased sales to existing OEM
imaging customers due to greater demand for their products. Net sales included
royalty, maintenance and service revenue of $1,272,500 or 4% of sales in the
fiscal year ended January 31, 2000 compared to $780,900, or 5.8% of net sales
in the fiscal year ended January 31, 1999. Backlog for our product and services
was approximately $6.0 million and $7.8 million at January 31, 2000 and 1999,
respectively, all of which was scheduled to be shipped within 12 months.

Cost of sales; gross profit. Cost of sales consists principally of the cost of
raw material components and subcontract labor assembly from outside
manufacturers and suppliers. Gross profit increased to $16.8 million, or 52.8%
of net sales, in the fiscal year ended January 31, 2000 from $6.1 million, or


                                       22
<PAGE>   24

45.6% of net sales, in the fiscal year ended January 31, 1999, representing an
increase of 175.3%. The increase in gross margin percent in fiscal year 2000
was due primarily to material and subcontract labor cost reductions offset in
part by declining average sales prices. The gross margin percent in fiscal year
1999 was also adversely effected by costs of $224,000 resulting from the late
delivery of the NET+ ARM chip from a vendor.

Selling and marketing expenses. Selling and marketing expenses consist mainly of
employee related expenses, commissions to sales representatives, trade shows,
publicity and travel expenses. Selling and marketing expenses increased to $7.6
million, or 23.7% of net sales, in the fiscal year ended January 31, 2000 from
$3.3 million, or 24.9% of net sales, in the fiscal year ended January 31, 1999,
representing an increase of 126.6%. The increase was the result of (i)
additional sales commissions of $1.4 million due to increased sales volume, (ii)
additional payroll costs of $1.1 million related to the expansion of the sales
force in the United States, Europe and Asia, and (iii) marketing costs
associated with the NET + Works family of products, greater participation in
trade shows, and costs associated with internet and web marketing activities.

Engineering, research and development expenses. Engineering, research and
development expenses consist primarily of salaries and the related costs of
employees engaged in research, design and development activities, net of
capitalized software costs. Engineering, research and development costs
increased to $3.5 million, or 10.9% of net sales, in the fiscal year ended
January 31, 2000 from $2.2 million, or 16.1% of net sales, representing an
increase of 61.0%. The increase was due to increased headcount and related
payroll expenses of $360,000 and increased costs of $228,900 associated with
external product development and depreciation of purchased software and other
assets. Software development costs of $938,100 and $723,600, in the fiscal
years ended January 31, 2000 and 1999, respectively, were capitalized and are
being amortized over the products' useful lives, typically two to three years.
Amortization expense related to capitalized software development costs was
$637,800 and $227,300 in the fiscal years ended January 31, 2000 and 1999,
respectively.

General and administrative expenses. General and administrative expenses consist
mainly of salaries, employee-related expenses, legal expenses, audit fees and
changes to accounts receivable allowances. General and administrative expenses
increased to $3.6 million, or 11.2% of net sales, in the fiscal year ended
January 31, 2000 from $2.2 million, or 16.4% of net sales, in the fiscal year
ended January 31, 1999, representing an increase of 61.8%. The increase in
expenses is associated with the increase in sales and headcount, including
increased payroll and related costs of $431,000 and costs of $221,200 associated
with the development of a newly formed MIS group. In addition, the increase is
due to new and increased costs associated with becoming a public entity,
including an increase in legal, audit, and insurance costs of $261,000 as well
as costs related to investor relations and similar activities.

Interest expense. Interest expense is the result of the Company's borrowings
against its line of credit with its lender, Coast Business Credit, and the
interest charged by its former sole shareholder, Osicom, for borrowings made by
the Company from Osicom, offset by income earned on cash and cash equivalents
and investments. Net interest expense decreased to $206,100, or 0.6% of net
sales, in the fiscal year ended January 31, 2000 from $551,700, or 4.1% of net
sales, in the fiscal year ended January 31, 1999, representing a decrease of
62.6%. The decrease is due primarily to income earned on cash and investments
of $364,700 in the fiscal year ended January 31, 2000. Interest income earned
in fiscal year 1999 was not material.

Provision for income taxes. There was no net provision for income taxes for the
fiscal year ended January 31, 2000 as the provision was offset by available net
operating loss carryforwards. There was no net provision for income taxes for
the fiscal year ended January 31, 1999 because the tax benefits attributable to
continuing operations were offset by the tax provision attributable to
discontinued operations. At January 31, 2000, the Company had federal net
operating losses of approximately $3,513,400 and research and development
credits of $221,000 which may be available to reduce future taxable income;
these carryforwards expire at various dates through 2014. The extent to which
net operating loss carryforwards may be utilized in a single taxable year may be
reduced in the event there has been any ownership change of a taxpayer. Further
ownership changes in the future may reduce the extent to which any net operating
losses and credits may be utilized.


FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1998

Net sales. Net sales increased to $13.4 million in the fiscal year ended January
31, 1999 from $7.9 million in the fiscal year ended January 31, 1998,
representing an increase of 68.9%. The increase in net sales was due primarily
to an increase in the number of customers to which we shipped product from seven
in fiscal year 1998 to 20 in fiscal year 1999. Net sales included royalty,
maintenance and service revenue of $780,900, or 5.8% of net sales in the fiscal
year ended January 31, 1999 compared to $456,000 or 5.8% of net sales in the
fiscal year ended January 31, 1998. Backlog for our products and services was
approximately $7.8 million and $1.9 million at January 31, 1999 and 1998,
respectively, all of which was scheduled to be shipped within 12 months.


                                       23
<PAGE>   25

Cost of sales; gross profit. Gross profit increased to $6.1 million, or 45.6% of
net sales, in the fiscal year ended January 31, 1999 from $3.9 million, or 48.7%
of net sales, in the fiscal year ended January 31, 1998, representing an
increase of 58.1%. The gross margin percentage decrease in the fiscal year ended
January 31, 1999, was due primarily to costs of $224,000 resulting from the late
delivery of the NET+ARM chip from Atmel, as well as slower than anticipated
general raw material cost reductions of $73,000 due to cash constraints. In
addition, the total impact from the decline in average sales prices resulted in
a decrease in gross profit of $153,000 for the fiscal year ended January 31,
1999 from the fiscal year ended January 31, 1998.

Selling and marketing expenses. Selling and marketing expenses increased to $3.3
million, or 24.9% of net sales, in the fiscal year ended January 31, 1999 from
$1.8 million, or 22.9% of net sales, in the fiscal year ended January 31, 1998,
representing an increase of 84.3%. This increase was the result of (i)
additional sales commissions of $681,000 due to the increased net sales volume,
(ii) increased marketing costs of $687,000 were primarily associated with the
introduction and brand identification efforts related to the NET+Works family of
products subsequent to its introduction in January 1998 as well as the addition
of two senior marketing employees, and (iii) marketing costs of $68,000
associated with targeting additional developers in the imaging market.

Engineering, research and development expenses. Engineering, research and
development expenses increased to $2.2 million, or 16.1% of net sales, in the
fiscal year ended January 31, 1999 from $1.5 million, or 18.7% of net sales, in
the fiscal year ended January 31, 1998, representing an increase of 45.2%. This
increase was due primarily to the increased expenditures associated with the
development of our NET+Works family of products. Software development costs of
$723,600 and $556,000 in the fiscal years ended January 31, 1999 and 1998,
respectively, were capitalized and are being amortized over the products' useful
lives, typically two to three years. Amortization expense related to capitalized
software development costs were $227,300 and $277,300 in the fiscal years ended
January 31, 1999 and 1998, respectively.

General and administrative expenses. General and administrative expenses
increased to $2.2 million, or 16.4% of net sales, in the fiscal year ended
January 31, 1999 from $1.8 million, or 22.6% of net sales, in the fiscal year
ended January 31, 1998, representing an increase of 22.2%. The increase in these
expenses resulted primarily from an increase of approximately $300,000 in the
accounts receivable valuation reserve to reflect the higher level of gross
receivables in the fiscal year ended January 31, 1999, as well as from the
addition of a chief financial officer at a cost of approximately $100,000.

Interest expense. Interest expense is the result of our borrowings against our
line of credit with our lender, Coast Business Credit and the interest charged
by our parent, Osicom, for our borrowings from Osicom. Interest expense
increased to $551,000, or 4.1% of net sales, in the fiscal year ended January
31, 1999, from $118,000, or 1.5% of net sales, in the fiscal year ended January
31, 1998, representing an increase of 366.9%. During the fiscal year ended
January 31, 1999, approximately $353,000 was attributable to interest charges on
advances to us from Osicom. During the fiscal year ended January 31, 1998,
Osicom did not charge any interest on advances to us. The interest rate on our
debt with Osicom was the prime rate plus three percent per year.

Provision for income taxes. There was no net provision for income taxes for the
fiscal years ended January 31, 1999 and 1998 because the tax benefits
attributable to continuing operations were offset by the tax provision
attributable to discontinued operations. At January 31, 1999, we had federal net
operating losses of approximately $3.8 million, and research and development
credits of $210,200, expiring at various dates through 2014 that may be
available to reduce future taxable income. The extent to which net operating
loss carryforwards may be utilized in a single taxable year may be reduced in
the event there has been any ownership change of a taxpayer. Further ownership
changes in the future may reduce the extent to which any net operating losses
and credits may be utilized.


