##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

|           |  |                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------
|          
|          
|          
|          
|(Mark One) |  |                                                                                          
|[X]        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended June 30, 1999                                             
|           |  | OR                                                                                       
|          
|          
|          
|          
|[  ]       |  | 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 000-26485

PARADYNE NETWORKS, INC.

(Exact name of registrant as specified in its
charter)




---

|                                |  |                    
|------------------------------- |  | -------------------
|                               
|                               
|                               
|                               
|Delaware                        |  | 75-2658219         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

8545 126th Avenue North

Largo, Florida 33773


(727) 530-2000


(Address, including zip code, of principal
executive offices and

Registrants telephone number, including zip
code)




---

Indicate by check mark whether 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 report(s)), and (2) has been
subject to such filing requirements for the past 90 days.

Yes  [X]  No  [   ].

The number of shares outstanding of the Registrants Common
Stock as of July 31, 1999 was 30,634,473.



---






---

TABLE OF CONTENTS



|                             |                                                                                               |                                            |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Financial Statements                                                                 
|                             |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME         
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                             | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                             | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II -- OTHER INFORMATION
|                             | Item 1. LEGAL PROCEEDINGS                                                                    
|                             | Item 2. CHANGES IN SECURITIES                                                                
|                             | Item 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                             | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                             | Item 5. OTHER INFORMATION                                                                    
|                             | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  



---



PARADYNE NETWORKS, INC.

For the Period Ended June 30, 1999

INDEX

|                              |  |                                                                                                       |    |      |    | 
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                       |    | Page
|                              |  |                                                                                                       |    |     
|                             
|                             
|                             
|                             
|PART I  FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements:                                                                                 |    |      |    | 
|                             
|                             
|                             
|                             
|                              |  | Consolidated Balance Sheets at June 30, 1999 and
	December  31, 1998                                  |    |      | 1  | 
|                             
|                             
|                             
|                             
|                              |  | Consolidated Statements of Income for the Three and Six Months
	Ended June 30, 1999 and June 30, 1998 |    |      | 2  | 
|                             
|                             
|                             
|                             
|                              |  | Consolidated Statements of Cash Flows  Six Months
	Ended June 30, 1999 and June 30, 1998             |    |      | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Notes to Consolidated Financial Statements                                                            |    |      | 4  | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations                |    |      | 7  | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                            |    |      | 12 | 
|                             
|                             
|                             
|                             
|PART II  OTHER INFORMATION   
|                             
|                             
|                             
|                             
|Item 1.                       |  | Legal Proceedings                                                                                     |    |      | 24 | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Changes in Securities                                                                                 |    |      | 24 | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Defaults upon Senior Securities                                                                       |    |      | 24 | 
|                             
|                             
|                             
|                             
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                   |    |      | 24 | 
|                             
|                             
|                             
|                             
|Item 5.                       |  | Other Information                                                                                     |    |      | 25 | 
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                      |    |      | 25 | 
|                             
|                             
|                             
|                             
|SIGNATURES                    |  |                                                                                                       | 26 |     



---



##### Table of Contents









PARADYNE NETWORKS, INC.






CONSOLIDATED BALANCE SHEETS


(In Thousands)


|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------ |  | ------ | ------ | ------ | 
|                                                                                                                                        |                                                                                                                                                                                 | June 30,                                   |        | December 31,
|                                                                                                                                        |                                                                                                                                                                                 | 1999                                       |        | 1998        
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |             
|                                                                                                                                        |                                                                                                                                                                                 | Unaudited                                  |        |             
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|ASSETS                                                                                                                                 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|CURRENT ASSETS:                                                                                                                         |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Cash and cash equivalents                                                                                                                                                       |                                            | $      | 3,663        |        |  | $      | 2,356  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Accounts receivable less allowance for doubtful accounts of
	$3,351 and of $3,007 at June 30, 1999 and December 31,
	1998, respectively                                         |                                            |        | 26,814       |        |  |        | 29,641 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Accounts receivable from affiliates                                                                                                                                             |                                            |        | 2,199        |        |  |        | 721    |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other receivables                                                                                                                                                               |                                            |        |             |        |  |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Income tax receivables                                                                                                                                                          |                                            |        | 3,379        |        |  |        | 4,230  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Inventories (Note 2)                                                                                                                                                            |                                            |        | 15,849       |        |  |        | 16,997 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Prepaid expenses & other current assets                                                                                                                                         |                                            |        | 1,197        |        |  |        | 1,808  |       
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total current assets                       |        |              | 53,101 |  |        |        | 55,753 | 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Property plant & equipment, less accumulated depreciation of
	$12,663 and $10,750 at June 30, 1999 and December 31,
	1998, respectively |                                                                                                                                                                                 |                                            | 15,786 |              |        |  | 16,103 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Deferred tax assets                                                                                                                     |                                                                                                                                                                                 |                                            | 1,141  |              |        |  | 1,143  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Other assets                                                                                                                            |                                                                                                                                                                                 |                                            | 1,705  |              |        |  | 2,064  |       
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total assets                               |        | $            | 71,733 |  |        | $      | 75,063 | 
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                   
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|CURRENT LIABILITIES:                                                                                                                    |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Accounts payable                                                                                                                                                                |                                            | $      | 17,911       |        |  | $      | 17,205 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Current portion of debt                                                                                                                                                         |                                            |        | 9,284        |        |  |        | 16,483 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Deferred tax liability                                                                                                                                                          |                                            |        | 1,914        |        |  |        | 2,357  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Payroll and benefit related liabilities                                                                                                                                         |                                            |        | 4,686        |        |  |        | 6,263  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other current liabilities                                                                                                                                                       |                                            |        | 5,213        |        |  |        | 5,063  |       
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total current liabilities                  |        |              | 39,008 |  |        |        | 47,371 | 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Long term debt                                                                                                                          |                                                                                                                                                                                 |                                            | 362    |              |        |  | 353    |       
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total liabilities                          |        |              | 39,370 |  |        |        | 47,724 | 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Stockholders Equity:                                                                                                                   |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Common stock, par value $0.001; 60,000,000 shares authorized,
	26,406,608 and 25,668,723 shares issued and outstanding as of
	June 30, 1999 and December 31, 1998, respectively |                                            |        | 26           |        |  |        | 26     |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Additional paid-in capital                                                                                                                                                      |                                            |        | 27,716       |        |  |        | 21,058 |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Deferred compensation                                                                                                                                                           |                                            |        | (2,808       | )      |  |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Retained earning (deficit)                                                                                                                                                      |                                            |        | 8,397        |        |  |        | 6,639  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Note receivable for common stock (Note 5)                                                                                                                                       |                                            |        | (1,228       | )      |  |        | (150   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Cumulative translation adjustment                                                                                                                                               |                                            |        | 260          |        |  |        | (234   | )     
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total stockholders equity                 |        |              | 32,363 |  |        |        | 27,339 | 
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       
|                                                                                                                                        |                                                                                                                                                                                 | Total liabilities and stockholders equity |        | $            | 71,733 |  |        | $      | 75,063 | 
|                                                                                                                                        |                                                                                                                                                                                 |                                            |        |              |        |  |        |       

See accompanying Notes to Consolidated Financial Statements

1



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##### Table of Contents



PARADYNE NETWORKS, INC.






CONSOLIDATED STATEMENTS OF INCOME


(Thousands except per share amounts)


(Unaudited)


