<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-K/A
(Mark One)

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES EXCHANGE ACT OF 1934

                         For the fiscal year ended JANUARY 31, 2002

                                       OR

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

                         Commission File number: 0-15810

                          SORRENTO NETWORKS CORPORATION
               (Exact name of Registrant as specified in charter)

<TABLE>
<S>                                                      <C>
                   New Jersey                                         22-2367234
(State or other jurisdiction of incorporation or         (IRS Employer Identification Number)
                  organization)

               9990 Mesa Rim Road
              San Diego, California                                     92121
    (Address of principal executive offices)                          (Zip Code)
</TABLE>

                                 (858) 558-3960
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

<TABLE>
               <S>                                            <C>
               Common Stock, Par Value $0.30                                 Nasdaq
                    Title of each class                       Name of exchange on which registered

</TABLE>

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

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

The Registrant's revenues for its most recent fiscal year were $40,827,000

The aggregate market value of voting stock based upon the bid and ask price held
by non-affiliates of the Registrant on April 30, 2002 was $33,244,301.


Number of shares outstanding of the Registrant's only class of common stock as
of April 30, 2002 (the latest practicable date):14,534,410.



                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None.





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                                     PART I

                                Item 1. Business

Introduction

     This Annual Report on Form 10-K may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes, "anticipates," "expects,"
"estimates" and words of similar import. Our actual results could differ
materially from any forward-looking statements, which reflect, management's
opinions only as of the date of this report, as a result of such risks and
uncertainties. We undertake no obligation to revise or publicly release the
results of any revisions to these forward-looking statements. Readers should
carefully review the risk factors set forth below in "Factors That May Affect
Future Results" and in other documents the company files from time to time with
the Securities and Exchange Commission, including its quarterly reports on Form
10-Q.

     We are a leading supplier of end-to-end, intelligent optical networking
solutions for metro and regional applications world-wide. Our solutions enable
communication service providers to offer broadband networking services over
optical fibers for metro and regional applications. Our technologies permit
telecommunications service providers to increase fiber capacity and fiber
bandwidth utilization, reduce network costs and network complexity over
scaleable and efficient networking platforms. Our optical networking systems
support a wide variety of protocols, mixed speeds of traffic and accommodate
changing traffic patterns directly over optical networks.

     Our dense wavelength division multiplexing (DWDM) platform can be used in
both metropolitan and regional network applications. DWDM technology allows many
optical signals to be transmitted simultaneously on the same optical fiber by
using different wavelengths of light to distinguish the signals. This technology
increases optical network capacity and flexibility. Our comprehensive suite of
optical networking interfaces and optical access multiplexers allow us to also
address broadband applications in the optical access market including data
center fail-over recovery, storage area networking (SAN) and internet
connectivity applications. Our introduction of a course wavelength division
multiplexing (CWDM) product is a lower cost, entry level that can be used for
enterprise customer access that complements our DWDM product line.

     We have also developed all-optical wavelength routing switch technology
that, when commercialized, will further increase the functionality of our
end-to-end all-optical networking solution. Our optical network element
management platforms permit management of end-to-end optical networks. We
currently have an installed base with over 20 communications service providers
and system integrators worldwide, including AT&T Broadband Network Solutions,
Deutsche Telekom, Belgacom, United Pan-Europe Communications, Cox
Communications, El Paso Global Networks, and INRANGE Technologies. According to
Ryan, Hankin & Kent, a telecommunications industry research group, we garnered
about 4% of the global metropolitan DWDM system market in calendar 2001 by
selling our GigaMux'r' optical transport systems and EPC'TM' access
multiplexers.

     An important development in 2001 was the significant downturn in both the
general economic environment and the telecommunications industry. These adverse
market conditions affected our operations and required us to undertake a number
of initiatives, including workforce reductions and other cost reduction
measures, that have substantially reduced our fixed costs and, we believe,
enhanced our ability to respond to the new economic and industry environment.


     On January 17, 2001, we changed our name to Sorrento Networks Corporation
from Osicom Technologies, Inc., in recognition of our corporate focus on the
business of our flagship optical networking subsidiary, Sorrento Networks, Inc.

Understanding Our Market

Definitions of technical terms used throughout this document can be found at the
end of this Item 1.