                                       24
<PAGE>   26

LIQUIDITY AND CAPITAL RESOURCES

         Prior to our public offering in September 1999, we financed our
operations through advances from Osicom and borrowings under its short-term bank
line of credit. We received proceeds, net of offering costs, of approximately
$22.2 million as a result of the initial public offering and sale of our stock.
At January 31, 2000, we had working capital of $19.5 million and cash and cash
equivalents of $11.1 million.


                                       25
<PAGE>   27
         Our operating activities provided cash of $6.4 million, used cash of
$1.9 million and provided cash of $45,300 during the fiscal years ended January
31, 2000, 1999 and 1998, respectively. Net income, a decrease in accounts
receivable and an increase in other current liabilities and the non-cash impact
of depreciation and amortization contributed to the cash provided from
operations in the fiscal year ended January 31, 2000. Cash used in the fiscal
year ended January 31, 1999 was primarily attributable to a net loss, growth in
accounts receivable and inventory caused by growth in demand for our OEM
products, offset in part by a growth in accounts payable and other current
liabilities and the non-cash impact of depreciation and amortization. Cash
provided by operating activities in the fiscal year ended January 31, 1998 was
primarily attributable to a decrease in inventories and the non-cash impact of
depreciation and amortization and the valuation allowance associated with
intangible assets, offset in part by a net loss, growth in accounts receivable
and a decrease in accounts payable and other current liabilities.

         In order to support our anticipated growth, we expect that our sales
and marketing expenses, engineering and research and development expenses and
general and administrative expenses each will increase in the fiscal year ending
January 31, 2001 and thereafter compared to the amounts of such expenses in the
fiscal year ending January 31, 2000. There can be no assurance that our
available cash and cash flow from operations will be sufficient to fund such
additional expenses.

         Our standard payment terms are net 30 days. While we actively pursue
collection within that time, receivables have frequently taken longer to collect
in part because we sell products to large companies in Asia.

         Our investing activities used cash of $10.6 million, $906,200 and $1.1
million in the fiscal years ended January 31, 2000, 1999 and 1998. The cash used
in the fiscal year ended January 31, 2000 related primarily to the purchase of
$8.2 million of short term investments and $1.4 million of property and
equipment. Cash used in the fiscal year ended January 31, 1999 related primarily
to software development costs of $723,600 and an increase in other assets of
$431,900, offset in part by the transfer of capitalized software in the amount
of $577,400 to Osicom, while the cash used in the fiscal year ended January 31,
1998 related primarily to the purchase of $604,800 of property plant and
equipment and $556,000 in software development costs.

         Cash provided by financing activities was $14.7 million during the
fiscal year ended January 31, 2000, primarily from proceeds from the sale of
common stock in connection with our initial public offering of $22.2 million,
offset in part by repayments of loans from Osicom and short-term debt. Cash
provided by financing activities was $3.2 million and $890,700 in the fiscal
years ended January 31, 1999 and 1998, respectively. Cash provided in the fiscal
year ended January 31, 1999 was primarily from net loans by Osicom of $3.0
million and net proceeds from short-term debt of $204,400 while cash provided by
financing activities in the fiscal year ended January 31, 1998 was attributable
to loans by Osicom of $854,400 and net proceeds from short-term debt of
$291,000, reduced by long-term debt repayments of $254,700.

         At January 31, 2000, our short-term debt was in the form of a credit
facility provided by Coast Business Credit. Coast Business Credit is a division
of Southern Pacific Bank and provides asset based lending services. The
Company's credit facility was for $5.0 million, of which $4.2 million was unused
at January 31, 2000 and is collateralized by accounts receivable, inventory and
equipment and a guarantee by Osicom. The loan bears interest at 2.5% over the
bank's prime rate, but not less than 8.0%.

         During the fiscal year ended January 31, 2000, the Company entered into
a technology development agreement with an entity and made a payment of
$500,000, representing a deposit for future services, in accordance with the
agreement. This payment is included in other assets in the accompanying balance
sheet at January 31, 2000. Additional payments totaling $2,000,000 are required
under the agreement. The timing of the additional payments is based on delivery
and acceptance of product. Payments required under this agreement are for
products for which technological feasibility has been established. Accordingly,
all payments will ultimately be recorded as capitalized software costs and
amortized over the estimated two to three year lives of the underlying
products.

         We anticipate that our available cash resources will be sufficient to
meet our presently anticipated capital requirements through the next 12 months.
Nonetheless, we may elect to sell additional equity securities, subject to the
provisions of our 365-day lock-up agreement with the underwriters of our initial
public offering, or to obtain additional credit. Our future capital requirements
may vary materially from those now planned and will depend on many factors,
including, but not limited to, the levels at which we maintain inventory and
accounts receivable; the market acceptance of our products; the levels of
promotion and advertising required to launch products or enter markets and
attain a competitive position in the marketplace; volume pricing concessions;
our business, product, capital expenditure and research and development plans
and technology roadmap; capital improvements to new and existing facilities;
technological advances; the response of competitors to our products; and our
relationships with suppliers and customers. In addition, we may require an
increase in the level of working capital to accommodate planned growth, hiring
and infrastructure needs. Additional capital may be required for consummation of
any acquisitions of businesses, products or technologies. To the extent that the
funds generated from this offering, together with existing resources and cash
generated from operations, are insufficient to fund our future activities, we
may need to raise additional funds through public or private financings or
borrowings. No assurance can be given that additional financing will be
available or that, if available, such financing can be obtained on terms
favorable to us and our shareholders. If additional funds are raised through the
issuance of equity securities, the percentage ownership of then current
stockholders of us will be reduced and such equity securities may have rights,
preferences or privileges senior to those of holders of our common stock. If
adequate funds are not available to satisfy short- or long-term capital
requirements, we may be required to limit our operations significantly.


                                       26
<PAGE>   28
YEAR 2000

         We funded our efforts to address the Year 2000 issue from available
cash and have not separately accounted for these costs in our financial
statements. These costs were not material. As of the date of this filing, we
have not incurred any material Year 2000 problem. In addition, we are not aware
of any major problems at our vendors or customers related to the Year 2000.

EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES

         We believe that the relatively moderate rate of inflation in the United
States over the past few years has not had a significant impact on our sales
or operating results or on the prices of raw materials. There can be no
assurance, however, that inflation will not have a material adverse effect on
our operating results in the future.

         Substantially all of our sales are currently denominated in U.S.
dollars and to date our business has not been significantly affected by currency
fluctuations. However, we conduct business in several different countries and
thus fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in those countries. In addition, inflation in such countries could
increase our expenses. In the future, we may engage in foreign currency
denominated sales or pay material amounts of expenses in foreign currencies and,
in such event, may experience gains and losses due to currency fluctuations. Our
operating results could be adversely affected by such fluctuations.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," SFAS No. 133. SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities and requires all derivatives
to be recorded on the balance sheet at fair value. SFAS No. 133, as amended, is
effective for years beginning after June 15, 2000. Adoption of SFAS No. 133 is
not expected to have a material impact on our results of operations,
financial position or cash flows.


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

         We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.

         Investment Rate Risk. Our investment portfolio includes debt
instruments that primarily have durations of less than one year. These bonds are
subject to interest rate risk, and could decline in value if interest rates
fluctuate. Our investment portfolio also at times includes certain commercial
paper which is also subject to interest rate risk. Due to the short duration and
conservative nature of these instruments, we do not believe that we have a
material exposure to interest rate fluctuations.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

         NETsilicon's Financial Statements, together with the related
Independent Auditors' Report, appear at pages F-1 through F-19, respectively, of
this Form 10-K.

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

         Not applicable.


                                       27
<PAGE>   29

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

         The information required by this item is incorporated by reference from
NETsilicon's definitive Proxy Statement for its 2000 annual meeting of
stockholders (the "Proxy Statement") under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 11.  EXECUTIVE COMPENSATION:

         The information required by this item is incorporated by reference from
the definitive Proxy Statement under the caption "Compensation and Other
Information Concerning Directors and Officers."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

         The information required by this item is incorporated by reference from
the definitive Proxy Statement in the tables under the captions "Principal
Shareholders" and "Election of Directors."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

         The information required by this item is incorporated by reference from
the definitive Proxy Statement under the caption "Certain Transactions."

                                     PART IV

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

         (a) The following documents are filed as part of this Annual Report on
             Form 10-K:

               (1) Financial Statements listed under Part II, Item 8.

               (2) Financial Statement Schedules. Financial statement schedules
                   have been omitted because the required information is not
                   present or not present in amounts sufficient to require
                   submission of the schedule, or because the information
                   required is included in the financial statements or the notes
                   thereto.

         (b) Reports on Form 8-K: The Company did not file any current report
             on Form 8-K during the fourth quarter of the fiscal year ended
             January 31, 2000.

         (c) The exhibits listed in the Exhibit Index immediately preceding the
             Exhibits are filed as a part of this Annual Report on Form 10-K.

         (d) Financial Statement Schedules: The financial statement schedules
             required by this item, if any, are listed under Item 14(a)(2).


                                       28
<PAGE>   30


                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  NETSILICON, INC.