|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |        |        | 
|---------------------------------------------------- | ------------------------------------------- | ------------------------ | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------- | ------- | - | ------ | ------ | ------ | 
|                                                     |                                             |                          |        |                 
|                                                     |                                             | Three Months Ended       |        | Six Months Ended
|                                                     |                                             | June 30,                 |        | June 30,        
|                                                     |                                             |                          |        |                 
|                                                     |                                             | 1999                     |        | 1998             |        | 1999 |        | 1998  
|                                                     |                                             |                          |        |                  |        |      |        |       
|Revenues:                                            |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Equipment Sales                             |                          | $      | 52,164           |        |      | $      | 45,224 |        |   | $      | 103,133 |         |   | $      | 87,879 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Services                                    |                          |        | 416              |        |      |        | 644    |        |   |        | 891     |         |   |        | 1,028  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Royalties                                   |                          |        | 200              |        |      |        | 350    |        |   |        | 2,818   |         |   |        | 350    |       
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                     |                                             | Total revenues           |        |                  | 52,780 |      |        |        | 46,218 |   |        |         | 106,842 |   |        |        | 89,257 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Cost of sales:                                       |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Equipment                                   |                          |        | 29,930           |        |      |        | 23,822 |        |   |        | 59,740  |         |   |        | 45,744 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Service                                     |                          |        | 169              |        |      |        | 182    |        |   |        | 325     |         |   |        | 307    |       
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                     |                                             | Total cost of sales      |        |                  | 30,099 |      |        |        | 24,004 |   |        |         | 60,065  |   |        |        | 46,051 | 
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|Gross margin                                         |                                             |                          | 22,681 |                  |        |      | 22,214 |        |        |   | 46,777 |         |         |   | 43,206 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Operating expenses:                                  |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research and development                    |                          |        | 9,067            |        |      |        | 8,728  |        |   |        | 17,835  |         |   |        | 17,282 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Selling, general & administrative           |                          |        | 13,800           |        |      |        | 14,653 |        |   |        | 27,663  |         |   |        | 28,063 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Amortization of deferred stock compensation |                          |        | 135              |        |      |        | 0      |        |   |        | 135     |         |   |        | 0      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Restructuring charges                       |                          |        | 0                |        |      |        | 59     |        |   |        | 0       |         |   |        | 59     |       
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                     |                                             | Total operating expenses |        |                  | 23,002 |      |        |        | 23,440 |   |        |         | 45,633  |   |        |        | 45,404 | 
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|Operating Income (loss)                              |                                             |                          | (321   | )                |        |      | (1,226 | )      |        |   | 1,144  |         |         |   | (2,198 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Other (income) expenses:                             |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest                                    |                          |        | 257              |        |      |        | 485    |        |   |        | 691     |         |   |        | 1,040  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                  |                          |        | 312              |        |      |        | 101    |        |   |        | (2,540  | )       |   |        | 67     |       
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|Income (loss) before provision for income tax        |                                             |                          | (890   | )                |        |      | (1,812 | )      |        |   | 2,993  |         |         |   | (3,305 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Provision (benefit) for income tax                   |                                             |                          | (280   | )                |        |      | (415   | )      |        |   | 1,235  |         |         |   | (757   | )     
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|Net Income (Loss)                                    |                                             | $                        | (610   | )                |        | $    | (1,397 | )      |        | $ | 1,758  |         |         | $ | (2,548 | )     
|                                                     |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|Weighted average number of common shares outstanding |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                       |                          |        | 26,356           |        |      |        | 25,610 |        |   |        | 26,124  |         |   |        | 25,606 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Diluted                                     |                          |        | 26,356           |        |      |        | 25,610 |        |   |        | 27,477  |         |   |        | 25,606 |       
|Income (loss) per common share                       |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Basic                                       |                          | $      | (0.02            | )      |      | $      | (0.05  | )      |   | $      | 0.07    |         |   | $      | (0.10  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Diluted                                     |                          | $      | (0.02            | )      |      | $      | (0.05  | )      |   | $      | 0.06    |         |   | $      | (0.10  | )     
|Consolidated Statements of Comprehensive Income      |                                             |                          |        |                  |        |      |        |        |        |   |        |         |         |   |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|Net income                                           |                                             |                          | (610   | )                |        |      | (1,397 | )      |        |   | 1,758  |         |         |   | (2,548 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Cumulative translation adjustment                    |                                             |                          | 430    |                  |        |      | (149   | )      |        |   | 494    |         |         |   | (121   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Comprehensive Income                                 |                                             |                          | (180   | )                |        |      | (1,546 | )      |        |   | 2,252  |         |         |   | (2,669 | )     

See accompanying Notes to Consolidated Financial Statements.

2



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##### Table of Contents



PARADYNE NETWORKS, INC.






CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)


|                                                                                                |                                                     |                                                     |       |        |        |   |       |        |        |  
|----------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ----- | ------ | ------ | - | ----- | ------ | ------ | -
|                                                                                                |                                                     |                                                    
|                                                                                                |                                                     | Six Months Ended                                   
|                                                                                                |                                                     | June 30,                                           
|                                                                                                |                                                     |                                                    
|                                                                                                |                                                     | 1999                                                |       | 1998  
|                                                                                                |                                                     |                                                     |       |       
|Cash flows provided by (used in) operating activities:                                          |                                                     |                                                     |       |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Net Income (Loss)                                   |                                                     | $     | 1,758  |        |   | $     | (2,548 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Adjustments to reconcile net income (loss) to cash provided
	by (used in) operating activities: |                                                     |                                                     |       |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | (Gain)/loss on Sale of Assets                       |                                                     |       | 4      |        |   |       | (38    | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Increase/(decrease) in allowance for bad debts      |                                                     |       | 344    |        |   |       | 1,825  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Depreciation & Amortization                         |                                                     |       | 2,967  |        |   |       | 2,480  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Deferred income taxes                               |                                                     |       | (441   | )      |   |       | (1,056 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|(Increase) decrease in assets                                                                   |                                                     |                                                     |       |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Receivables                                         |                                                     |       | 2,483  |        |   |       | 5,864  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accounts receivable from affiliates                 |                                                     |       | (1,478 | )      |   |       | (56    | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Income tax receivable                               |                                                     |       | 851    |        |   |       | (24    | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Inventories                                         |                                                     |       | 1,148  |        |   |       | (2,516 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Prepaid expenses and other current assets           |                                                     |       | 611    |        |   |       | 198    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Other long term assets                              |                                                     |       | 53     |        |   |       | 730    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Increase (decrease) in Liabilities                                                              |                                                     |                                                     |      |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accounts payable                                    |                                                     |       | 706    |        |   |       | 4,372  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Payroll related                                     |                                                     |       | (1,577 | )      |   |       | (1,345 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Other current liabilities                           |                                                     |       | 150    |        |   |       | (1,762 | )     
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|                                                                                                |                                                     | Net cash provided by operating activities           |       |        | 7,579  |   |       |        | 6,124  |  
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Cash flows provided by (used in) investing activities:                                          |                                                     |                                                     |       |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Capital expenditures                                |                                                     |       | (2,236 | )      |   |       | (3,733 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Proceeds from sale of property, plant and equipment |                                                     |       | 23     |        |   |       | 429    |       
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|                                                                                                |                                                     | Net cash (used in) investing activities             |       |        | (2,213 | ) |       |        | (3,304 | )
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Cash flows provided by (used in) financing activities:                                          |                                                     |                                                     |       |        |        |   |       |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Proceeds from debt issued to parent                 |                                                     |       |        |        |   |       | 5,000  |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Payment of acquisition costs                        |                                                     |       |        |        |   |       | (83    | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Proceeds from stock options exercised               |                                                     |       | 2,637  |        |   |       | 67     |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | (Repayment of) bank line of credit                  |                                                     |       | (7,208 | )      |   |       | (8,421 | )     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Borrowings under other debt obligations             |                                                     |       | 329    |        |   |       | 837    |       
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Repayment of other debt obligations                 |                                                     |       | (311   | )      |   |       | (556   | )     
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|                                                                                                |                                                     | Net cash provided by (used in) financing activities |       |        | (4,553 | ) |       |        | (3,156 | )
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Effect of foreign exchange rate changes on cash                                                 |                                                     |                                                     | 494   |        |        |   | (121  | )     
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Net Increase (decrease) in cash and cash equivalents                                            |                                                     |                                                     | 1,307 |        |        |   | (457  | )     
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Cash and cash equivalents at beginning of period                                                |                                                     |                                                     | 2,356 |        |        |   | 3,240 |       
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Cash and cash equivalents at end of period                                                      |                                                     | $                                                   | 3,663 |        |        | $ | 2,783 |       
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|Supplemental disclosure of cash flow information:                                               |                                                     |                                                     |      |        |        |   |      |       
|Non-cash transactions                                                                           |                                                     |                                                     |       |        |        |   |       |       
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       
|                                                                                                | Stock issued for Note                               |                                                     | $     | 1,078  |        |   |       |       |       
|                                                                                                |                                                     |                                                     |       |        |        |   |       |       

See accompanying Notes to Consolidated Financial Statements

3



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##### Table of Contents



PARADYNE NETWORKS, INC.






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BUSINESS AND BASIS OF PRESENTATION

Paradyne Networks, Inc. (the Company) designs,
manufactures, and markets data communications and networking
products for network service providers and business customers.
The Companys products enable business customers to
efficiently access wide area network services and allow network
service providers to provide customers with high-speed services
for data, voice, video and multimedia applications.

The accompanying unaudited consolidated financial statements
include the results of the Company and its wholly-owned
subsidiaries: Paradyne Corporation; Paradyne Canada Ltd.;
Paradyne International Ltd.; Paradyne Worldwide Corp. (formerly
Paradyne Far East Corporation); Ark Electronic Products Inc.;
Paradyne GmbH; and Paradyne International Sales Ltd. Intercompany
 accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not contain all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. However,
 in the opinion of management, such statements reflect all
adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of interim period results.
These financial statements should be read in conjunction with the
 December 31, 1998 audited financial statements and notes
thereto included in the Companys Registration Statement on
Form S-1 as filed with the Securities and Exchange
Commission on July 15, 1999 (the IPO Registration
Statement) for its initial public offering of Common Stock
(the IPO.)

The results of operations for the interim periods are not
necessarily indicative of results to be expected for the entire
year or for other future interim periods.