Rapid Growth in Bandwidth Demand

     Fueled by the growth of the Internet, the volume of data traffic
transmitted across telecommunications networks now exceeds voice traffic. The
growth of data traffic is attributable to increased Internet usage, increased
access speeds




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and greater use of bandwidth intensive applications. According to Ryan, Hankin &
Kent, Internet traffic is projected to increase at a rate exceeding 40% per year
for the next five years.

Migration of Network Infrastructure

     Traditional copper-based and SONET/SDH based telecommunications
infrastructures were originally designed for voice traffic. These
infrastructures do not scale effectively to provide the bandwidth needed to
support the growth in high-speed data traffic. In addition, these
infrastructures need network-wide upgrades in order to accommodate growing
traffic thus resulting in long delays for provisioning new services. DWDM and
CWDM technologies are more flexible, more efficient and more scalable networking
alternatives for meeting the growing demand for bandwidth and new broadband
services. Multi-wavelength optical (DWDM) networks for long-haul applications
were the first to be deployed, and optical solutions specifically designed to
address the challenges faced by metropolitan markets have significantly lagged
in deployment. Accordingly, metro networks are considered to be traffic
bottlenecks in the fast and efficient transmission of data. Significantly,
recent developments in technology are permitting metropolitan optical networking
vendors to address regional applications, which prior to 2000 were only
addressable by long haul networking products.

Enhanced Competition in the Service Provider Market

     Worldwide deregulation in the telecommunications industry has led to an
increase in the number of service providers seeking to address the growing
demand for bandwidth. In the U.S. and internationally, traditional service
providers such as Incumbent Local Exchange Carriers (ILECs), IXCs and PTTs are
seeing new entrants in the broadband networking market seeking to capitalize on
the growing demand for bandwidth. A number of competitors to these incumbents
are building new data-centric networks to address the present bandwidth
bottlenecks in the metropolitan markets, including utilities and cable
television companies (MSOs) which are upgrading their current networks and are
leveraging existing investments in fiber optic infrastructure to deliver
high-speed data services in both the local and regional markets. This enhanced
competition in the service provider market is driving increased capital
expenditures on network infrastructure focused on delivering scalable high-speed
data services in a cost efficient manner.

Network Topography

     The following describes each of the network segments within the optical
network hierarchy:

     o    Long-haul networks are high capacity networks that connect service
          providers and carry voice and data across large geographic regions
          typically spanning distances up to 4,000 kilometers. Long-haul
          networks are relatively simple networks, built around the SONET/SDH
          time domain multiplexing hierarchy and are primarily designed only to
          satisfy carriers' long-haul network capacity requirements.

     o    Metropolitan core (metro-core) networks connect the central offices of
          service providers in a metropolitan area and facilitate the transport
          and switching of traffic within extended metropolitan areas and
          between the network edge and long-haul networks. Metropolitan core
          networks are typically implemented in ring configurations and reach
          ring circumferences up to 300 kilometers. In order to efficiently use
          the optical network, sub-rate multiplexing devices aggregate traffic
          into wavelengths carrying higher speed aggregate bit rates across
          telecommunications networks. Regional networks typically transport
          voice and data traffic between cities across distances of 200 to 600
          kilometers or more.

     o    Access networks connect enterprises or traffic aggregation nodes in
          multiple locations throughout metropolitan areas to service providers'
          central offices or connect different end-user locations to each other.
          In order to efficiently use the optical network, optical access
          devices aggregate traffic from end users into wavelengths for
          transport across telecommunications networks. Because access networks
          must support the varying demands of end users, these networks tend to
          support multiple services and bit rates.



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Metropolitan area optical network opportunity

     While optical technologies are being deployed in long-haul networks to
relieve capacity constraints, these solutions are not specifically designed to
address the issues inherent in metropolitan and regional optical networks. Data
is normally mapped into the voice multiplexing hierarchy for transport over the
long-haul network. Metropolitan optical networks are characterized by varying
traffic patterns and protocols, topologies and end-user requirements, making
them more complex and difficult to manage than long haul networks. As a result,
service providers have only recently begun to exploit the benefits of optical
technologies in metropolitan optical networks.