                                   By:  /s/ Cornelius Peterson VIII
                                        ---------------------------
                                           Cornelius Peterson VIII
                                           President and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Name                                      Title                                        Date
              ----                                      -----                                        ----

<S>                                     <C>                                                     <C>
/s/ Cornelius Peterson VIII             President, Chief Executive Officer and                   April 27, 2000
-------------------------------------   Director (Principal Executive Officer)
Cornelius Peterson VIII

/s/ Daniel J. Peterson                  Vice President, Finance, Chief Financial Officer         April 27, 2000
-------------------------------------   (Principal Financial and Accounting Officer)
Daniel J. Sullivan

/s/ Michael K. Ballard                  Director                                                 April 27, 2000
-------------------------------------
Michael K. Ballard

/s/ Francis E. Girard                   Director                                                 April 27, 2000
-------------------------------------
Francis E. Girard

/s/ William Johnson                     Director                                                 April 27, 2000
-------------------------------------
William Johnson

/s/ Edward B. Roberts                   Director                                                 April 27, 2000
-------------------------------------
Edward B. Roberts

/s/ F. Grant Saviers                    Director                                                 April 27, 2000
-------------------------------------
F. Grant Saviers
</TABLE>


                                       29
<PAGE>   31


                                NETSILICON, INC.

                              FINANCIAL STATEMENTS

                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                                                   PAGE
    Financial Statements:

<S>                                                                                                                 <C>
       Report of Independent Certified Public Accountants.....................................................      F-2
       Balance Sheets as of January 31, 2000 and 1999.........................................................      F-3
       Statements of Operations for the Years Ended January 31, 2000, 1999 and 1998...........................      F-4
       Statements of Stockholders' Equity (Deficit) for the Years Ended January 31, 2000, 1999 and 1998.......      F-5
       Statements of Cash Flows for the Years Ended January 31, 2000, 1999 and 1998...........................      F-6
       Notes to Financial Statements..........................................................................    F-7-F-19
</TABLE>


                                      F-1
<PAGE>   32


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors of
NETsilicon, Inc.

         We have audited the accompanying balance sheets of NETsilicon, Inc. as
of January 31, 2000 and 1999 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended January 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

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

                              /S/ BDO SEIDMAN, LLP
                                      ............


Boston, Massachusetts
February 18, 2000


                                      F-2
<PAGE>   33


                                NETsilicon, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 January 31,
                                                                -------------------------------------------
                                                                        2000                   1999
                                                                ---------------------  --------------------

                            ASSETS
CURRENT ASSETS
<S>                                                                   <C>                    <C>
     Cash and equivalents....................................         $   11,096,500         $      582,600
     Short-term investments (Note C).........................              8,203,700                     --
     Accounts receivable, net (Note E and S).................              2,266,000              4,204,500
     Due from affiliate (Note G).............................                     --              1,218,300
     Inventory, net (Notes B, E and S).......................              4,322,400              3,769,300
     Prepaid expenses and other current assets...............                798,900                238,600
                                                                ---------------------  ---------------------
         TOTAL CURRENT ASSETS................................             26,687,500             10,013,300

PROPERTY AND EQUIPMENT, NET (Notes D, E and H)...............              1,822,300                685,200
                                                                ---------------------  ---------------------

OTHER ASSETS
     Capitalized software, net (Note B)......................                770,700                470,400
     Other assets (Note H)...................................                500,000                479,500
                                                                ---------------------  ---------------------
         TOTAL OTHER ASSETS..................................              1,270,700                949,900
                                                                ---------------------  ---------------------

TOTAL ASSETS (Note E)........................................         $   29,780,500         $   11,648,400
                                                                =====================  =====================


        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
     Short term debt (Note E)................................         $      779,700         $    3,191,500
     Short term portion of capital lease obligation (Note H).                 78,000                     --
     Accounts payable........................................              3,013,200              2,789,800
     Due to affiliate (Note G)...............................                 56,900              6,423,100
     Other current liabilities (Note F)......................              3,244,700              1,080,100
                                                                ---------------------  ---------------------
         TOTAL CURRENT LIABILITIES...........................              7,172,500             13,484,500

CAPITAL LEASE OBLIGATION, less current portion...............                125,100                     --
                                                                ---------------------  ---------------------
         TOTAL LIABILITIES...................................              7,297,600             13,484,500
                                                                ---------------------  ---------------------

COMMITMENTS AND CONTINGENCIES (Note H)

STOCKHOLDERS' EQUITY (DEFICIT) (Notes J, K, and L)
     Preferred stock, $0.01 par value; 5,000,000 authorized;
     none issued                                                                  --                     --
     Common stock, $0.01 par value; 35,000,000 authorized;
        Issued and outstanding:
         Voting, 6,037,500 and 1,000,000 shares..............                 60,400                 10,000
         Non- Voting, 7,500,000 and 9,000,000 shares.........                 75,000                 90,000
     Additional paid-In capital..............................             24,755,400              2,463,000
     Accumulated other comprehensive loss....................                (26,400)                    --
     Accumulated deficit.....................................             (2,381,500)            (4,399,100)
                                                                ---------------------  ---------------------
         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................             22,482,900             (1,836,100)
                                                                ---------------------  ---------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).........         $   29,780,500         $   11,648,400
                                                                =====================  =====================
</TABLE>

                See accompanying notes to financial statements.


                                      F-3
<PAGE>   34


                                NETsilicon, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended January 31,
                                                              ---------------------------------------------------

                                                                    2000               1999              1998
                                                              -----------------   ----------------   ------------
<S>                                                               <C>                <C>              <C>
NET SALES...................................................      $ 31,840,900       $ 13,373,000     $ 7,920,300

COST OF SALES (Note G)......................................        15,040,200          7,270,400       4,060,200
                                                              -----------------   ----------------   -------------

    GROSS MARGIN............................................        16,800,700          6,102,600       3,860,100
                                                              -----------------   ----------------   -------------

OPERATING EXPENSES:
    Selling and marketing...................................         7,560,300          3,336,400       1,809,600
    Engineering, research and development...................         3,466,200          2,152,500       1,482,600
    General and administrative..............................         3,550,500          2,194,400       1,795,400

                                                              -----------------   ----------------   -------------
       TOTAL OPERATING EXPENSES.............................        14,577,000          7,683,300       5,087,600
                                                              -----------------   ----------------   -------------

OPERATING  INCOME (LOSS) FROM
    CONTINUING OPERATION....................................         2,223,700         (1,580,700)     (1,227,500)

    Interest expense, net of interest income of $364,700
     in 2000................................................          (206,100)          (551,700)       (118,500)
                                                              -----------------   ----------------   -------------

INCOME (LOSS) FROM  CONTINUING
    OPERATIONS BEFORE INCOME TAX BENEFIT....................         2,017,600         (2,132,400)     (1,346,000)

    Income tax benefit (Note M).............................                --                 --         493,000
                                                              -----------------   ----------------   -------------

INCOME (LOSS) FROM CONTINUING
    OPERATIONS..............................................         2,017,600         (2,132,400)       (853,000)

INCOME (LOSS) FROM DISCONTINUED
    OPERATIONS NET OF INCOME TAX of $493,000 in 1998
    (Notes A, M and Q)......................................                --           (289,800)        676,600
                                                              -----------------   ----------------   -------------

NET INCOME (LOSS)...........................................      $  2,017,600       $ (2,422,200)    $  (176,400)
                                                              =================   ================   =============


NET INCOME (LOSS) PER COMMON SHARE (Notes L and N)
    From Continuing Operations
       Basic................................................      $       0.18       $      (0.21)    $     (0.09)
                                                              -----------------   ----------------   -------------
       Diluted..............................................      $       0.17       $      (0.21)    $     (0.09)
                                                              -----------------   ----------------   -------------

    From dicontinued operations
       Basic................................................                --              (0.03)           0.07
                                                              -----------------   ----------------   -------------
       Diluted..............................................                --              (0.03)           0.07
                                                              -----------------   ----------------   -------------

    Net income (loss) per common share
       Basic................................................      $       0.18       $      (0.24)    $     (0.02)
                                                              =================   ================   =============
       Diluted..............................................      $       0.17       $      (0.24)    $     (0.02)
                                                              =================   ================   =============

SHARES USED IN PER SHARE CALCULATION
       Basic................................................        11,326,600         10,000,000      10,000,000
                                                              =================   ================   =============
       Diluted..............................................        11,978,200         10,000,000      10,000,000
                                                              =================   ================   =============
</TABLE>

                See accompanying notes to financial statements.