2.  INVENTORY

Inventories at June 30, 1999 and December 31, 1998 are
summarized as follows (in thousands):

|                |  |          |        |              |  |   |        | 
|--------------- |  | -------- | ------ | ------------ |  | - | ------ | 
|                |  | June 30, |        | December 31,
|                |  | 1999     |        | 1998        
|                |  |          |        |             
|Raw materials   |  | $        | 9,988  |              |  | $ | 11,064 | 
|               
|               
|               
|               
|Work-in-process |  |          | 1,953  |              |  |   | 1,970  | 
|               
|               
|               
|               
|Finished goods  |  |          | 3,908  |              |  |   | 3,063  | 
|                |  |          |        |              |  |   |        | 
|                |  | $        | 15,849 |              |  | $ | 16,997 | 
|                |  |          |        |              |  |   |        | 

4



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##### Table of Contents



PARADYNE NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

3.  EARNINGS PER SHARE

The following table summarizes (in thousands, except per share
data) the weighted average shares outstanding for basic and
diluted earnings per share for the periods presented.

|                                              |                                  |                    |      |                  |   |      |        |        |   |   |       |        |   |   |        |        |  
|--------------------------------------------- | -------------------------------- | ------------------ | ---- | ---------------- | - | ---- | ------ | ------ | - | - | ----- | ------ | - | - | ------ | ------ | -
|                                              |                                  |                    |      |                 
|                                              |                                  | Three Months Ended |      | Six Months Ended
|                                              |                                  | June 30,           |      | June 30,        
|                                              |                                  |                    |      |                 
|                                              |                                  | 1999               |      | 1998             |   | 1999 |        | 1998  
|                                              |                                  |                    |      |                  |   |      |        |       
|Net Income (Loss)                             |                                  | $                  | (610 | )                |   | $    | (1,397 | )      |   | $ | 1,758 |        |   | $ | (2,548 | )     
|Weighted average of common shares outstanding |                                  |                    |      |                  |   |      |        |        |   |   |       |        |   |   |        |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic                            |                    |      | 26,356           |   |      |        | 25,610 |   |   |       | 26,124 |   |   |        | 25,606 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Dilutive effect of stock options |                    |      |                  |   |      |        |        |   |   |       | 1,353  |   |   |        |        |  
|                                             
|                                             
|                                             
|                                             
|                                              | Diluted                          |                    |      | 26,356           |   |      |        | 25,610 |   |   |       | 27,477 |   |   |        | 25,606 |  
|                                             
|                                             
|                                             
|                                             
|Earnings per common share:                    |                                  |                    |      |                  |   |      |        |        |   |   |       |        |   |   |        |       
|                                             
|                                             
|                                             
|                                             
|                                              | Basic                            |                    | $    | (.02             | ) |      | $      | (.05   | ) |   | $     | .07    |   |   | $      | (.10   | )
|                                             
|                                             
|                                             
|                                             
|                                              | Dilutive effect of stock options |                    |      |                  |   |      |        |        |   |   | $     | (.01   | ) |   |        |        |  
|                                             
|                                             
|                                             
|                                             
|                                              | Diluted                          |                    | $    | (.02             | ) |      | $      | (.05   | ) |   | $     | .06    |   |   | $      | (.10   | )

Options are not included in the 1998 or the three months ended
June 30, 1999 calculations of diluted loss per share due to
their antidilutive effect.

In June, 1999 Paradyne Networks, Inc. filed an amendment to its
Certificate of Incorporation providing that effective upon the
Initial Public Offering every two outstanding shares of the
Companys common stock shall be combined into one share of
common stock. The amendment provided that the Company has
60,000,000 authorized common shares at a par value of $.001. All
earnings per share data has been adjusted to reflect this reverse
 split.

4.  STOCK OPTION PLAN

During the second quarter of 1999, the Company issued options to
acquire 235,000 shares of the Companys common stock at
prices ranging from $5 to $9 per share with a fair market value
of $11.70 per share. Deferred stock compensation related to these
 options in the amount of $1.5 million is being ratably amortized
 over the vesting period.

During the second quarter of 1999, various executives and key
employees of the Company issued promissory notes, totaling
$139,000 to the Company in connection with the purchase of 44,219
 shares of common stock. The principal balance of the notes and
the related accrued interest at rates ranging from 4.9% to 5.15%
are payable at the earlier of the termination of employment or
five years from the date of the note unless otherwise stated. The
 notes which are held in escrow by the Company are secured by the
 shares of common stock acquired with the notes. All unvested
shares purchased with the notes are subject to repurchase by the
company if the respective executive or key employee terminates
their employment before becoming fully vested. The balance of all
 notes receivable in connection with the purchase of common stock
 as of June 30, 1999 was $1.2 million plus accrued interest.

5.  SUBSEQUENT EVENTS

On July 15,1999 the Company raised $63.2 million, net of
underwriting fees, in an initial public offering. On
July 21, 1999, $10.4 million of the proceeds from this
offering were used to pay off the outstanding balance under the
line of credit with Bank of America NT & SA. While this line
of credit continues to be available to the Company, there have
been no borrowings under this line of credit since July 21,
1999.

5



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##### Table of Contents



PARADYNE NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

In July, 1999 the Company recorded a deferred stock compensation
charge in the amount of $1.2 million principally resulting from
the vesting, as of the initial public offering, of stock options
to acquire 76,000 shares of the Companys common stock at
prices ranging from $2 to $9.

6



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##### Table of Contents



PARADYNE NETWORKS, INC.






|         |                                                                                       
|-------- | --------------------------------------------------------------------------------------
|ITEM  2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS

The following discussion and other sections of this
Form 10-Q may contain forward-looking statements that
involve risks and uncertainties. All statements regarding future
events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking
 statements. In many cases, you can identify forward-looking
statements by terminology, such as may,
will, should, expects,
intends, plans, anticipates,
believes, estimates,
predicts, potential, or
continue, or the negative of such terms and other
comparable terminology. These statements are only predictions.
Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those
projected in the forward-looking statements.

Overview

We are a leading developer, manufacturer and distributor of
broadband and narrowband network access products for network
service providers (NSPs) and business customers. We
offer solutions that enable business class, service level
managed, high-speed connectivity over the existing telephone
network infrastructure and provide for cost-effective access
speeds of up to 45 MBPS. We market and sell our products
worldwide to NSPs and business customers through a multi-tier
distribution system that includes direct sales, strategic partner
 sales, NSP sales and traditional distributor or value added
reseller (VAR) sales. We estimate that direct and
indirect sales to, and services performed for Lucent accounted
for approximately 27% of our total revenues for the first six
months of 1999. Sales to Rhythms, an NSP, accounted for
approximately 29% of our total revenue during the first half of
1999. A loss or a significant reduction or delay in sales to any
of our major customers could materially and adversely affect our
business, financial condition and results of operations.

We generally recognize revenue from equipment sales upon
shipment. Estimated sales returns based on historical experience
by product are recorded at the time the product revenue is
recognized. Charges for warranty work are included in cost of
equipment sales. Revenue from services, which consists mainly of
repair of out-of-warranty products, is recognized when the
services are performed and all substantial contractual
obligations have been satisfied. License and royalty revenues are
 recognized when the Company has completed delivery of technical
specifications and performed substantially all required services
under the related agreement.

7



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##### Table of Contents



PARADYNE NETWORKS, INC.

Three Months Ended June 30, 1999 Compared to Three Months
 Ended June 30, 1998

Revenues.Total revenues increased $6.6 million, or 14.2%
to $52.8 million for the three months ended June 30, 1999
from $46.2 million for the same period in 1998. The increase was
primarily due an increase in the volume of sales of our broadband
 access products. As a percentage of total revenues, equipment
sales were 98.8% of total revenues for the three months ended
June 30, 1999 compared to 97.8% for the three months ended
June 30, 1998. The change in percentage is mostly due to a
decrease in royalty and service revenues.

Gross Margin.Gross margin increased $.5 million or 2% to
$22.7 million for the three months ended June 30, 1999 from
$22.2 million for the three months ended June 30, 1998. Most
 of the increase results from increased sales of our broadband
access products. Gross margin as a percentage of total revenues
decreased to 43.0% in 1999 from 48.1% in 1998 primarily because
our newer, competitively priced products comprised a greater
portion of our total revenues. Gross margin for equipment sales
increased $.8 million reflecting increased sales at lower margins
 resulting from the competitive pricing of recently introduced
products.

Research and Development Expenses.Research and
development expenses increased $.3 million, or 3.9%, to $9.1
million for the three months ended June 30, 1999 from $8.7
million in 1998. As a percentage of total revenues, research and
development expense decreased to 17.2% for the first three months
 of 1999 from 18.9% in the first quarter of 1998. This decrease
is primarily attributable to the 14.2% increase in revenue during
 the period.

Selling, General and Administrative (SG&A)
Expenses.SG&A expenses decreased $.9 million, or 5.8%,
to $13.8 million in the three months ended June 30, 1999
from $14.7 million for the three months ended June 30, 1998.
 The decrease is primarily attributable to a $.7 million decrease
 in professional and contractor fees and a $.5 million decrease
in rental expenses, offset by a $.3 million increase in expenses
related to consignment of equipment to customers. SG&A
expense as a percentage of revenue declined from 31.7% for the
three months ended June 30, 1998 to 26.1% for the three
months ended June 30, 1999. This decrease resulted due to
the 14.2% increase in revenue during the period as well as the
above-described reduction in expenses.

Amortization of Deferred Stock Compensation.Deferred
stock compensation is related to the granting of stock options to
 key employees at prices deemed to be below fair market value for
 financial reporting purposes. The deferred stock compensation is
 being amortized over the vesting period of the options,
generally four years. Amortization of deferred stock compensation
 of $.1 million was recorded during the quarter ended
June 30, 1999.

Six Months Ended June 30, 1999 Compared to Six Months
Ended June 30, 1998

Revenues.Total revenues increased $17.6 million, or 19.7%
 to $106.8 million for the six months ended June 30, 1999
from $89.3 million for the same period in 1998. The increase was
primarily due an increase in the volume of sales of our broadband
 access products. As a percentage of total revenues, equipment
sales were 96.5% of total revenues for the six months ended
June 30, 1999 compared to 98.5% for the six months ended
June 30, 1998. The percentage decrease is mostly due to a
$2.5 million increase in royalty income in 1999 which includes
$1.1 million from a one-time royalty fee from Globespan related
to termination of an existing agreement, and $1.5 million from a
one-time license fee from a third party for intellectual property
 relating to narrowband technology.