     The optical networking market has seen a substantial downturn in 2001 from
2000 levels. The metro DWDM market, which was expected to increase, has also
experienced a slowdown in recent months as capital spending has declined
throughout the telecommunications industry. While Sorrento Networks believes
that the metro WDM world-wide market will grow significantly in the years to
come, such growth is not likely to occur until capital spending resumes in the
markets we serve, and we are unable to assess at present when this might take
place. According to industry analysts, including RHK (Ryan, Hankin and Kent)
and others, the metro WDM market in 2001 was about $1.2 billion worldwide and is
expected to grow to $3.6 billion by 2005.


Regional optical network opportunity

     In addition to the metropolitan market, recent engineering enhancements
have permitted the use of metropolitan optical (DWDM) networking platforms in
regional optical networking applications. This development opens up the
opportunity to address a portion of the substantial long haul market. In some
regions, e.g., in Europe, regional solutions apply to the majority of the
networks installed. Industry researchers recently started looking at
reclassifying the regional market opportunity, although statistical data for
this market are not expected until next year.

Specific challenges facing metropolitan optical networks

     Service providers face numerous specific challenges in addressing
metropolitan and regional optical networks:

     o    Scalability Limitations. Originally constructed for voice traffic, the
          current (SONET/SDH) network infrastructure does not allow for the
          network efficiencies necessary to address the shift to a predominantly
          data-driven network. Due to its inherent lack of scalability, the
          current network infrastructure may require service providers to
          undertake the expensive and tedious process of replacing network
          equipment or overlaying new layers of similar equipment in response to
          changes or increases in bandwidth demand. Alternative approaches to
          WDM are being developed by other vendors to address the scalability of
          the SONET/SDH networks. These nonstandard solutions are called next
          generation SONET/SDH and can minimize the wasted bandwidth of legacy
          SONET/SDH. These solutions, however, are not able to accommodate the
          need for large amounts of bandwidth.

     o    Need to Support Multiple Protocols. Metropolitan optical networks are
          characterized by a wide variety of protocols. The inability to support
          multiple protocols and services from a single platform further
          increases the cost and complexity of the metropolitan networks.
          Alternative approaches to WDM are being developed by other vendors to
          address the requirement for support of multiple services. These
          nonstandard solutions are called multiservice provisioning platforms.
          These solutions generally carry out protocol conversions and are much
          more complex than WDM solutions.

     o    Market Downturn. Virtually all telecom related market segments have
          suffered a decline in demand in the current economic downturn. What
          was once viewed as only a long-haul decline in market demand has now
          affected the regional and metropolitan networks as both enterprise and
          carrier business have cut back capital spending. While we expect that
          demand in the regional and metropolitan markets will be strong in
          future periods, there are no assurances that capital spending will
          resume within this sector in the near term.

     o    Several Stages of Conversion. Present solutions require several
          conversions to transport data through a metropolitan network. In the
          access networks, aggregation of traffic often requires protocol
          conversions into a common protocol before optical transmission. In the
          central office, data is often demultiplexed and




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         converted into electrical signals for regeneration, switching or
         further aggregation into higher capacity links and then reconverted
         into optical signals for transmission in the metro-core network.

     o    Inefficient Bandwidth Utilization. Within metropolitan optical
          networks, service providers must cater to end-users with varying
          access speeds. Current optical access solutions do not make efficient
          use of scarce wavelength resources. Service providers must assign a
          full wavelength to each signal, whether or not the end-user requires
          the full bandwidth potential of each wavelength.

     o    Difficulty of Network Management. Multiple protocols and service,
          coupled with the lack of standards that exist in metropolitan optical
          networks, make network management functions, such as performance
          monitoring and configuration, exceedingly difficult. Lack of a robust
          network management platform further adds to the cost and complexity of
          metropolitan optical networks.

     o    Need for New, Enhanced Service Offerings to Generate New Revenue
          Opportunities. Broadband network service providers are searching for
          next-generation solutions that will enable them to generate additional
          sources of revenue by offering new or enhanced services to their
          customers. Current solutions typically require the service provider to
          deploy equipment that is specifically designed for a particular
          service and transmission rate. Next-generation solutions must be able
          to offer enhanced features, wavelength provisioning and
          bandwidth-on-demand features, that end-users will increasingly request
          from service providers.