                                      F-4
<PAGE>   35



                                NETsilicon, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                               COMMON STOCK
                                                                  ACCUMULATED                        TOTAL
                                                   ADDITIONAL        OTHER                        STOCKHOLDERS'     COMPREHENSIVE
                          ---------------------    PAID-IN       COMPREHENSIVE     ACCUMULATED       EQUITY            INCOME
                            SHARES     AMOUNT      CAPITAL           LOSS            DEFICIT        (DEFICIT)          (LOSS)
                          ----------  ---------  -------------  ----------------  -------------  ---------------   ---------------

<S>                       <C>          <C>         <C>                  <C>        <C>             <C>               <C>
BALANCE AT JANUARY 31,
 1997..................   10,000,000   $100,000    $ 2,463,000          $     --   $(1,800,500)    $    762,500

Net loss and
 comprehensive loss....           --         --             --                --      (176,400)        (176,400)     $   (176,400)
                          ----------  ---------  -------------  ----------------  -------------  ---------------   ===============

BALANCE AT JANUARY 31,
 1998..................   10,000,000    100,000      2,463,000                --    (1,976,900)         586,100

Net loss and
 comprehensive loss....           --         --             --                --    (2,422,200)      (2,422,200)     $ (2,422,200)
                          ----------  ---------  -------------  ----------------  -------------  ---------------   ===============

BALANCE AT JANUARY 31,
 1999..................   10,000,000    100,000      2,463,000                --    (4,399,100)      (1,836,100)

Sale of common stock,
 net of issuance costs
 of $788,000...........    3,537,500     35,400     22,213,700                --            --       22,249,100

Issuance of common
 stock options to non-
 employees.............           --         --         78,700                --            --           78,700

Net income.............           --         --             --                --     2,017,600        2,017,600      $  2,017,600

Unrealized loss on
 short-term invest-
 ments.................           --         --             --           (26,400)           --          (26,400)          (26,400)
                                                                                                                   ---------------
Comprehensive income...           --         --             --                --            --               --      $  1,991,200
                                                                                                                   ===============

                          ----------  ---------  -------------  ----------------  -------------  ---------------
BALANCE AT JANUARY 31,
 2000..................   13,537,500   $135,400    $24,755,400          $(26,400)  $(2,381,500)    $ 22,482,900
                          ==========  =========  =============  ================  =============  ===============
</TABLE>

                See accompanying notes to financial statements.


                                      F-5
<PAGE>   36


                                NETsilicon, INC.
                            STATEMENTS OF CASH FLOWS
                                    (Note O)

<TABLE>
<CAPTION>
                                                                                 Fiscal Year Ended January 31,
                                                                   ----------------------------------------------------------
                                                                        2000                1999                 1998
                                                                   ----------------   ------------------  -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>                   <C>                  <C>
    Net income (loss).........................................       $   2,017,600         $ (2,422,200)        $   (176,400)
    Adjustments to reconcile net income (loss) to.............
    net cash provided by (used in) operating activities:......
        Depreciation and amortization.........................           1,127,300              644,100              580,500
        Intangible assets valuation allowance.................                  --                   --              237,900
        Stock option compensation - non-employee..............              78,700                   --                   --
        Changes in operating assets and liabilities:..........
           Accounts receivable................................           1,938,500             (609,200)            (169,300)
           Inventories........................................            (553,100)          (1,161,900)              55,400
           Other current assets...............................            (560,300)             (66,000)             (87,000)
           Accounts payable...................................             223,400            1,012,500             (168,000)
           Other current liabilities..........................           2,164,600              686,100             (227,800)
                                                                   ----------------   ------------------  -------------------
              NET CASH PROVIDED BY (USED IN) OPERATING
                 ACTIVITIES...................................           6,436,700           (1,916,600)              45,300
                                                                   ----------------   ------------------  -------------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
    Purchases of short term investments.......................          (8,230,100)                  --                   --
    Purchases of property and equipment.......................          (1,386,400)            (328,100)            (604,800)
    Software development costs (Note B).......................            (938,100)            (723,600)            (556,000)
    Capitalized software transferred to Osicom................                  --              577,400                   --
    Other assets..............................................             (20,500)            (431,900)              16,100
                                                                   ----------------   ------------------  -------------------
              NET CASH USED IN INVESTING ACTIVITIES...........         (10,575,100)            (906,200)          (1,144,700)
                                                                   ----------------   ------------------  -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds (repayments) of affiliates advances..............          (5,147,900)           3,033,800              854,400
    Proceeds (repayments) of short-term debt, net.............          (2,411,800)             204,400              291,000
    Repayments of long-term debt..............................                  --              (17,900)            (254,700)
    Payments of capital lease obligation......................             (37,100)                  --                   --
    Proceeds from issuance of common stock....................          22,249,100                   --                   --
                                                                   ----------------   ------------------  -------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES.......          14,652,300            3,220,300              890,700
                                                                   ----------------   ------------------  -------------------


INCREASE (DECREASE) IN CASH AND EQUIVALENTS...................          10,513,900              397,500             (208,700)


CASH AND EQUIVALENTS - BEGINNING OF PERIOD....................             582,600              185,100              393,800
                                                                   ----------------   ------------------  -------------------


CASH AND EQUIVALENTS - END OF PERIOD..........................       $  11,096,500         $    582,600         $    185,100
                                                                   ================   ==================  ===================
</TABLE>

                 See accompanying notes to financial statements.


                                      F-6
<PAGE>   37



                          NOTES TO FINANCIAL STATEMENTS


         NETsilicon, Inc. (the "Company") develops and markets semiconductor
devices and software products designed to meet the networking requirements of
embedded systems. The Company's products are incorporated into the design of
embedded systems to provide them with the ability to communicate over
standards-based local-area networks ("LANS), wide-area networks ("WANS") and
the Internet, enabling the development of new embedded system applications.
The Company believes that it offers the first comprehensive solution that, in
conjunction with the physical interface and memory, encompasses all of the
hardware and software necessary to network enable embedded systems. The
Company's technology is designed to have broad applicability and therefore may
add network functionality to many embedded systems. The Company's products are
currently contained in a broad array of imaging products, including printers,
scanners, fax machines, copiers and multi-function peripherals manufactured by
22 original equipment manufacturers. The Company's products are also in various
stages of being incorporated into the design of products in additional markets,
such as industrial automation equipment, communication devices, data
acquisition and test equipment, Internet devices and utility monitoring
equipment.

         The accompanying financial statements are the responsibility of the
management of the Company.

A. THE COMPANY AND BASIS OF PRESENTATION

         The Company was incorporated in Massachusetts on April 17, 1984 under
the name of Digital Products, Inc. In September 1996, Osicom Technologies, Inc.
("Osicom") acquired sole ownership of the Company through a merger with a
newly-formed corporation in exchange for Osicom common stock in a transaction
accounted for as a pooling of interests. On September 15, 1999, the Company
completed an initial public offering of its common stock. At January 31, 2000,
Osicom held a 55.4% non-voting interest in the Company. The accompanying
financial statements represent only the assets, liabilities, operations and
financial position of the Company.

         The Company was comprised of two product lines: OEM and Stand-Alone
Print Server. The Company developed both board and system-level products to
satisfy the specific design needs of OEMs and stand-alone solutions for end-user
customers. The end-user customers were addressed through value-added resellers
and distributors; this sales activity is referred to as Stand-Alone Print Server
Line sales. The Company had decided to focus its resources on the future
development of its NET+Works family of products within the OEM line.

         As a result, in May 1998, the Company sold its Stand-Alone Print Server
Line to Osicom, which consisted principally of specific sales employees and
capitalized software related to Stand-Alone Print Server products. Based on this
transaction, the Company has accounted for the Stand-Alone Print Server Line as
a discontinued operation. The Company did not realize a gain or loss on sale as
Osicom purchased the capitalized software and other miscellaneous assets at
their book value as of the date of purchase. Sales, cost of sales, selling,
marketing, engineering, general and administrative, research and development
expenses included in discontinued operations within the Company's historical
Statements of Operations represent only those transactions specific to the
Stand-Alone Print Server Line. See Note Q.

         For periods prior to the Company's initial public offering in
September, 1999, general and administrative expenses include an amount that
management considered to be a reasonable allocation of general corporate
expenses. Management and administrative salaries were allocated based upon
estimated time devoted to Company's operations; all other allocations of general
corporate expenses, including public company costs, were based upon specific
identification of the relationship of Company's operations to the total
operations of Osicom. Included in selling and marketing and general and
administrative expenses are $0, $80,000 and $202,900 of allocated corporate
overhead expenses for the fiscal years ended January 31, 2000, 1999 and 1998,
respectively.


                                      F-7
<PAGE>   38

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Cash and Equivalents and Short-term Investment -- All highly liquid
debt instruments purchased with a remaining maturity of three months or less are
classified as cash equivalents. Management determines the classification of debt
and equity securities at the time of purchase and reevaluates the classification
at each balance sheet date. The Company classifies its short-term investments as
available-for-sale and therefore records them at fair value with unrealized
gains and losses, net of taxes, reported as a component of accumulated other
comprehensive income (loss). All available-for-sale securities are classified as
current assets. The cost of investments sold, for purposes of calculating
realized gains and losses, is determined using the first-in, first-out method.
Realized gains and losses are recognized in the statement of operations.

         Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles which require management to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, the disclosure of contingent assets and liabilities and the values of
purchased assets and assumed liabilities in acquisitions. Actual results could
differ from these estimates.

         Accounts and Notes Receivable -- In the normal course of business, the
Company extends unsecured credit to its customers related to the sales of
various products. Typically credit terms require payment within thirty days from
the date of shipment. The Company evaluates and monitors the creditworthiness of
each customer on a case-by-case basis.

         Allowance for Doubtful Accounts -- The Company provides an allowance
for doubtful accounts based on its continuing evaluation of its customers'
credit risk. The Company generally does not require collateral from its
customers.