Gross Margin.Gross margin increased $3.6 million or 8.3%
to $46.8 million for the six months ended June 30, 1999 from
 $43.2 million for the six months ended June 30, 1998. A
substantial portion of the increase was due to the recognition of
 $2.5 million of royalty revenues. Gross margin as a percentage
of total revenues decreased to 43.8% in 1999 from 48.4% in 1998
primarily because our newer, competitively priced products
comprised a greater portion of our total revenues. Gross margin
for equipment sales increased $1.3 million

8



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##### Table of Contents





Research and Development Expenses.Research and
development expenses increased $.5 million, or 3.2%, to $17.8
million for the six months ended June 30, 1999 from $17.3
million for the first half of 1998. As a percentage of total
revenues, research and development expense decreased to 16.7% for
 the first six months of 1999 from 19.4% in the first half of
1998. This decrease is primarily attributable to the 19.7%
increase in revenue during the period.

Selling, General and Administrative (SG&A)
Expenses.SG&A expenses decreased $.4 million, or 1.4%,
to $27.7 million in the six months ended June 30, 1999 from
$28.1 million for the six months ended June 30, 1998. The
decrease is primarily attributable to a $1.1 million decrease in
professional and contractor fees, a $.6 million decrease in
advertising, and a $.6 decrease in rental expenses, offset by a
$.7 increase in personnel related expenses mainly due to higher
incentive based expenses as a result of the higher revenues, an
increase in expense related to consignment of equipment to
customers of $.6 million and higher depreciation expense of $.5
million. SG&A as a percentage of revenue declined from 31.4%
for the six months ended June 30, 1998 to 25.9% for the six
months ended June 30, 1999. This decrease resulted primarily
 due to the 19.7% increase in revenue during the period.

Amortization of Deferred Stock Compensation.Deferred
stock compensation is related to the granting of stock options to
 key employees at prices deemed to below fair market value for
financial reporting purposes. The deferred stock compensation is
being amortized over the vesting period of the options, generally
 four years. Amortization of deferred stock compensation of $.1
million was recorded during the six months ended June 30,
1999.

Interest and Other (Income) Expense, Net.Interest and
other (income) expense, net, increased by $2.9 million to
$1.8 million of income for the six months ended June 30,
1999, from $1.1 million of expense for the same period in 1998.
Interest and other (income) expense, net, is related to
interest on notes payable and borrowings under lines of credit,
gains and losses on equity investments and foreign exchange gains
 and losses. This increase was primarily attributable to the
receipt by Paradyne of approximately $3.0 million of income from
the sale of patents. Interest expense also decreased by $.3
million due to a reduction in the debt related to Lucent and
Communication Partners, L.P. which was offset by a $.3M increase
in foreign exchange losses.

Liquidity and Capital Resources For The Six Months Ended
June 30, 1999

Cash provided by operations for the six months ended
June 30, 1999 totaled $7.6 million and resulted primarily
from $4.3 million in net proceeds from a license of intellectual
property related to modem technology and sale of patents. Further
 contributing to cash from operations was a reduction in trade
receivables reflecting a 9% decrease in revenues in the second
quarter of 1999 compared to the fourth quarter of 1998 due to
lower sales of narrowband products and a $1.1 million reduction
in inventory mainly due to normal monthly fluctuations. The
decrease in trade receivables primarily resulted from lower
equipment sales to one of our largest customers. Decreases to
cash from operating activities partially offsetting the above
increases resulted from increases in receivables from affiliates
reflecting a $1.1 million one-time royalty fee from GlobeSpan
Semiconductor, Inc. related to the termination of an existing
agreement and a $1.6 million decrease in payroll and benefit
related liabilities related to payments of 1998 commissions and
management bonuses.

Net cash used in investing activities for the six months ended
June 30, 1999 totaled $2.2 million and reflects capital
expenditures made in support of operations. The Company
anticipates that capital requirements for the remainder of the
year will be in the $1.5 million to $3.0 million per quarter
range.

Net cash used in financing activities for the six months ended
June 30, 1999 totaled $4.6 million primarily reflecting debt
 repayments on our Bank of America NT&SA revolving credit
facility of $7.2 million, offset in part by proceeds from the
exercise of stock options totaling $2.6 million. Net borrowings
were not required to fund operations and capital expenditures in
the period. A portion of the proceeds from the July, 1999 initial
 public offering was used to pay down the debt.

9



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##### Table of Contents



The Company had $3.6 million of cash and cash equivalents at
June 30, 1999 representing an increase of $1.3 million from
$2.3 million at December 31, 1998. Working capital increased
 by $5.7 million or 68% from $8.4 million at December 31,1998 to
$14.1 at June 30, 1999.

On July 15, 1999 the Company raised $63.2 million in an
initial public offering. The Company believes that the proceeds
from the initial public offering and the current offering,
together with the cash flows from operations and borrowings under
 the Bank of America NT&SA line of credit facility, will be
sufficient to meet our working capital needs for at least the
next 18 months.

Year 2000 Issues

Background:Some computers, software and other equipment
include programming code in which calendar year data is
abbreviated to only two digits (e.g., 99) rather than four digits
 (e.g., 1999). As a result, these systems automatically assume
that the first two digits of a calendar year are 1
and 9. Therefore, time-sensitive functions of these
systems may misinterpret dates after January 1, 2000, to refer to
 the twentieth century rather than the twenty-first century
(i.e., 02 could be interpreted as 1902
rather than 2002). The problems associated with this
design decision are commonly referred to as the Millennium
Bug, Year 2000 problem or Y2K
problem.

Assessment:In 1996 we identified the Year 2000 problem as
 a potential risk to our operations. As a result, we developed a
comprehensive multi-year plan to make our internal computer
software and hardware systems Year 2000 compliant. Our Year 2000
compliance plan is comprised of 3 phases: an assessment phase; an
 implementation phase; and a testing phase. This plan, initiated
in the first quarter of fiscal 1997, is in the final stages of
implementation. While we believe that we have implemented a
comprehensive plan for addressing the Year 2000 problem and
anticipate completing our compliance activities in a timely
manner, we cannot be certain that these Year 2000 compliance
efforts will be successful. The financial impact of making the
required systems changes cannot be known precisely at this time,
but we currently expect these expenses to be less than
approximately $4.0 million. The financial impact, could, however,
 exceed this estimate. Nonetheless, these costs are not expected
to be material to our business, financial condition, or results
of operation. To date, we have incurred expenses of approximately
 $3.7 million.

Internal Infrastructure:We believe that we have
identified all of the major computer hardware, software
applications and other calendar year dependent equipment used in
connection with our internal operations. Our Year 2000 compliance
 plan addresses items that must be modified, upgraded, or
replaced in order to minimize the possibility of a material
disruption of our business. We have replaced our accounting,
sales, distribution and manufacturing systems with what we
believe to be a Year 2000 compliant enterprise resource planning
system. We have replaced our human resource and payroll systems
application software with what we believe to be Year 2000
compliant software, and we have replaced our internal phone
system and associated equipment with what we believe to be a Year
 2000 compliant system. Currently, we are in the process of
modifying, upgrading and replacing, as appropriate, other
computer software applications, hardware, and equipment that
could potentially be adversely affected by the Year 2000 problem.
 Monthly updates on Year 2000 activities are made available to
all employees. We expect to complete this implementation phase by
 the end of the third quarter of 1999. The fourth quarter of 1999
 has been reserved for final testing of all of our systems for
compliance.

Network Service Providers:Our ongoing operations are
dependent on the uninterrupted service provided to us by our
voice (landline and wireless), data and Internet service vendors.
 We have initiated communications with our various service
providers and have received assurance that they have or will
address Year 2000 compliance issues associated with their ability
 to provide uninterrupted service. Any failure of these vendors
to resolve any outstanding Year 2000 issues in a timely manner
could materially and adversely affect our business, financial
condition and results of operation.

Distributors and Suppliers:We have initiated
communications with our key distributors, service support
providers and suppliers to establish the status of their Year
2000 compliance. We have communicated with our major suppliers of
 minicomputers, servers, computers, software and other equipment
used, operated or maintained by us to identify and, to the extent
 possible, resolve issues associated with the Year 2000 problem.

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As we must rely to a large extent on representations made by our
suppliers and distributors from surveys and questionnaires, a
failure by these parties to adequately address and resolve Year
2000 problems poses the most likely unresolved Year 2000 risk to
us. In the event our suppliers are unable to adequately address
Year 2000 problems, such inability could disrupt their supply of
critical components to us for the manufacture of our products.

Contingency Plans:We are currently developing contingency
 plans to be implemented as part of our efforts to identify and
correct Year 2000 problems affecting our internal systems. We
expect to complete these contingency plans by the end of the
third quarter of 1999. Depending on the systems affected, these
plans could include (i) accelerated replacement of effected
equipment or software, (ii) increased work hours for our
personnel or use of contract personnel to correct on an
accelerated schedule any Year 2000 problems which may arise,
(iii) the provision of manual workarounds for information
systems and (iv) other similar approaches. If we are
required to implement any of these contingency plans, such plans
may have a material adverse effect on our business, financial
condition or results of operations. Additionally, we may not
complete these contingency plans in a timely manner, and failure
to do so could have a material adverse effect on our business,
financial condition or results and operations.

The discussion of our efforts and expectations relating to Year
2000 compliance are forward-looking statements. Our ability to
achieve Year 2000 compliance and the level of incremental costs
associated with achieving this compliance could be adversely
impacted by, among other things, the availability and cost of
programming and testing resources, the ability of parties with
whom we interact to resolve Year 2000 issues and unanticipated
problems identified in our ongoing compliance review.

Inflation

Because of the relatively low levels of inflation experienced in
1996, 1997 and 1998, inflation did not have a significant effect
on our results in such years.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Factors Which May Impact Future Operating Results

Factors that are likely to affect our results of operations in
the future include the following:



| |                                                              
| | -------------------------------------------------------------
| | Rapid Technological Change Could Render Our Products Obsolete

The telecommunications and data communications markets are
characterized by rapid technological change. Our success will
depend on our ability to adapt and to respond to technological
changes. If we fail to keep pace with technological change, our
product sales could suffer.