Our Solution

     Our solutions feature products designed to specifically address the
shortcomings of legacy SONET/SDH networks and to facilitate offering new
services throughout metropolitan and regional optical networks. We enable our
customers to meet the rapidly growing demand for bandwidth by offering
end-to-end metropolitan and regional optical networking solutions for the
aggregation, transport and management of traffic. Our current products,
including our GigaMux'r' DWDM transport system, with our EPC'TM' sub-rate
multiplexing modules, our JumpStart'TM' CWDM transport system as well network
management product line that includes GigaView, TeraManager'TM' and
TeraConfigurator'TM'. are specifically designed to meet the unique requirements
of the metropolitan and regional markets. We have also developed a prototype
all-optical wavelength routing switch, called TeraMatrix'TM', that will
complement our current products when market conditions permit us to put it into
production,

Our end-to-end metropolitan optical networking solution offers numerous
benefits, including:


         Cost Effective Entry-Level Access Solution. Our Jumpstart CWDM platform
     allows low cost multiplexing of up to four wavelengths carrying a mix of
     protocols and signals for access applications.

         Scalable Architecture. We have created a delayered or flat optical
     networking solution that simultaneously transmits voice, data, and video
     over optimized fiber channels. The modular architecture of our solution
     enables service providers to incrementally expand capacity, as their
     bandwidth needs increase. This simple, scaleable, and functional solution
     solves short and long-term service provider problems, which enhances their
     ability to reduce costs and offer value-added services. For example, a
     service provider can begin deployment with a single channel and later
     expand to multiple channels providing up to 640Gbps of transmission
     capacity without interrupting existing traffic.

         Protocol and Signal Transparency. Our suite of solutions transports a
     mix of protocols and signals, including SONET/SDH, ATM, IP, Gigabit
     Ethernet, Fibre Channel and ESCON in their native formats over numerous
     wavelengths in the same fiber. This "transparency" brings in operational
     simplicity in that the service provider can offer networking connectivity
     without having to worry about protocol conversions. This is particularly
     important in metropolitan areas where multiple protocols are utilized and
     data transmission rates change often. The transparency of our solution
     eliminates the unnecessary opto-electro-optical conversions as well as
     several layers of equipment that would otherwise be required in the
     transport and switching of traffic, thus reducing network complexity and
     signal latency.

         Efficient and Cost Effective Bandwidth Utilization. Our EPC'TM',
     optical access sub-rate multiplexer




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     aggregates traffic, of varied rates utilizing a wavelength per direction of
     transmission, from businesses and network points of presence for transport
     throughout optical networks. This sub-rate aggregation allows better
     utilization of wavelengths and lowers capital expenditures of telecom
     service providers by reducing investments in excess network capacity. Our
     GigaMux'r' optical transport product utilizes DWDM technology to provide
     ring and linear optical multi-wavelength connections over new and existing
     fibers and to enable traffic to travel throughout metropolitan and regional
     optical networks without opto-electro-optical conversion at every node.

         Manageability. The design of our end-to-end optical networking solution
     will allow service providers to perform network management from a single
     platform with our TeraManager'TM' product. This intelligent optical network
     management software platform provides fault, configuration, performance,
     and security management utilizing an easy-to-use graphical user interface
     that allows "point and click" network provisioning and monitoring.

         Regional optical transport. Our solution permits service providers to
     expand beyond the confines of metropolitan networks using the same platform
     for metropolitan and regional applications. Regional networks can now be
     built using the lower cost solutions developed for the metropolitan
     environment.



Sorrento Strategy

     Our objective is to become a leading supplier of end-to-end, intelligent
optical networking solutions for metro and regional applications world-wide. The
key elements of our strategy are to:

Enhance and complete our end-to-end metropolitan/regional optical networking
solution

     We intend to continue to enhance our existing family of metropolitan and
regional optical networking products and to introduce new products that increase
the functionality of our end-to-end optical solution. We introduced
TeraManager'TM' and TeraConfigurator'TM' in our management solution portfolio in
fiscal 2002. We also introduced JumpStart'TM', our CWDM solution, in fiscal year
2002. We have also completed the development of a prototype all-optical
wavelength routing switch, the TeraMatrix'TM', which will enable service
providers to dynamically reassign bandwidth in response to changing network
traffic patterns.