         Inventory -- Inventory, comprised of raw materials, work in process,
finished goods and spare parts, is stated at the lower of cost (first-in,
first-out method) or market. Inventories consisted of:


                                                       January 31,
                                             --------------------------------
                                                 2000              1999
                                             --------------    --------------
 Raw material............................      $ 2,882,800       $ 1,603,400
 Work in process.........................        1,938,200         2,150,100
 Finished goods..........................          126,400           140,400
                                             --------------    --------------
                                                 4,947,400         3,893,900
 Less: Valuation reserve.................          625,000           124,600
                                             --------------    --------------
                                               $ 4,322,400       $ 3,769,300
                                             ==============    ==============


         Fair Value of Financial Instruments -- The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. Except for financial instruments issued in
conjunction with related party transactions management believes that there are
no material differences between the recorded book values of its financial
instruments and their estimated fair value. It is not practicable to estimate
the fair value of related party notes payable or notes receivable of the Company
due to their related party nature.

         Property and Equipment -- Property and equipment are recorded at
historical cost. Depreciation and amortization are provided over the estimated
useful lives of the individual assets or the terms of the leases (if shorter)
using accelerated and straight-line methods. Useful lives for property and
equipment range from three to seven years. Depreciation of leasehold
improvements is computed using the straight-line method over five years.

         Capitalized leases are initially recorded at the present value of the
minimum payments at the inception of the contracts, with an equivalent liability
categorized as appropriate under current or non-current liabilities. Such assets
are depreciated on the same basis as described above. Interest expense, which
represents the difference between the minimum payments and the present value of
the minimum payments at the inception of the lease, is allocated to accounting
periods using a constant rate of interest over the term of the lease.

         Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. The Company measures impairment loss
by comparing the fair


                                      F-8
<PAGE>   39

market value, calculated as the present value of expected future cash flows, to
its net book value. Impairment losses, if any, are recorded currently.

         Software Development -- Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred, otherwise, development costs that will become an integral part of the
Company's products are deferred in accordance with Statement of Financial
Accounting Standards ("SFAS") Nos. 2 and 86. The deferred costs are amortized
using the straight-line method over the remaining estimated two to three year
economic life of the product or the ratio that current revenues for the product
bear to the total of current and anticipated future revenues for that product.
Amortization expense for the fiscal years ended January 31, 2000, 1999 and 1998
was $637,800, $227,300 and $277,300, respectively. Accumulated amortization was
$108,600 and $206,200 as of January 31, 2000 and January 31, 1999, respectively.

         The recoverability of capitalized software costs are reviewed on an
ongoing basis primarily based upon projections of discounted future operating
cash flows from each software product line. The excess amount, if any, of the
remaining net book value over the calculated amount is fully reserved.

         Revenue Recognition -- The Company generally recognizes product revenue
upon shipment to its OEM customers. Revenue from service obligations is deferred
and recognized over the lives of the contracts. The Company accrues for warranty
costs, sales returns and other allowances at the time of shipment.

         Software Revenue Recognition -- The Company follows the Statement of
Position ("SOP") No. 97-2 "Software Revenue Recognition," which superceded SOP
No. 91-1 "Software Revenue Recognition" effective for transactions entered into
in fiscal years beginning after December 15, 1997. During 1998, SOP No. 98-9 was
issued. The provisions of SOP No. 98-9 amend certain provisions of SOP No. 98-4
and SOP 97-2.

         Income Taxes -- Income taxes are accounted for in accordance with SFAS
No. 109 "Accounting for Income Taxes." The statement employs an asset and
liability approach for financial accounting and reporting of deferred income
taxes generally allowing for recognition of deferred tax assets in the current
period for future benefit of net operating loss and research credit
carryforwards as well as items for which expenses have been recognized for
financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized if, on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.

         Advertising -- The Company expenses advertising expenditures as
incurred. Advertising expenses of the Company consist of allowances given to
customers as well as direct expenditures by the Company.

         Income and Loss Per Common Share -- In 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share" effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. SFAS 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement. It also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation
(See Note N). This statement also requires restatement of all prior-period EPS
data presented. The adoption had no effect on the calculation of EPS. Basic
income and loss per common share is computed by dividing net income or loss
available to common shareholders by the weighted average number of common
shares outstanding during each period presented. Diluted EPS is based on the
weighted average number of common shares outstanding as well as dilutive
potential common shares, which in the Company's case consist of convertible
securities outstanding, warrants to acquire common stock and shares issuable
under stock benefit plans. Potential common shares are not included in the
diluted per share computation if their effect would be anti-dilutive.

         Stock-Based Compensation -- The Company follows SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation. The Company has chosen to continue to account for employee
stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock (See Note L). As required by SFAS No. 123, the Company records
compensation for stock options issued to non-employees, in exchange for products
or services, utilizing the fair value method outlined in SFAS No. 123.


                                      F-9
<PAGE>   40

         Derivative Instruments -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities and requires all derivatives
to be recorded on the balance sheet at fair value. SFAS 133, as amended, is
effective for years beginning after June 15, 2000. Adoption of SFAS 133 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.

C.  SHORT-TERM INVESTMENTS

         Short-term investments consist of the following available for sale
securities as of January 31, 2000:

<TABLE>
<CAPTION>
                                                                                        Unrealized        Unrealized
                                                     Amortized                           Holding            Holding
                                                        Cost         Market Value         Gains             Losses
                                                    -------------    --------------    -------------     --------------
<S>                                                  <C>              <C>                   <C>              <C>
         Corporate bonds.......................      $2,038,700       $2,026,900         $   --              $11,800
         Medium and short-term notes...........       2,426,600        2,419,600             --                7,000
         Euro dollar bonds.....................       3,764,800        3,757,200             --                7,600
                                                    -------------    --------------    -------------     --------------
         Total short-term investments..........      $8,230,100       $8,203,700         $   --              $26,400
                                                    =============    ==============    =============     ==============
</TABLE>


         The corporate bonds, medium and short-term notes, and euro dollar bonds
all mature within one year. The Company realized no gains or losses on the sale
of short-term investments in 2000.


D. PROPERTY AND EQUIPMENT

         Property and equipment of the Company consisted of the following
components:

<TABLE>
<CAPTION>
                                                                    January 31,
                                                       ---------------------------------------
                                                              2000                 1999
                                                       -------------------    ----------------

<S>                                                          <C>                <C>
        Manufacturing, engineering and plant
        equipment and software....................           $ 4,286,200        $ 3,240,700
        Equipment held under capital lease........               240,200                 --
        Office furniture and fixtures.............               347,700            313,800
        Leasehold and building improvements.......               185,800            158,100
                                                       -------------------    ----------------
                    Total property and equipment..             5,059,900          3,712,600
        Less: Accumulated depreciation............            (3,237,600)        (3,027,400)
                                                       -------------------    ----------------
        Net book value............................           $ 1,822,300        $   685,200
                                                       ===================    ================
</TABLE>

         Depreciation expense was $489,500, $416,800 and $303,200 for the fiscal
years ended January 31, 2000, 1999 and 1998, respectively.


                                      F-10
<PAGE>   41


E. SHORT-TERM DEBT

         Short-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                 January 31,
                                                        -------------------------------
                                                            2000              1999
                                                        -------------     -------------
<S>                                                         <C>             <C>
         Floating interest rate loan (2.5% over
         lender's prime rate) secured by all the
         tangible assets of the Company; weighted
         average interest rate for the years ended
         January 31, 2000 and 1999 was 10.4% and
         10.5%, respectively......................
                                                            $779,700        $3,191,500
                                                        =============     =============
</TABLE>


         On October 11, 1996, the Company obtained a $3,000,000 line of credit
from Coast Business Credit that was subsequently increased to $5,000,000. The
line of credit is collateralized by substantially all the assets of the Company
and a guarantee by Osicom. Advances are limited to 80% of eligible receivables
and 30% of eligible inventory. The loan bears interest at 2.5% over the bank's
prime rate but not less than 8% (11% at January 31, 2000). The proceeds of this
loan were used to repay the line of credit outstanding at the time of the 1996
acquisition of the Company by Osicom under which the interest rate was 4% over
the lender's prime rate. The highest amount and average amounts of debt
outstanding were $4,021,500 and $2,277,100 during the year ended January 31,
2000, and $3,478,000 and $2,614,900 for the year ended January 31, 1999.

         Subsequent to January 31, 2000, the Company terminated its line of
credit with Coast Business Credit and is in the process of negotiating a more
favorable credit facility.


F. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:


                                                       January 31,
                                          ------------------------------------
                                               2000                1999
                                          ---------------     ----------------
  Commissions and royalties.........        $1,343,800            $  408,300
  Compensation and benefits.........           851,300               438,800
  Other.............................         1,049,600               233,000
                                          ---------------     ----------------
  Total.............................        $3,244,700            $1,080,100
                                          ===============     ================



G. DUE FROM OR TO AFFILIATES

         Due from affiliates at January 31, 1999 represents a receivable from an
Osicom subsidiary. Charges to this subsidiary for manufactured goods and other
expenses, including charges related to the sale of the Company's Stand-Alone
Print Server Line, for the years ended January 31, 2000 and 1999 were
approximately $1,893,800 and $1,410,500, respectively.


                                      F-11
<PAGE>   42

  Due to affiliates consist of:

                                                      January 31,
                                            ---------------------------------
                                                 2000              1999
                                            ---------------    --------------

  Due to Osicom..........................       $    --         $ 5,884,800
  Due to Uni-Precision...................        56,900             538,300
                                            ---------------    --------------
                                                $56,900         $ 6,423,100
                                            ===============    ==============

         From time to time the Company had received non-interest bearing
advances, including payments of expenses on behalf of the Company, from Osicom.
As of January 31, 1998, Osicom began accruing interest on the outstanding
balance at prime rate plus 3% per year. Interest expense attributable to
borrowings from Osicom amounted to $264,500 and $353,000 for the years ended
January 31, 2000 and 1999, respectively. The amount due to Osicom was repaid
following the Company's initial public offering in the fiscal year ended January
31, 2000.