Our existing products could become obsolete or unmarketable as a
result of the emergence of new industry standards or customer
demands. For example, our customers could determine that they no
longer require service level management, or SLM, with network
access products. Furthermore, our products could become obsolete
or unmarketable as a result of any new technology or products
which are superior to ours. We may be unable to compete
effectively if we are unable to adapt to changes in industry
standards, meet customer demands or develop new products or
enhancements to existing products.

Our products compete with numerous high-speed access
technologies, including cable modems, satellite technology and
other wireless technologies. These competing technologies may
ultimately prove to be superior to our products. Our products may
 become uncompetitive or obsolete as a result of the development
of competing technologies that are more reliable, faster and less
 expensive than our technology. For example, substantially all of
 our products are deployed in networks that use standard copper
telephone wires. The physical properties of copper wire limit the
 speed and distance over which data can be transmitted. Service
levels degrade as distance from the central switching station
increases. Other competing technologies, such as wireless and
cable are not subject to such limitations.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our Success Will Depend On The Acceptance Of New
	Telecommunications Services 
	 Based On DSL

Our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by network service
providers, or NSPs, and end users of their services. If DSL
technology fails to gain widespread acceptance, our revenues and
results of operations may be adversely affected. Historically, we
 focused on providing innovative solutions to the narrowband
access market. We, however, are increasingly focusing on the
broadband access market. We have invested substantial resources
in the development of DSL technology, and many of our products
are based on DSL technology. Many NSPs continue to evaluate DSL
technology and other alternative high-speed data access
technologies, but they may not continue to pursue the deployment
of DSL technology. Even if NSPs adopt policies favoring
full-scale deployment of DSL technology, they may not choose to
purchase our DSL product offerings. In addition, we have limited
ability to influence or control decisions made by NSPs. NSPs are
continuously evaluating alternate high-speed data access
technologies and may, at any time, adopt technologies other than
the DSL technologies offered by us.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | We Are Substantially Dependent On Network Service Providers,
	Who May Reduce Or Discontinue Their Purchase Of Products Or
	Services At Any Time

We estimate that sales to NSPs accounted for approximately 40% of
 our total revenues in 1998. If our NSP customers are forced to
defer or curtail their capital spending programs, we could lose,
or experience delays or reductions in significant sales to such
customers. Given the capital requirements, complex regulatory
framework and other barriers to entry in the market, there are a
limited number of NSPs. The market for many of the services
provided by NSPs has only begun to emerge since the passage of
the Telecommunications Act of 1996 and many NSPs are still
building their infrastructure and rolling out their services.
Many of these NSPs still need to develop, construct and expand
their networks. The inability of our emerging NSP customers to
complete development of their networks, attract or retain
customers, respond to trends, such as price reductions for their
services or diminished demand for telecommunications services
generally, could cause them to reduce their capital spending
programs.

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Generally, our NSP customers do not have an obligation to
purchase additional products or services from us. Termination of
purchase arrangements with these NSP customers or a significant
reduction or delay in the amount of our products they order could
 materially and adversely affect our revenues. In addition, the
telecommunications industry has recently experienced
consolidation, which may cause us to lose NSP customers. The loss
 of one or more of our NSP customers could also materially and
adversely affect our revenues.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our Success Depends On Network Service Providers Incorporating
	 Our Products Into Their Infrastructure

We anticipate that a significant portion of our future revenues
will be attributable to sales to NSPs of our DSL, SLM and other
broadband products. Our future performance will therefore be
substantially dependent on incorporation of our products by NSPs
into their service offerings to subscribers. The failure of our
products to become an accepted part of NSPs service
offerings or a slower than expected increase in the volume of
sales by us of SLM products could materially and adversely affect
 our revenues. Our success in the NSP market will depend on
numerous factors, many of which are outside our control. Some of
these factors include:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NSP and subscriber acceptance of and satisfaction with our
	products;                                                                                         
|
| |  | the realization of operating cost efficiencies for NSPs when SLM
	products are deployed and our ability to demonstrate these
	operational benefits;           
|
| |  | subscriber demand for our products and support for our products
	within the NSPs sales force;                                                                
|
| |  | our successful development of systems and products that address
	the requirements for products deployed as part of an NSPs
	infrastructure;                  
|
| |  | the timing and successful completion of integration development
	work by NSPs to incorporate our SLM functionality into their
	operational support system; and
|
| |  | the absence of new technologies that make our products and
	systems obsolete before they can achieve broad acceptance.                                        



| |                                                     
| | ----------------------------------------------------
| | Various Factors Could Cause Our Results To Fluctuate

Paradynes quarterly and annual results of operations have
fluctuated in the past and are likely to fluctuate significantly
in the future due to a variety of factors, many of which are
outside of our control. Fluctuations in our results could cause
our stock price to decline substantially. Some of these factors
that might affect our results of operations include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The timing and amount of, or cancellation or rescheduling of,
	orders for our products and services to existing and new
	customers.This may adversely affect our operating results in
	 any particular quarter if we were unable to recognize revenue
	for a particular sale in the quarter in which such sale was
	expected.                                                                                               
|
| |  | Our ability to develop, introduce, ship and support new
	products and product enhancements and manage product transitions
	on a timely basis.Our failure to accomplish these tasks
	could render our products obsolete or non-competitive,
	particularly since technology in our industry changes often. As a
	 result, customers may decide to purchase competitive products,
	which could cause our revenues to suffer.   
|
| |  | Announcements, new product introductions and reductions in
	price of products offered by our competitors. These events
	could also cause our customers to decide to purchase the products
	 of our competitors which would adversely affect our revenues
	and, therefore, our results of operations. Also, we may feel it
	necessary to reduce prices of our products, which could impact
	operating margins and net income.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to achieve cost reductions.As with all
	companies, we constantly strive to improve our margins through
	reductions in our cost of sales. Failure to reduce our costs
	could reduce our margins which in turn could adversely affect our
	 ability to operate profitably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Our ability to obtain sufficient supplies of sole or limited
	source components for our products.If we cannot obtain
	components for our products, we may be unable to produce
	sufficient quantities of our products to meet demand. As a
	result, our revenues could be adversely affected. This is
	particularly true with respect to obtaining sole or limited
	source components because replacement sources, if any, will take
	time to identify.                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The timing and rate of deployment of our products by NSPs.The timing and rate of deployment by NSPs can affect sales of
	 products to these NSPs and, in turn, our operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Preferential pricing arrangements.We have preferential
	pricing arrangements with some of our customers. In our effort to
	 win new business we may negotiate preferential pricing
	arrangements in the future with other customers. While these
	arrangements are intended to provide greater revenue, they will
	have a negative impact on our margins. Furthermore, because our
	strategy relies on entering into these arrangements in the
	future, if we fail to do so, our results could be below
	expectations.                                                                                                                                                                                                                                                                                                                        
|
| |  | Our ability to attain and maintain production volumes and
	quality levels for our products.Many factors could affect
	our ability to maintain production volumes and quality levels.
	They include an inability to obtain raw materials or components,
	labor shortages, and the maintenance of adequate facilities for
	production. If we fail to maintain production volumes or quality
	level we may be unable to produce sufficient quantities of our
	products to meet demand, which would adversely affect our
	revenues.                                                                                                                                                                                                                                                                                                               
|
| |  | The mix of products sold and the mix of distribution channels
	through which they are sold.The mix of products sold can
	adversely affect our results. Margins vary within our newer and
	older products. If we fail to successfully sell our higher margin
	 products, our gross margins may be lower than expected. In
	addition, some distribution channels have higher costs associated
	 with sales. As a result, the mix of distribution channels may
	adversely affect operating income.                                                                                                                                                                                                                                                                                                                                               
|
| |  | Fluctuations in demand for our products and services,
	especially by our major customers.Because we are highly
	dependent on sales to a relatively small numbers of customers,
	changes in demand from those customers can have a
	disproportionately large effect on our revenues and results of
	operations. For example, direct and indirect product sales to,
	and services performed for, Lucent constituted approximately 47%
	of our total revenues in 1998 and 27% in the first six months of
	1999. If Lucents demand for our products in 1999 or in
	future years were to decline, our revenues would suffer.                                                                                                                                                                                                                      
|
| |  | Expiration of favorable supply or purchase contracts.For
	example, we currently have a supply agreement with Lucent under
	which we are the exclusive supplier through June 2001 of
	Lucents requirements for stand-alone network access
	products for resale. As a result, Lucent must purchase these
	products from us. Direct and indirect sales of these products to
	Lucent accounted for approximately 46% of our total revenues in
	1998 and 26% in the first six months of 1999. After the
	expiration of the agreement, we may be unable to negotiate a new
	supply agreement. If we are unable to negotiate a new supply
	agreement, Lucent could enter into a supply agreement with
	another party or purchase these products from multiple providers.
	 In either case, our sales of these products would decline
	substantially.
|
| |  | Costs relating to possible acquisitions and integration of
	technologies or businesses.The costs to acquire technologies
	 and businesses is substantial. In addition to the direct costs,
	there are significant indirect costs related to integration of
	personnel and technologies and potential product redesign. These
	costs may decrease operating income or increase operating loss if
	 they are not offset by comparable increases in revenue.                                                                                                                                                                                                                                                                                                                                                                                     

In addition conditions in the telecommunications market,
including consolidation in the industry, and economic conditions
generally could adversely affect both our revenues and costs. Due
 to these and other