     The combination of our GigaMux'r' optical transport products, with the
EPC'TM' sub-rate multiplexer, the JumpStart'TM' CWDM, and TeraManager'TM', our
carrier class network management product, creates an intelligent all-optical
transport solution. When released at a future date, our TeraMatrix'TM' switching
product will provide more efficient use of bandwidth, require less network
equipment and allow for greater scalability.


Leverage our engineering leadership

     We intend to leverage our engineering expertise in the areas of optical,
mechanical, electrical and network management design to continue to provide
leading end-to-end metropolitan and regional optical networking systems and to
expand our market share. We believe we were the first company to commercially
ship a metropolitan optical networking product using DWDM technology. As of
January 31, 2002, we had a skilled team of 67 engineers that continually focus
on developing products for the metropolitan and regional optical transport
market. We believe that our technological leadership has been the key to our
success and will enable us to rapidly develop new product offerings and
end-to-end optical solutions for the metropolitan and regional markets.


Allow our customers to leverage their fiber assets by offering
revenue-generating services

     The majority of our existing customers and targeted customers have a large
amount of fiber assets in the metropolitan and regional network infrastructure.
We intend to continue to develop and provide solutions that will enable our
customers to leverage their existing fiber infrastructure to deliver
revenue-generating services, while reducing their overall network costs. In
addition, we believe our existing customer base provides us with an advantage
when competing for new customers. We intend to continue to work closely with our
customers and invest in sales and marketing resources to maintain our high level
of customer service and remain responsive to our customers' changing needs.


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Aggressively pursue expense reduction initiatives

     The Company plans to aggressively pursue cost reduction initiatives to
bring its expenses in line with current and future anticipated revenues. Such
reductions may affect the size of our workforce, and may require decreasing our
operating expenses and capital spending. During fiscal 2001, we effected three
such initiatives, and anticipate the need for another cost reduction initiative
in the near future.

Maintain our sales, service and support organizations worldwide

     We intend to continue to market our products worldwide. We currently have
sales, service and support teams in North America, Europe and Asia. This global
presence has helped us to position our products into the Asia-Pacific market
with shipments in the fourth quarter of fiscal year 2002. We believe that sales,
service and support efforts on a customer-by-customer basis are most effective
due to the technical evaluation and significant investments that are made by our
customers.


Products

     Our family of optical networking systems is designed to provide our
customers with end-to-end solutions for the metropolitan and regional optical
networking markets. Our transport, access, switching and network management
systems include the following products, some of which are still in development.



     GigaMux'r' - DWDM Optical Transport

         Our GigaMux'r' optical transport product utilizes DWDM technology to
     expand the capacity of new and existing fibers and enable traffic to travel
     throughout metropolitan optical networks without O-E-O conversions at each
     intermediate node. Our GigaMux'r' features wavelength translation,
     wavelength multiplexing, optical amplification, optical add-drop
     multiplexing, protection switching and performance monitoring. The scalable
     and modular architecture of our GigaMux'r' product enables service
     providers to easily and cost-effectively expand their existing networks as
     bandwidth requirements increase. GigaMux'r' can simultaneously transport
     multiple protocols bi-directionally over one or more fibers, which reduces
     the cost and complexity of the network.

         Our GigaMux'r' product is Network Equipment Building Standards, or
     NEBS, level III certified. As of January 31, 2002, we have shipped our
     GigaMux'r' product to over 20 direct carrier customers or resellers
     worldwide. Our GigaMux'r' product includes the following key features:

         o    Scalability: the system can grow from 1 to 64 protected channels
              (640 Gbps/fiber) without a major upgrade or service interruption.

         o    Protocol transparency: the system can aggregate and transport
              SONET/SDH (OC-3/STM-1 through OC-192/STM-64 carrying voice, IP or
              ATM traffic), ESCON, Fibre Channel, Fast Ethernet, Gigabit
              Ethernet and video.

         o    Modular protection: the system's modular protection system allows
              redundancy to be implemented at any point in the network.

         o    Add/drop channels: the system is equipped with add/drop modules
              that allow specific channels to be added or dropped while all
              other channels pass through. Our filter subsystem can add or drop
              from single channels to larger wavelength bands.

         o    Reach: Up to 600 kilometers with optical amplifiers and up to 1000
              km with the addition of dispersion compensation.