         In the ordinary course of business a wholly-owned subsidiary of Osicom,
Uni-Precision Industrial, Ltd., manufactured and assembled products for the
Company on a competitive bid basis. During the years ended January 31, 2000,
1999 and 1998 purchases from Uni-Precision were $3,365,900, $1,557,200 and
$775,600 of which $56,900 and $538,300 were unpaid at January 31, 2000 and 1999.


H. LEASES AND OTHER COMMITMENTS

  (i) Leases

         Rental expense under operating leases was $455,800, $460,500 and
$330,800 for the years ended January 31, 2000, 1999 and 1998, respectively. The
table below sets forth minimum payments under operating leases with remaining
terms in excess of one year, at January 31, 2000:

                                                               OPERATING
                                                                 LEASES
                                                             --------------
    2001................................................        $ 615,600
    2002................................................          700,000
    2003................................................          699,300
    2004................................................           57,600
                                                             --------------
                                                              $ 2,072,500
                                                             ==============


         In July 1999, the Company entered into a capital lease for certain
equipment that expires in June 2002. At January 31, 2000, the net book value of
the equipment under the capital lease amounted to $210,200. The remaining
capital lease obligation is $203,100 at January 31, 2000.

  (ii) Other Commitments

         During the fiscal year ended January 31, 2000, the Company entered a
technology development agreement with an entity and made a payment of $500,000,
representing a deposit for future services, in accordance with the agreement.
This payment is included in other assets in the accompanying balance sheet at
January 31, 2000. Additional payments totaling $2,000,000 are required under
the agreement. The timing of the additional payments is based on delivery and
acceptance of product. Payments required under this agreement are for products
for which technological feasibility has been established. Accordingly, all
payments will ultimately be recorded as capitalized software costs and amortized
over the estimated two to three year lives of the underlying products.

(iii) Employment Contracts

         The Company has employment agreements with certain executives. An
agreement with the Vice President, Industrial Automation, Embedded Markets
Europe provides for a base annual salary of $125,000 subject to annual review by
the Compensation Committee and requires six months notice for termination
without cause. An agreement with the Vice President, Finance and Chief Financial
Officer contains provisions for the payment of one year's base annual salary and
the vesting of his unvested stock options if his employment is terminated
without cause. The Company has also agreed with the President that if the
Company is sold to, or merges with, a company unaffiliated with the Company or
Osicom, all of his stock options granted at the closing of the Company's initial
public offering will vest immediately.

I. LITIGATION

         The Company is not aware of any claims or actions pending against it.


                                      F-12
<PAGE>   43

J. STOCKHOLDERS' EQUITY

         (i) The Company amended its Certificate of Incorporation in August 1998
               to authorize the issuance of the following shares:
                 35,000,000 shares of Common Stock ($0.01 par value) 5,000,000
                 shares of Preferred Stock ($0.01 par value)

         The Company's Board of Directors has discretion to issue preferred
stock in such series and with such preferences as it may designate without the
approval of the holders of common shares. As of January 31, 2000 no such
designations have been made.

         (ii) On June 30, 1999, the Company effected a 100,000-for-one stock
split resulting in 10,000,000 shares being issued and outstanding post-split. In
connection with the split, Osicom exchanged its 10,000,000 shares of common
stock for 9,000,000 shares of non-voting and 1,000,000 shares of voting common
stock.

         All shareholders' equity accounts have been retroactively restated to
reflect the above changes.

         (iii) The Company completed an initial public offering on September 15,
1999 in which 6,037,500 million shares were offered at $7 per share (3,537,500
shares sold by the Company and 2,500,000 shares sold by Osicom). Proceeds to
the Company, net of offering costs, were approximately $22.2 million.

         At January 31, 2000, the Company had outstanding 6,037,500 shares of
voting common stock and 7,500,000 shares of non-voting common stock. All
outstanding non-voting common stock is held by Osicom. No voting common stock
was held by Osicom at January 31, 2000.


K. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS

         The Company does not have any capital stock transactions (other than
those discussed in Note J) or business acquisitions to disclose.


L. STOCK OPTION PLANS AND STOCK AWARD PLAN

         The Company adopted two stock option plans in August 1998: The 1998
Incentive and Non-Qualified Stock Option Plan and the 1998 Director Option Plan.
The purpose of these plans is to attract, retain, motivate and reward officers,
directors, employees and consultants of the Company to maximize their
contribution towards the Company's success. All options are granted at prices
not less than fair value at the date of grant. Such options generally become
exercisable over periods of one to four years and have terms varying up to 10
years. The Company's stock option plans authorize the issuance of 6,800,000
shares of common stock for the grant of stock options.

         Additionally, certain employees of the Company hold options to purchase
Osicom common stock under Osicom's stock option plans. All stock options were
granted at not less than the fair market value on the date of grant and all were
granted prior to the Company's initial public offering in September, 1999. Under
the Osicom plans, options generally vested over a two-year period from the date
of grant.

         The following table summarizes the activity in the Company's
stock option plans (excluding activity related to Osicom's stock option plans):

<TABLE>
<CAPTION>
                                                                                 Weighted Average
                                                         Number of Shares         Exercise Price
                                                        ------------------     -------------------

<S>                                                                <C>                     <C>
         Shares under option at January 31, 1999                       --                       --
           Granted......................................        3,320,778                  $  7.53
           Exercised....................................               --                       --
           Canceled.....................................           (5,325)                    7.00
                                                        -----------------
         Shares under option at January 31, 2000                3,315,453                     7.53
                                                        =================
</TABLE>


         Additional information about outstanding options to purchase the
Company's common stock at January 31, 2000 is as follows:


<TABLE>
<CAPTION>
                                                             OUTSTANDING                                    EXERCISABLE
                                           -------------------------------------------------    -----------------------------------
                                                                    WEIGHTED AVERAGE
                EXERCISE PRICE                             ---------------------------------                     WEIGHTED AVERAGE
                   PER SHARE                 SHARES        LIFE (YEARS)     EXERCISE PRICE        SHARES          EXERCISE PRICE
         ------------------------------    ------------    -------------    ----------------    ------------    -------------------
<S>                                            <C>              <C>                <C>                   <C>               <C>
         $7.00....................            3,102,703         9.62               $ 7.00            369,741          $  7.00
         $10.75 to $15.38.........              170,750         9.80                13.70              9,375            12.88
         $19.75 to $22.75.........               42,000         9.95                21.54                 --               --
                                           ------------                                         ------------
         $7.00 to $22.75..........            3,315,453         9.64                 7.53            379,116             7.15
                                           ============                                         ============
</TABLE>



<PAGE>   44


All stock options issued to employees have an exercise price not less than the
fair market value of the common stock on the date of grant, and in accordance
with the accounting for such options utilizing the intrinsic value method there
is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation related to the
grant of Company and Osicom options been determined based on the fair value at
the grant dates in accordance with the method delineated in SFAS No. 123, the
Company's income (loss) and per share amounts for the years ended January 31,
2000, 1999 and 1998 would have been revised to the pro forma amounts presented
below:

<TABLE>
<CAPTION>
                                                                     JANUARY 31,
                                               ---------------------------------------------------------
                                                     2000                1999                1998
                                               -----------------    ----------------    ----------------
<S>                                                 <C>                <C>                   <C>
         Net income (loss):
           As reported.................             $ 2,017,600        $(2,422,200)          $(176,400)
           Pro forma...................                 734,200        $(2,702,200)          $(528,300)
         Basic income (loss) per share:
           As reported.................             $      0.18        $     (0.24)          $   (0.02)
           Pro forma...................                    0.06        $     (0.27)          $   (0.05)
         Diluted income per share:
           As reported.................             $      0.17        $     (0.24)          $   (0.02)
           Pro forma...................                    0.06        $     (0.27)          $   (0.05)
</TABLE>

         The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for Netsilicon option grants during the year ended January
31, 2000: expected life of option 4.5 years, expected volatility of 45.8%,
risk-free interest rate of 5.88% and a 0% dividend yield. The fair value, at
date of grant, using these assumptions was $3.18 to $10.34 per option and the
weighted average was $3.42. The assumptions for grants of Osicom options for
the years ended January 31, 2000 and 1999 were: expected life of option 3
years, expected volatility of 45%, risk-free interest rate of 5.28% and a


                                      F-13
<PAGE>   45

0% dividend yield. The fair value, at date of grant, using these assumptions was
$1.23 to $9.52 per option and the weighted average was $5.57 in 2000 and $3.11
in 1999. The assumptions for grants of Osicom options for the year ended
January 31, 1998 were: expected life of option of 3 years, expected volatility
of 45%, risk-free interest rate of 5.35% and a 0% dividend yield. The fair
value, at date of grant, using these assumptions was $2.04 to $11.44 per
option and the weighted average was $5.27.

Nonemployee Stock Options Issued for Services

         During the year ended January 31, 2000, the Company issued
nonstatutory options to non-employees for the purchase of 25,000 shares of
common stock at a weighted average exercise price of $7.00 per share. Such
options were granted for services provided during the year. Accordingly, the
Company recorded the $78,700 fair value of such awards (using the Black-Scholes
option-pricing model) as an expense in the accompanying financial statements.