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| |                                                   
| | --------------------------------------------------
| | We May Not Achieve Revenue Growth Or Profitability

We cannot be certain that we will continue to achieve revenue
growth or realize sufficient revenues to achieve profitability.
Excluding a one-time gain in connection with a contract
renegotiation with Lucent in 1997 and the related tax effect, we
had an accumulated net deficit of approximately $37.2 million
during the period from August 1, 1996 through
December 31, 1998. We have not been profitable in any fiscal
 year of operations except in 1997 when we were profitable as a
result of the non-recurring gain in connection with the
renegotiation of a contract with Lucent. We anticipate that we
will continue to incur significant product development and
selling, general and administrative expenses and, as a result, we
 will need to generate higher revenues to achieve and sustain
profitability on an annual basis.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our Dependence On Only A Few Major Customers For A Substantial
	 Portion Of Our Revenues Exposes Us To Financial Risks

We depend on a small number of customers for a substantial
portion of our revenues. As a result, a loss or a significant
reduction or delay in sales to any of our major customers could
materially and adversely affect our revenues. Direct product
sales to Lucent and services performed for Lucent in 1998
accounted for approximately 35% of our total revenues. Sales to
Tech Data Corporation, a distributor, in 1998 accounted for
approximately 15% of our total revenues. We estimate that
approximately 70% of our sales to Tech Data represented products
that were resold to Lucent. Collectively, we estimate that direct
 and indirect sales to, and services performed for, Lucent
accounted for approximately 47% of our total revenues in 1998 and
 27% in the first six months of 1999. Sales to SITA, an NSP, in
1998 accounted for approximately 9% of our total revenues in 1998
 and 7% in the first six months of 1999, and sales to Rhythms,
also an NSP, accounted for approximately 6% of our total revenues
 in 1998 and 29% in the first six months of 1999. Unless and
until we diversify and expand our customer base, our future
success will significantly depend upon certain factors which are
not within our control, including:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | the timing and size of future purchase orders, if any, from our
	larger customers;
|
| |  | the product requirements of our customers;                                        
|
| |  | the financial and operational success of our customers; and                       
|
| |  | the success of our customers services deployed using our
	products.              

Diversification and expansion of our customer base is
particularly critical because of the highly competitive nature of
 our business. Our contracts are generally subject to annual
renewal with the exception of our contracts with Lucent and
several other customers, which have two to five year terms, and
our customers generally do not have any obligation to purchase
products solely from Paradyne. Under a supply agreement between
Lucent and Paradyne, Paradyne is the exclusive supplier of
Lucents requirements for stand alone network access
products, such as our FrameSaver products, for resale through
June 2001.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We Compete In Highly Competitive Markets And Competition Could
	 Harm Our Ability To Sell Products And Services

The telecommunications market is highly competitive. We compete
directly with other providers of broadband and narrowband access
equipment. If we are unable to compete effectively in the market
for our products or services, our revenue and future
profitability could be materially and adversely affected. We
believe that competition may increase substantially as the
introduction of new technologies, deployment of broadband
networks and potential regulatory changes create new
opportunities for established and emerging companies in the
industry. We expect that competition for products that address
the broadband access market will grow as more established and new
 companies focus on this market.

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Many of our current and potential competitors are larger than we
are and have significantly greater financial, sales and
marketing, technical, manufacturing and other resources and more
established channels of distribution. As a result, these
competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to
 devote greater resources to the development, promotion and sale
of their products. Our competitors may enter our existing or
future markets with solutions that may be less costly, provide
higher performance or additional features or be introduced
earlier than our solutions.

Our markets are characterized by increasing consolidation both
within the data communications sector and by companies combining
or acquiring data communications products and technology for
delivering voice-related services, as exemplified by the recently
 announced acquisitions of Ascend by Lucent, Diamond Lane by
Nokia and Xylan by Alcatel. We cannot be sure of the impact of
any of these acquisitions on the competitive environment for our
products. Increased competition and consolidation could result in
 price reductions and a decrease in our market share.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Our Dependence On Development Relationships Could Threaten Our
	 Ability To Sell Products

Our success is dependent upon our continued relationship with
certain companies, including AG Communications Systems, Ascend,
GlobeSpan, NetScout and Xylan. If any of these companies breaches
 or terminates its agreement or fails to perform its obligations
under its agreement, we might not be able to sustain or grow our
business. In particular, if any of these companies, other current
 corporate partners or future corporate partners discontinue
their support of products that we have developed in cooperation
with them, fail to continue to develop product enhancements
required to meet customer demand, fail to appropriately address
performance issues related to products that we have developed in
cooperation with them, face claims of infringement of third party
 intellectual property rights with respect to the technology
included in products that we have developed in cooperation with
them or fail to continue to support joint marketing programs, our
 ability to sell products that we have developed in cooperation
with them would be hampered. Additionally, in the event that any
of our significant relationships are terminated, we may not be
able to replace them in a timely manner, if at all.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our Ability To Sustain Or Grow Our Business Might Be Harmed If
	 We Lose Sales Of Access Products To Lucent

We have a relationship with Premisys Communications through which
 we have exclusive distribution rights through April 2005 for
Premisys IMACS system, which we market to Lucent and
AT&T under the name Acculink Access Controller. We have also
entered into a supply and exclusivity agreement with Lucent under
 which we are the exclusive supplier of Lucents
requirements for various access products, such as the Acculink
Access Controller, for resale through June 2001. Sales of
Acculink Access Controller accounted for greater than 10% of our
total revenues during each of 1997 and 1998. Our revenues would
be adversely affected if Premisys fails to meet its obligations
under the agreement or if Lucent or AT&T were to
substantially reduce or discontinue their orders of Acculink
Access Controller.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | We Depend On Sole And Single Source Suppliers Which Exposes Us
	 To Potential Supply Interruption

We currently purchase a number of important parts, such as
framers, semiconductors and embedded communications processors,
from sole source vendors for which alternative sources are not
currently available. Delays or interruptions in the supply of
these components result in delays or reductions in product
shipments. The purchase of these components from outside
suppliers on a sole source basis subjects us to risks, including
the continued availability of supplies, price increases and
potential quality assurance problems. We currently purchase key
components for which there are currently no immediate substitutes
 available from approximately 45 vendors. All of these components
 are critical to the production of our products. While
alternative suppliers may be available to us, we must first
identify these suppliers and qualify them. We cannot be certain
that any such suppliers will meet our required qualifications or
that we will be able to identify alternative suppliers in a
timely fashion, if at all. We may not be able to obtain
sufficient quantities of these components on the same or

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| |                                                    
| | ---------------------------------------------------
| | Our Sales Cycle Is Typically Long And Unpredictable

Our business is subject to lengthy sales cycles. As a result, we
may not recognize revenues from the sale of our products for long
 periods of time. Delays in product testing or approval, or
cancellations of orders by customers, especially our NSP
customers, could materially and adversely affect our revenues. On
 average, our sales cycle ranges from six to nine months. Sales
of our products require a substantial commitment of capital and
time from our customers, many of whom have lengthy internal
procedures for approving large capital expenditures and lengthy
testing and decision-making processes. Before our NSP customers
purchase products from us, they must first make a decision to
standardize their service on a particular product, which involves
 extensive testing. Our sales cycle may be slowed further, or
affected by, budgetary constraints and purchasing requirements of
 our customers, all of which are beyond our control. Moreover,
sales of our products often require significant training of both
our customers and end users before the decision to purchase. As a
 result, we may expend significant resources pursuing potential
sales opportunities that will not be consummated.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Because Of Our Long Product Development Process, We Incur
	Substantial Expenses Before We Earn Associated Revenues

In order to remain competitive, we invest significant resources
toward research and development of our current and potential
products. Development costs and expenses are incurred before we
generate any revenues from sales of products resulting from these
 efforts. Our current or future customer base may not purchase
any products resulting from our current or future development
efforts.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | A Failure By Us To Protect Our Technology May Adversely Affect
	 Our Ability To Compete

Our success and ability to compete is substantially dependent
upon our technology. A failure to protect our technology could
result in competitors offering similar products potentially
resulting in a loss of competitive advantage and decreased
revenues. We rely on a combination of patent, trademark,
copyright and trade secret laws and non-disclosure agreements to
protect such technology. Currently, we hold over 155 United
States patents and have over 100 United States patent
applications pending. In addition, we hold certain corresponding
foreign patents and have certain corresponding foreign patent
applications pending. However, we cannot be certain that patents
will be issued with respect to any of our pending or future
patent applications. In addition, we do not know whether any of
our issued patents will be upheld as valid or that they will
prevent the development of competitive products.

We seek to protect our intellectual property rights by limiting
access to the distribution of our software, documentation and
other proprietary information. If any third parties infringe our
proprietary rights, such infringement could materially and
adversely affect our competitive positions. As with our issued
patents, we cannot be certain that the steps we have taken to
protect our intellectual property will adequately prevent the
misappropriation of any of our technology. Our competitors may
independently develop technologies that are substantially
equivalent or superior to our technologies. In addition, the laws
 of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States.
Third parties may attempt to copy or reverse engineer aspects of
our products or to obtain and use information that we regard as
proprietary. Accordingly, we may not be able to protect our
proprietary rights against unauthorized third party copying or
use.