     EPC'TM' - Sub-Rate Access Multiplexer

         Electric Photonic Concentrator, or EPC'TM', is our sub-rate access
     multiplexer product that aggregates a wide variety of traffic from
     businesses and network points of presence for high-speed transport
     throughout optical





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     networks. The traffic is aggregated and effectively shares a wavelength per
     direction of transmission and can be ported directly into the DWDM stage of
     our GigaMux'r'. EPC'TM' is designed to lower the cost and increase the
     efficiency of bandwidth delivery within optical networks.

         Our EPC'TM' products include the following key features:

         o     Support for asynchronous or synchronous (SONET/SDH) time division
               multiplexing of data

         o     Provisionable bit rates and protocol and overhead transparency

     JumpStart'TM' - CWDM Transport

         JumpStart is our entry level solution for multiplexing up to 4
     bi-directional data channels using coarse wavelength division multiplexing
     technology on a single fiber. The product is very compact and can be
     stacked to provide additional capacity - 4 channels per fiber.

     TeraManager'TM' - Element Management System

         TeraManager'TM' is our TL1-based intelligent element management
     software platform that provides fault, configuration, performance and
     security management for all the Sorrento networks products and for networks
     built with such products. Service providers can operate our network
     management platform through an easy-to-use graphical user interface, which
     gives users a complete network view and enables "point and click"
     provisioning and monitoring.

         Our TeraManager'TM' product will includes the following features:

         o     Fault, configuration, security and performance management
         o     Carrier class performance
         o     Interface with higher layer operation support systems

     TeraMatrix'TM' - Optical Switching

         We have completed development of a fully functioning prototype of
     TeraMatrix'TM', a MEMS-based, all-optical wavelength routing switch, that
     enables dynamic, real-time wavelength provisioning. TeraMatrix'TM' is
     designed to utilize advanced optical technology to create an all-optical
     switching product requiring significantly less space in the service
     provider's central office than do competing solutions.

         Commercial release of TeraMatrix'TM' is on hold, given the existing
     downturn in telecom spending and the uncertain market demand for an all
     optical metro/regional switch.


Meret Optical Communications

     Our other optical networking subsidiary, Meret Communications, Inc., doing
business as Meret Optical Communications, also markets our new CWDM product, as
well as feature-rich video transport and switching, RF transmission, and RF
synthesis products.

Customers

     Our target customer base includes wholesale and retail broadband service
providers, such as inter-exchange carriers, local and foreign telephone
companies, the telecom affiliates of utility companies (utilicoms), cable
television service providers, system integrators and distributors.

     Our customers generally fit the following customer profiles:

     o   Wholesale Network Providers - these customers provide wavelength and
         broadband services to communication service providers and include
         telecommunication carriers, cable companies and utilicoms.
     o   Managed Services Providers - these customers provide wavelength and
         broadband services to enterprises and include telecommunication
         carriers, cable companies, utilicoms and Internet Service Providers.





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     o   System Integrators - companies that specialize in providing turnkey
         networking solutions for enterprise networks and applications such as
         data-center connectivity and storage area networks.
     o   Major Enterprises - major enterprise customers are generally large
         organizations with complex networking needs, usually spanning multiple
         locations and difficult types of network requirements. Enterprise
         customers include industrial corporations, government agencies, and
         utilities.
     o   Small and Medium Businesses - these customers have a need for networks
         as well as connection to the Internet and/or to their business
         partners. However, they generally have limited resources. Therefore, we
         provide product through systems integrators or Value Added Resellers.

     During fiscal 2002 the majority of our sales were to relatively few
customers, and we expect this customer concentration to continue for the
foreseeable future. For fiscal 2002, we shipped our optical networking products
to a total of 17 customers worldwide. Three customers, AT&T Broadband, Cox
Communications and Deutsche Telekom each represented more than 10% of our net
sales for fiscal 2002 and two customers each accounted for more than 10% of our
net sales during fiscal 2001.