M. INCOME TAXES

         The Company's provision for taxes on income consists of the following:


<TABLE>
<CAPTION>
                                                                  YEARS ENDED JANUARY 31,
                                                      ------------------------------------------------
                                                          2000             1999             1998
                                                      -------------     -----------    ---------------
<S>                                                         <C>             <C>             <C>
               Income taxes:
                Current.......................              $   --          $   --          $      --
               Deferred.......................                  --              --                 --
                                                      -------------     -----------    ---------------
               Total..........................                  --              --                 --
                 Allocation of tax expense to
                 discontinued operations......                  --              --            493,000
                                                      -------------     -----------    ---------------
               Income tax benefit.............             $    --          $   --          $ 493,000
                                                      =============     ===========    ===============
</TABLE>


         The Company's operations generate permanent and temporary differences
for depreciation, amortization and valuation allowances. The Company has
recorded a 100% valuation allowance against its deferred tax assets, including
net operating loss and research credit carryforwards, in accordance with the
provisions of Statement of Financial Accounting Standards No. 109. Such
allowance is recognized if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.

         Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred tax assets and
liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                                                      JANUARY 31,
                                                            ---------------------------------
                                                                2000               1999
                                                            --------------    ---------------

<S>                                                             <C>                <C>
         Deferred tax assets:
           Valuation allowances....................             $ 559,800          $ 178,900
           Research and development credits........               221,000            210,200
           Tax loss carryforward...................             1,480,900          1,582,200
           Other...................................               150,500             39,800
                                                            --------------    ---------------
                       Gross deferred tax assets...             2,412,200          2,011,100
           Less: valuation allowance...............            (2,087,400)        (1,812,800)
                                                            --------------    ---------------
         Deferred tax asset........................               324,800            198,300
                                                            --------------    ---------------
         Deferred tax liabilities:
           Software developments costs.............              (324,800)          (198,300)
                                                            --------------    ---------------
                       Deferred tax liabilities....              (324,800)          (198,300)
                                                            --------------    ---------------
                       Net deferred tax asset
                       (liability).................             $      --          $      --
                                                            ==============    ===============
</TABLE>


         At January 31, 2000, the Company has federal net operating losses of
approximately $3,513,400 and research and development credits of $221,000 that
may be available to reduce future taxable income; these carryforwards expire at
various dates through 2014. The Internal Revenue Code of 1986, as amended,
reduces the extent to which NOLs and tax credit carryforwards may be utilized in
a single taxable year in the event there has been an ownership change of a
company as defined by applicable Code provisions. The acquisition of the Company
by Osicom in September 1996 resulted in such an ownership change. $558,900 of
the


                                      F-14
<PAGE>   46
 Company's NOLs expiring in the year ending January 31, 2010 are subject to
an annual limitation of approximately $290,000. Further ownership changes, as
defined by the Code, may reduce the extent to which any net operating losses and
credits may be utilized. These carryforwards expire as follows:


<TABLE>
<CAPTION>

                                          NOL             CREDITS
                                     -------------      ------------
<S>                                   <C>                 <C>
         2008.................        $       --          $ 54,800
         2009.................                --           102,300
         2010.................           384,800            63,900
         2013.................           998,100                --
         2014.................         2,130,500                --
                                     -------------      ------------
                                      $3,513,400          $221,000
                                     =============      ============
</TABLE>


         The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% is as follows:


<TABLE>
<CAPTION>
                                                                               YEARS ENDED JANUARY 31,
                                                                 -----------------------------------------------------
                                                                     2000               1999                1998
                                                                 --------------    ---------------     ---------------
<S>                                                                 <C>              <C>                 <C>
         Income (loss) before income taxes from continuing
         operations                                                 $2,017,600       $(2,132,400)        $(1,346,000)
                                                                 ==============    ===============     ===============

         Theoretical tax expense (benefit) at 35%......               $706,200       $  (746,300)        $  (471,100)
         Taxable income absorbed by former parent......               (988,600)               --                  --
         Impact of non-qualified stock options.........                     --           (24,300)            (60,000)
         Impact of state taxes and other...............                186,300          (284,900)            (83,600)
         Change in valuation allowance.................                 96,100         1,055,500             121,700
                                                                 --------------    ---------------     ---------------
         Income tax benefit............................             $       --       $        --         $  (493,000)
                                                                 ==============    ===============     ===============
</TABLE>


N. EARNINGS PER SHARE CALCULATION

         The following data show the amounts used in computing basic earnings
per share:

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED JANUARY 31,
                                                                -------------------------------------------------------
                                                                      2000                1999               1998
                                                                -----------------    ---------------     --------------

<S>                                                                   <C>              <C>                  <C>
         Net income (loss).................................           $2,017,600       $(2,422,200)         $(176,400)
         Less: preferred dividends.........................                   --                --                 --
                                                                -----------------    ---------------     --------------
         Net income (loss) available to
           common shareholders used
           in basic EPS....................................           $2,017,600       $(2,422,200)         $(176,400)
                                                                =================    ===============     ==============

         Average number of common
           shares used in basic EPS........................           11,326,600        10,000,000         10,000,000
                                                                =================    ===============     ==============
</TABLE>

         The Company had a net loss for the fiscal years ending January 31, 1999
and 1998. Accordingly, the effect of dilutive securities including warrants to
acquire common stock and stock options, vested and non-vested, are not included
in the calculations of EPS because their effect would be anti-dilutive. The
following data shows the effect on income and the weighted average number of
shares of dilutive potential common stock.


                                      F-15
<PAGE>   47
<TABLE>
<CAPTION>
                                                                    YEARS ENDED JANUARY 31,
                                                  ----------------------------------------------------------
                                                        2000                  1999                  1998
                                                  ----------------      ---------------        -------------
<S>                                                     <C>                <C>                    <C>
         Net income (loss) available to
           common shareholders used
           in basic EPS...................              $2,017,600         $(2,422,200)           $(176,400)
         Adjustments.....................                       --                  --                   --
                                                  ----------------      ---------------        -------------
         Net income (loss) available to
           common shareholders after
           assumed conversions of
           dilutive securities.............             $2,017,600         $(2,422,200)           $(176,400)
                                                  ================      ===============        =============

         Average number of common
           shares used in basic EPS                     11,326,600          10,000,000           10,000,000
         Effect of dilutive securities:
                       Stock options.........              651,600                  --                   --
                                                  ----------------      ---------------        -------------
         Average number of common
           shares and dilutive potential
           common stock used in
           dilutive EPS...................              11,978,200          10,000,000           10,000,000
                                                  ================      ===============        =============
</TABLE>

         The shares issuable upon exercise of options and warrants represent the
quarterly average of the shares issuable at exercise net of the shares assumed
to have been purchased, at the average market price for the period, with the
assumed exercise proceeds. Accordingly, options with exercise prices in excess
of the average market price for the period are excluded because their effect
would be anti-dilutive. For the year ended January 31, 2000, 42,000 options were
excluded from the calculation of diluted income per share, as their effect would
be anti-dilutive.


O. SUPPLEMENTAL CASH FLOW DISCLOSURES

         Cash paid for interest and income taxes are as follows:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED JANUARY 31,
                                             -----------------------------------------------------
                                                   2000               1999              1998
                                             -----------------    -------------     --------------

<S>                                                 <C>              <C>                <C>
        Interest........................            $898,400         $262,800           $118,500
        Income Taxes....................            $     --         $     --           $     --
                                             =================    =============     ==============
</TABLE>

         Non-cash investing and financing activities are as follows:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED JANUARY 31,
                                                       ----------------------------------------------------
                                                            2000                1999              1998
                                                       ----------------    ---------------     ------------

<S>                                                           <C>                  <C>              <C>
        Unrealized losses on investments..........            $(26,400)            $   --           $   --
        Common stock options issued to
        non-employees.............................             $78,700             $   --           $   --

        Capital leases entered into during the
        year......................................            $240,200             $   --           $   --
                                                       ================    ===============     ============
</TABLE>


                                      F-16
<PAGE>   48

P. CONCENTRATIONS OF CREDIT RISK

         Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. As regards the former, the Company places its temporary
cash investments with high credit financial institutions.

         Substantially all of the Company's OEM customers in the imaging market
are headquartered in Japan. The current economic conditions existing in many
Asian countries, including Japan, are uncertain and may have a significant
effect on the business operations of such OEM customers. Consequently, the
Company's dependence on its OEM customers in the imaging market in Japan and the
uncertain factors affecting Japan's economic condition could have a material
adverse effect on the Company's business, operating results, cash flows and
financial condition.

         Although the Company is directly affected by the economic well being of
its significant customers listed in the following tables, management does not
believe that significant credit risk exists at January 31, 2000. The Company
performs ongoing credit evaluations of its customers' financial condition and
does not require collateral.