We are also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of
others. These claims may require us to enter into license
arrangements or may result in protracted and costly litigation,
regardless of the merits of such claims. We may not be able to
obtain

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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | If We Are Unable To Attract And Retain Key Personnel And A
	Skilled Workforce, We May Not Be Able To Sustain Or Grow Our
	Business

Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering
and management personnel, many of whom would be difficult to
replace. The loss of such personnel could materially and
adversely affect our business, financial condition and results of
 operations. Specifically, we believe that our future success is
highly dependent on our senior management, and in particular on
Andrew May, President and Chief Executive Officer. Except for
agreements with Messrs. May, Murphy and Slattery, we do not
have employment contracts with our executive officers. In any
event, employment contracts would not prevent key personnel from
terminating their employment with us.

We believe that our future success will also depend highly upon
our ability to attract and retain highly skilled customer support
 and product development personnel. The market for qualified
personnel in the telecommunications industry is highly
competitive, and we frequently experience difficulty in
recruiting qualified personnel. Recruiting qualified personnel is
 an intensely competitive and time-consuming process.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our Reliance On International Sales May Make Us Susceptible To
	 Global Economic Factors, Foreign Tax Law Issues And Currency
	Fluctuations

We currently have 10 sales offices and subsidiaries in North
America, Europe and Asia through which we market and sell our
products. International sales accounted for approximately 20% of
our total revenues in 1998. Our international operations subject
us to risks to which we would not otherwise be exposed. These
risks may cause our results of operations to fluctuate. For
example, sales to customers outside of the United States
accounted for approximately 30% of revenues in 1997 and 20% of
revenues in 1998, respectively. This decrease was primarily due
to the decline in sales of our older narrowband products and
economic instability in Asia. Our international operations
subject us to risks to which we would not otherwise be exposed,
such as:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | impact of recessions in economies outside of the United States;                                              
|
| |  | currency exchange rate fluctuations;                                                                         
|
| |  | political and economic instability;                                                                          
|
| |  | policy, legal, regulatory or other changes affecting the
	telecommunications and data communications markets;
|
| |  | uncertain intellectual property rights protection;                                                           

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| |   |                                                
| | - | -----------------------------------------------
| |  | potential adverse tax consequences;            
|
| |  | change in tariffs; and                         
|
| |  | difficulties in accounts receivable collection.



| |                                                                           
| | --------------------------------------------------------------------------
| | Our Failure To Comply With Regulations Could Affect Our
	Product Offerings

We are subject to a significant number of communications
regulations and standards, some of which are evolving as new
technologies are deployed and due to ongoing judicial and
administrative proceedings. New regulations or new
interpretations of existing laws or regulations, or compliance
with additional existing regulations due to changes in the nature
 of our products could result in significant additional cost to
Paradyne. Moreover, failure of our products to comply, or delays
in compliance, with the various existing and evolving industry
regulations and standards could delay the introduction of our
products. Our products may be required to comply with various
regulations, including those promulgated by the Federal
Communications Commission (FCC), state public
utilities commissions and various foreign governments. Our
products must comply with the Communications Act of 1934 and the
Telecommunication Act of 1996. In the United States, in addition
to complying with FCC regulations, our products are required to
meet certain safety requirements. For example, NSPs may require
that our products that are located in their facilities be network
 equipment building standard certified before they purchase the
products from us. Outside of the United States, our products are
subject to the regulatory requirements of each country in which
the products are manufactured or sold. These requirements vary
widely, and we may be unable to obtain on a timely basis, or if
at all, necessary approvals for the manufacture, marketing and
sale of our products.

Enactment by federal, state or foreign governments of new laws or
 regulations, changes in the interpretation of existing laws or
regulations or a reversal of the trend toward deregulation in the
 telecommunication industry could materially and adversely affect
 our customers, and thereby materially and adversely affect our
business, financial condition and results of operations.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Changes To Regulations Affecting The Telecommunications
	Industry Could Reduce Demand For Our Products

If our NSP customers are required to comply with new laws, new
regulations or new interpretations of existing laws or
regulations, or if they are required to comply with additional
existing regulations due to changes in the nature of their
services, those changes could materially and adversely affect the
 market for our products. A large percentage of our customers are
 NSPs whose voice services, and many of their other network
services, must comply with the Communications Act of 1934, the
Telecommunications Act of 1996 and regulations prescribed by the
FCC. Furthermore, most of our NSP customers voice services
are subject to regulation by state public utilities commissions.
Some of our NSP customers are subject to foreign government
regulation. Many of these federal, state and foreign regulations
continue to evolve due to ongoing judicial and administrative
proceedings, particularly those federal regulations designed to
define rights and obligations under the Telecommunications Act of
 1996. For example, the FCC is considering changes to its
regulations, including those relating to the access to copper
telephone lines, the ability of customers to install equipment at
 an NSPs central location and the compatibility
requirements placed upon equipment which may be run on copper
telephone lines. Furthermore, the United States Congress is
considering a variety of amendments to the Communications Act of
1934 and the Telecommunications Act of 1996.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Compliance With Evolving Industry Standards Could Adversely
	Affect Our Product Offerings

Many of our products must comply with equipment standards adopted
 by national and international standards bodies. If we are
required, or deem it otherwise necessary or advisable, to comply
with new standards or with additional existing standards due to
changes in standards, we may have to modify our current or future
 products. The costs of any modification could materially and
adversely affect our business, financial condition and results of
 operations. Compliance with these standards is important because
 it often enhances the marketability of our products. Many of
those standards are influenced by industry committees that
develop

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| |                                              
| | ---------------------------------------------
| | We Rely Heavily On Distributors And Resellers

We estimate that in 1998 over 70% of our sales were made through
distributors and resellers. We often rely on distributors and
resellers to provide installation, training and customer support
to the ultimate end users of our products. As a result, our
success depends on the continued sales and customer support
efforts of our network of distributors and resellers. Any
reduction, delay or loss of orders from our significant
distributors or resellers could materially and adversely affect
our revenues.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our Ability To Sustain Or Grow Our Business May Be Harmed If
	We Are Unable To Provide Adequate Customer Support

Our ability to continue to grow our company and to retain current
 and future customers depends in part upon the quality of our
customer support operations. A failure to offer adequate customer
 support could materially and adversely affect our reputation or
cause demand for our products to decline. Our customers generally
 require significant support and training prior to the
installation and deployment of our products. Providing adequate
levels of support to our customers, requires significant
expenditures of resources and capital. As the market for
high-speed access devices grows and as the technology for these
devices continues to evolve, we will need to augment and improve
upon our customer support operations.



| |                                                                   
| | ------------------------------------------------------------------
| | We May Not Be Able To Finance Our Growth And Capital
	Requirements

Substantial working capital is required in order to fund and
continue to build our business. If we fail to do so, we will not
be able to remain competitive or continue to meet the increasing
demands for our products. We expect to use the net proceeds of
this offering for general corporate purposes, including working
capital and capital expenditures. We may also need to spend
significant amounts of cash to fund operating losses and
increases in expenses, take advantage of opportunities or respond
 to developments or competitive pressures. We believe that the
proceeds from the initial public offering and the proceeds of
this offering, together with our existing capital resources and
our revolving line of credit facility with BankAmerica NT&SA,
 will allow us to meet our capital requirements for at least the
next 18 months. However, our capital requirements depend on
several factors, including the rate of market acceptance of our
products, the ability to expand our client base, the growth of
our sales and marketing efforts and other factors. If capital
requirements vary materially from those currently planned, we may
 require additional financing sooner than anticipated. We cannot
be certain that additional financing will be available to us when
 needed or that such financing can be obtained on terms favorable
 to us. If adequate funds are not available or are not available
on acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to
competitive pressures.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | We Rely Upon Distributions, Dividends And Loans From Our
	Subsidiaries In Order To Meet Our Obligations And Commitments

As a holding company, we have no operations of our own. If our
subsidiaries are unable to pay dividends or make loans or other
distributions to us, we may not be able to meet obligations and
debts that we incur, and the market price of our common stock
could be adversely affected. In connection with a line of credit
facility, our operating subsidiary Paradyne Corporation and its
Canadian subsidiary are restricted from paying dividends and
making loans and other distributions. For a further description
of these restrictions, please see Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The Year 2000 Problem May Severely Disrupt Our Business,
	Financial Condition And Results Of Operations

As is true for most companies, the Year 2000 problem creates a
risk for us. Some computers, software and other equipment include
 programming code in which calendar year data is abbreviated to
only two digits

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| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | systems we use to run our business;                                                                                                                                                                                            
|
| |  | systems used by our service providers, distributors and
	suppliers; and                                                                                                                                                        
|
| |  | the potential for failures of our products, particularly our
	central office-based systems, due to Year 2000 problems
	associated with products manufactured by other equipment vendors
	used in conjunction with our products.

A disruption in the operations of parties with whom we interact
could materially and adversely affect our business, financial
condition and results of operations.

Substantial uncertainty remains in the software industry
concerning the potential effects associated with the Year 2000
problem. We have developed a comprehensive multi-year plan to
ensure that our internal computer software and hardware systems
will be Year 2000 compliant. While we believe that we have
implemented a comprehensive plan for addressing the Year 2000
problem and anticipate completing our compliance activities in a
timely manner, we cannot be certain that these Year 2000
compliance efforts will be successful. Furthermore, the financial
 impact of making the required systems changes cannot be known
precisely at this time.

We are currently developing contingency plans to be implemented
as part of our efforts to identify and correct Year 2000 problems
 affecting our internal systems. We expect to complete these
contingency plans by the end of the third quarter of 1999.
Depending on the systems affected, these plans could include
accelerated replacement of affected equipment or software,
increased work hours for our personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000
problems which may arise, the provision of manual workarounds for
 information systems, and other similar approaches. If we are
required to implement any of these contingency plans, such plans
may materially and adversely affect our business, financial
condition and results of operations. Additionally, we may not
complete these contingency plans in a timely manner, and failure
to do so could materially and adversely affect our business,
financial condition and results of operations.

If
 Our Products Contain Defects, We May Be Subject To Significant
Liability Claims From

Our
Customers And The End-Users Of Our Products And Incur Significant
 Unexpected


Expenses
 And Lost Sales


Our products are complex and, despite extensive testing, may
therefore contain undetected errors or failures. If this happens,
 we may experience delay in or loss of market acceptance and
sales, product returns, diversion of research and development
resources, injury to our reputation or increased service and
warranty costs. We also have exposure to significant liability
claims with respect to our customers because our products are
designed to provide critical communications services. Although we
 attempt to limit such exposure through product liability
insurance and through contractual limitations in our customer
agreements, such precautions may not cover all potential claims
resulting from a defect in one of our products.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Management And Our Single Largest Stockholder May Limit Your
	Ability To Influence The Outcome Of Director Elections And Other
	Stockholder Matters

Our executive officers, directors and principal stockholders and
their affiliates beneficially owned approximately 76% of our
outstanding shares of common stock, as of July 31,1999. As a
 result, these stockholders, if acting together, would be able
effectively to control substantially all matters requiring
approval by our stockholders.

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##### Table of Contents



Entities associated with Texas Pacific Group owned approximately
54% of our outstanding shares of common stock, as of
July 31,1999 and will be able to exercise control over
Paradyne, subject to the fiduciary duties of its representatives
on the board of directors under Delaware law. The interests of
Texas Pacific Group may not always coincide with the interests of
 other stockholders. Texas Pacific Group, through its
representatives on the board of directors, could cause us to
enter into transactions or agreements which we would not
otherwise consider absent Texas Pacific Group influence.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our Stock Price May Be Volatile And You May Not Be Able To
	Resell Shares At Or Above The Offering Price

Prior to the effective date of our initial public offering on
July 15, 1999, there was no public market for our common
stock. The trading price of our common stock could be subject to
wide fluctuations in response to various factors, some of which
are beyond our control, such as:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in quarterly results of
	operations;                                                                   
|
| |  | changes in intellectual property rights of Paradyne or our
	competitors;                                                                
|
| |  | announcements of technological innovations;                                                                                             
|
| |  | the introduction of new products or changes in product pricing by
	 Paradyne or our competitors;                                        
|
| |  | changes in financial estimates by securities analysts;                                                                                  
|
| |  | announcements of significant acquisitions, strategic
	partnerships, joint ventures or capital commitments by us or our
	competitors; and
|
| |  | additions or departures of key personnel.                                                                                               



| |                                                                    
| | -------------------------------------------------------------------
| | A Failure To Manage Our Growth Could Adversely Affect Our
	Business

We have experienced expansions and contractions of our operations
 in the past. If we are unable to manage our growth effectively,
our future profitability could be adversely affected. We
anticipate that expansion of our operations will be required to
address the potential growth in our client base and the
opportunities in the broadband access market. Our current
expansion is placing a significant strain on our managerial,
operational and financial resources. We may not have adequate
resources to support our future operations.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We May Engage In Acquisitions, And We May Be Unable To
	Successfully Integrate Any New Operations, Technologies, Products
	 Or Personnel

Recently, the telecommunications industry has experienced
substantial mergers and acquisitions activity. We have engaged in
 discussions in the past with third parties concerning potential
acquisitions of product lines, technologies and businesses.
However, we currently have no commitments or agreements with
respect to any such acquisition. In the event that such an
acquisition does occur, because of the small size of our
management team, we may be particularly susceptible to risks
associated with the assimilation of operations, technologies,
products and personnel and the diversion of managements
attention from other business concerns.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Should We Sell A Substantial Number Of Shares Of Our Common
	Stock In The Public Market, The Price Of Our Common Stock Could
	Fall

Sales of a substantial number of shares of our common stock in
the public market after our initial public offering could cause
the market price of our common stock to decline and could impair
our ability to raise additional capital through the sale of
equity securities. As of July 31, 1999, we had approximately
 30,634,473 shares of common stock outstanding, of which
approximately 6,979,527 shares are freely transferable without
restriction or registration under the Securities Act, unless such
 shares are held by our affiliates, as that term is defined in
Rule 144 under the Securities Act. The remaining 23,654,946
shares of common stock held by

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| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Our Corporate Charter And Bylaws May Discourage Take-Over
	Attempts And Depress The Market Price Of Our Stock

Provisions in our restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a change of
control or changes in our management. These provisions include:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the right of the board of directors to elect a director to fill a
	 vacancy created by the expansion of the board of directors;                                   
|
| |  | the ability of the board of directors to alter our bylaws without
	 obtaining stockholder approval;                                                               
|
| |  | the requirement that at least 50% of the outstanding shares of
	common stock are needed to call a special meeting of
	stockholders;                               
|
| |  | the division of the board of directors into three classes, with
	each class serving staggered three-year terms; and                                               
|
| |  | the requirement that all actions by stockholders must be effected
	 at a duly called meeting of the stockholders and may not be
	effected by a consent in writing.

These provisions could discourage take-over attempts and could
adversely affect the market price of our common stock. In
addition, these provisions may limit the ability of stockholders
to remove our current management. In addition, our board of
directors can issue up to 5,000,000 shares of preferred stock
without the approval of the holders of common stock. Any
preferred stock may have rights senior to the common stock. The
issuance of preferred stock could adversely affect the voting
power of holders of common stock and reduce the likelihood that
such holders will receive dividend payments and payments upon
liquidation. Such issuance could have the effect of decreasing
the market price of the common stock. The issuance of preferred
stock could also have the effect of delaying, deterring or
preventing a change in control of Paradyne.




Item  3.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

If we were to borrow from our revolving line of credit facility
with Bank of America NT&SA we would be exposed to changes in
interest rates. Additionally, we are exposed from investments in
some held-to maturity securities. Under our current policies, we
do not use interest rate derivative instruments to manage
exposure to interest rate changes. Additionally, we do not
currently engage in foreign currency hedging transactions to
manage exposure for transactions denominated in currencies other
than U.S. dollars.

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##### Table of Contents






PART II  OTHER INFORMATION




Item  1.  LEGAL PROCEEDINGS

Not applicable.




Item  2.  CHANGES IN SECURITIES

(a)  Not applicable.

(b)  Not applicable.

(c)  Not applicable.

(d)  Use of Proceeds.

The Companys Registration Statement on Form S-1
(Registration No. 333-76385) was declared effective on
July 15, 1999. The Company sold 4,000,000 shares of its
common stock at an initial price of $17.00 per share. The Company
 received net proceeds of approximately $62,240,000 after
deducting estimated underwriting discounts, commissions, and
offering expenses. The Company used $10.4 million of the net
proceeds of the offering to repay all outstanding indebtedness
under its $35,000,000 revolving line of credit facility with Bank
 of America NT&SA. It intends to use the remainder of the net
 proceeds for general corporate purposes, including working
capital and capital expenditures. The Company is currently
assessing the specific uses and allocations for these remaining
funds.




Item  3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.




Item  4.  SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS

On June 1, 1999, stockholders representing approximately 97%
 of the outstanding capital stock of the Company, in an action by
 written consent, approved an increase in the number of the
Companys directors to seven (7) and elected the following
persons to serve as directors of the Company:

Thomas E. Epley













On June 3, 1999, stockholders representing approximately 97%
 of the outstanding capital stock of the Company approved the
following items in an action by written consent:



| |    |                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The amendment and restatement of the Companys Certificate
	of Incorporation (effecting a 1-for-2 reverse stock split of the
	Companys common stock);                              
| | 2. | The adoption of the Companys 1996 Amended and Restated
	Equity Incentive Plan, the 1999 Employee Stock Purchase Plan, and
	 the 1999 Non-Employee Directors Stock Option Plan; and
| | 3. | The approval of the form of Indemnification Agreement to be
	entered into by the Company and each of its executive officers
	and directors.                                         

Prompt notice of the taking of both the June 1 and June 3 actions
 was given to those stockholders who did not consent in writing
to these actions.

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##### Table of Contents






Item  5.  OTHER INFORMATION

Not Applicable.




Item  6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

|     |          |  |  |             |  |  |                                             | 
|---- | -------- |  |  | ----------- |  |  | ------------------------------------------- | 
|Item |          |  |  | Description
|     |          |  |  |            
|     | 3(i) (1) |  |  |            |  |  | Certificate of Incorporation of the Company | 
|     | 3(ii)(1) |  |  |            |  |  | Bylaws of the Company                       | 
|     | 27.1     |  |  |            |  |  | Financial Data Schedule                     | 



| |     |                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Filed with the Companys Registration Statement on
	Form S-1, Registration No. 333-76385, declared effective on
	July 15, 1999, and incorporated herein by reference.

(b)  Reports on Form 8-K

The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999.

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##### Table of Contents






SIGNATURES

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



| |                        
| | -----------------------
| | Paradyne Networks, Inc.

Date: August 27, 1999

| |                                                     
| | ----------------------------------------------------
| | /s/ ANDREW S. MAY                                   
| |                                                     
| | Andrew S. May                                       
| | President, Chief Executive                          
| | Officer, and Director (Principal Executive
	Officer)
|
| | /s/ PATRICK M. MURPHY                               
| |                                                     
| | Patrick M. Murphy                                   
| | Senior Vice President,                              
| | Chief Financial Officer,                            
| | And Treasurer (Principal                            
| | Financial and                                       
| | Accounting Officer                                  

26