         The following data shows the customers accounting for more than 10% of
net receivables:

<TABLE>
<CAPTION>
                                                 JANUARY 31,
                                          ------------------------
                                            2000            1999
                                          --------        --------

<S>                                         <C>             <C>
Customer A...............................   24.7%           13.7%
Customer B...............................   15.3            18.5
Customer C...............................   11.0             6.1
Customer D...............................    7.2            19.7
</TABLE>



         The following data shows the net sales to major customers (customers
who represented 10% or more of net sales during any of the periods shown) as a
percentage of net sales:


<TABLE>
<CAPTION>
                             YEARS ENDED JANUARY 31,
                       -------------------------------------
                         2000          1999          1998
                       ----------    ----------    ---------

<S>                      <C>           <C>           <C>
Customer A               25.8%          4.3%           --  %
Customer B               23.8           9.6           2.9
Customer E               12.5          11.6           7.1
Customer D                5.1          11.4           8.8
Customer F                2.7          11.6           8.7
Customer G                1.3           3.5          10.8
Customer H                0.7           7.2          13.8
Customer I                0.6           7.9          33.7
</TABLE>

Q. DISCONTINUED OPERATION

         Effective May 1, 1998 the Company sold its Stand-Alone Print Server
Line to Osicom as described in Note A. The agreement provides for the terms and
conditions of the transfer by the Company to Osicom of the right to manufacture
and sell Stand-Alone Print Server products. The agreement provides that Osicom
shall have the right to manufacture and sell the Company's Stand- Alone Print
Servers to distributors who will then market such products directly to the
consumer. The Company has assigned accounts receivables accruing after July 31,
1998, computer software and furniture, fixtures, equipment, software licenses
and


                                      F-17
<PAGE>   49

trademarks to Osicom. Osicom will pay any future licensing fees. Osicom has the
option to acquire inventory of Stand-Alone Print Servers at the Company's cost
during the period of the agreement. The agreement requires the Company to
provide certain engineering support to Osicom, for which Osicom shall pay 100%
of the actual cost of such support to the Company. It also requires Osicom to
assign all its rights in the trademark NET+ARM to the Company and requires
Osicom to use its best efforts to obtain a consent in writing from ARM Limited
to the assignment of the rights to NET+ARM. The agreement is for one year unless
earlier terminated by mutual agreement. Lastly, Osicom has agreed to cause
certain intellectual property previously owned by Osicom to be co-owned by the
Company and Osicom.

         The Company entered into a supply agreement with Osicom pursuant to
which the Company sells to Osicom several products, including the NET+ARM chips
for fixed prices. The prices are subject to change consistent with any changes
in the Company's costs for such products. The agreement also provides that
Osicom manufactures products for the Company at Osicom's best price, as
determined by mutual agreement. The agreement has a term of five years and does
not obligate Osicom to purchase any products from the Company or the Company to
utilize Osicom for manufacturing.

         The Company and Osicom entered into a one-year sublease agreement for
approximately 6,000 square feet of office space at the Company's facilities for
an annual rental of $88,000 per year payable quarterly. The sublease terminated
in September, 1999.


R. SEGMENT INFORMATION

Information in the table below is presented on the same basis utilized by the
Company to manage its business. Export sales and certain income and expense
items are reported in the geographic area where the final sale to customers is
made, rather than where the transaction originates.

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JANUARY 31,
                                               -----------------------------------------------------------
                                                    2000                 1999                  1998
                                               ---------------      ----------------     -----------------
<S>                                                                     <C>                   <C>
         Net sales:
           United States..................        $15,917,000           $ 6,604,600           $ 5,653,500
           Asia............................        14,153,100             5,277,400             1,150,700
           Europe.........................          1,575,700             1,475,000             1,089,500
           Other...........................           195,100                16,000                26,600
                                               ---------------      ----------------     -----------------
                      Total net sales.........    $31,840,900           $13,373,000           $ 7,920,300
                                               ===============      ================     =================
</TABLE>

         Other net sales includes sales to Australia and Canada for each period
presented. There were no long-lived assets at any foreign locations during the
years presented.


S. VALUATION AND QUALIFYING ACCOUNTS

         Changes in the inventory valuation reserve were as follows:

<TABLE>
<CAPTION>

<S>                                                                                <C>
                   Balance at January 31, 1997.........................          $ 391,000
                    Additions charged to costs and expenses............            146,000
                    Amounts used during year...........................           (345,000)
                                                                              ---------------
                   Balance at January 31, 1998.........................            192,000
                    Additions charged to costs and expenses............            131,800
                    Amounts used during year...........................           (199,200)
                                                                              ---------------
                   Balance at January 31, 1999.........................            124,600
                    Additions charged to costs and expenses............            554,500
                    Amounts used during year...........................            (54,100)
                                                                              ---------------
                   Balance at January 31, 2000.........................          $ 625,000
                                                                              ===============
</TABLE>


                                      F-18
<PAGE>   50
         Changes in the accounts receivable and sales valuation reserves were as
follows:

<TABLE>
<CAPTION>
<S>                                                                               <C>
                   Balance at January 31, 1997.........................          $ 280,000
                    Additions charged to costs and expenses............             22,600
                    Amounts used during year...........................           (285,500)
                                                                              ---------------
                   Balance at January 31, 1998.........................             17,100
                    Additions charged to costs and expenses............            312,000
                    Amounts used during year...........................            (29,100)
                                                                              ---------------
                   Balance at January 31, 1999.........................            300,000
                    Additions charged to costs and expenses............            443,900
                    Amounts used during year...........................            (40,900)
                                                                              ---------------
                   Balance at January 31, 2000.........................          $ 703,000
                                                                              ===============
</TABLE>


                                      F-19
<PAGE>   51

                                  EXHIBIT INDEX

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

<S>                       <C>
           3.1            Restated Articles of Organization of the Company, as amended (filed as Exhibit 3.1
                          to the Company's Registration Statement on Form S-1 File No. 333-62231, and
                          incorporated herein by reference)
           3.2            Restated By-Laws of the Company, as amended (filed as Exhibit 3.2 to the
                          Company's Registration Statement on Form S-1, File No. 333-62231, and
                          incorporated herein by reference)
           4              Specimen of stock certificate for shares of common stock (filed as Exhibit 4
                          to the Company's Registration Statement on Form S-1, File No. 333-62231, and
                          incorporated herein by reference)
           10.1           NETsilicon, Inc. Amended and Restated 1998 Incentive and Non-qualified Stock
                          Option Plan (filed as Exhibit 10.1 to the Company's Registration Statement on Form
                          S-1, File No. 333-62231, and incorporated herein by reference)
           10.2           NETsilicon, Inc. Amended and Restated 1998 Director Stock Option Plan (filed as
                          Exhibit 10.2 to the Company's Registration Statement on Form S-1, File No. 333-1328,
                          and incorporated herein by reference)
           10.3           Supply Agreement between Osicom Technologies, Inc. and the Company dated as of May
                          1, 1998 (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1
                          File No. 333-62231, and incorporated herein by reference)
           10.4           Intercompany Agreement between Osicom Technologies, Inc. and the Company dated as
                          of May 1, 1998 (filed as Exhibit 10.4 to the Company's Registration Statement on
                          Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.5           Agreement of Sublease between Osicom Technologies, Inc. and the Company dated as
                          of August 1, 1998 (filed as Exhibit 10.5 to the Company's Registration Statement
                          on Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.6           Loan and Security Agreement between the Company and Coast Business Credit dated
                          October 11, 1996, as amended (filed as Exhibit 10.6 to the Company's Registration
                          Statement on Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.7           Amendment No. 2 to the Loan and Security Agreement between the Company and Coast
                          Business Credit dated October 28, 1998 (filed as Exhibit 10.7 to the Company's
                          Registration Statement on Form S-1 File No. 333-62231, and incorporated herein by
                          reference)
           10.8           Employment Agreement between the Company and Michael Evensen dated October 1, 1998
                          (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 File
                          No. 333-62231, and incorporated herein by reference)
           10.10          Trademark License Agreement between ARM Limited and Osicom Technologies Inc. dated
                          July 14, 1998 (filed as Exhibit 10.10 to the Company's Registration Statement on
                          Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.11          Software License Agreement between Integrated Systems, Inc. and Osicom
                          Technologies Inc. dated November 14, 1997, as amended (filed as Exhibit 10.11 to
                          the Company's Registration Statement on Form S-1 File No. 333-62231, and
                          incorporated herein by reference)
           10.12          License Agreement between Peerless Systems Corporation and Osicom Technologies,
                          Inc., DPI Print Server Division for Peerless Standard Input/Output (PSIO) dated
                          August 10, 1998 (filed as Exhibit 10.12 to the Company's Registration Statement on
                          Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.13          Novell Embedded Systems Technology Master Agreement between Novell, Inc. and
                          Digital Products, Inc., dated December 1, 1995, as amended (filed as Exhibit 10.13
</TABLE>


<PAGE>   52

<TABLE>
<CAPTION>
<S>                       <C>
                          to the Company's Registration Statement on Form S-1 File No. 333-62231, and
                          incorporated herein by reference)
           10.14          Letter Agreement Amendment to Intercompany Agreement between Osicom Technologies,
                          Inc. and the Company (filed as Exhibit 10.14 to the Company's Registration
                          Statement on Form S-1 File No. 333-62231, and incorporated herein by reference)
           10.15          Letter Agreement between the Company and Cornelius Peterson VIII (filed as Exhibit
                          10.15 to the Company's Registration Statement on Form S-1 File No. 333-62231, and
                          incorporated herein by reference)
           23.1           Consent of BDO Seidman, LLP, independent accountants
           27.1           Financial Data Schedule
</TABLE>