Key Relationships

     We have entered into long-term agreements with some of our customers and
strategic allies, including:

AT&T Broadband Network Solutions

     In February 2000, we entered into a strategic alliance agreement with AT&T
Broadband. Under the terms of this agreement, we and AT&T Broadband Network
Solutions agreed to negotiate in good faith concerning the implementation of a
number of joint sales and marketing initiatives. AT&T Broadband also agreed to
help introduce our technology to individuals at other AT&T divisions and to
provide feedback concerning our products' performance. The initial term of this
agreement expired in February 2002 and was automatically renewed for an
additional one-year term. Similar automatic renewals will occur in each
succeeding February. Either we or AT&T Broadband may terminate the agreement for
any reason upon ninety days notice. In addition, we concurrently entered into an
equipment purchase agreement. We started shipping our products to AT&T Broadband
in the second quarter of fiscal year 2001.

INRANGE Technologies

     In March 2000, we entered into a strategic alliance agreement with INRANGE.
Under the terms of the agreement, INRANGE will act as an exclusive worldwide
distributor of our optical networking products for storage networks of
enterprise customers. INRANGE has agreed to offer our wave division multiplexing
(WDM) and dense wave division multiplexing, or DWDM products, including
GigaMux'r', as part of family of virtual storage networking products. In
addition, INRANGE must purchase minimum amounts of our products in order to
retain exclusive worldwide rights for offering our products in the enterprise
storage networking market. These products will facilitate the creation of
virtual storage networks by reducing the costs of sending information over long
distances. The initial term of this agreement expires in March 2005 and will be
automatically renewed for additional two-year terms. INRANGE has agreed to
purchase targeted minimum amounts of products from us. We have a right to
terminate this agreement with sixty days prior written notice to INRANGE in the
event INRANGE fails to purchase the applicable targeted minimum amounts of
products. In fiscal year 2002, INRANGE did not meet its minimum purchase
commitment under this agreement. In addition, General Signals Holding Company,
the parent company of INRANGE, purchased 550,459 of our Sorrento subsidiary's
series A convertible preferred shares in March 2000. We started shipping our
products to INRANGE in the second quarter of fiscal year 2001.

United Pan-Europe Communications

     In March 2000, we entered into a strategic alliance agreement and an
equipment purchase agreement with United Pan-Europe Communications, N.V., or
UPC. Under the terms of these agreements, United Pan-Europe Communications has
agreed to make Sorrento a supplier for optical networking products in networks
deployed throughout Europe. These agreements also contemplate our working
together with United Pan-Europe Communications on joint sales and marketing
initiatives. The likelihood of any large scale deployments by UPC given its
current operating environment is questionable, and the future benefit to the
Company from this relationship is uncertain. The initial terms of these
agreements expire in March 2003 and will be automatically renewed for additional



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<PAGE>

one-year periods unless either we or United Pan-Europe Communications provide
notice at least 90 days prior to the expiration of the then-current term of the
intent to terminate the agreements. In addition, UnitedGlobalCom, Inc., parent
to United Pan-Europe Communications, purchased 3,027,523 of our Sorrento
subsidiary's series A convertible preferred shares in March 2000, through an
affiliated entity. We started shipping our products to UPC in the second quarter
of fiscal year 2001.

Looking Glass Networks

In August 2001, we entered into an equipment purchase agreement with Looking
Glass Networks, or LGN. Under the terms of this agreement, LGN agreed to
purchase metro DWDM optical networking equipment from Sorrento as the primary
supplier. LGN also agreed to receive early adopter access to new and emerging
Sorrento technologies, and to serve as a beta tester for new and emerging
equipment and to provide feedback concerning our products' performance. The
initial term of this agreement expires in August 2004 and will be automatically
renewed for additional one-year terms. Either LGN or Sorrento may terminate the
agreement at the end of the initial or any renewal term upon ninety days notice.
We started shipping our products to LGN in the third quarter of fiscal year
2002.

TeraBeam

     In June 2000, we entered into a development, purchase and strategic
partnership agreement with TeraBeam. Under the terms of this agreement, the
customer has agreed to make commercially reasonable efforts to purchase target
quantities of our products but is not contractually committed to purchase these
target quantities. The initial term of this agreement is 48 months from the date
of the first commercial shipment of our products to the customer. At the end of
the initial term, the agreement will automatically renew for four successive one
year terms. Either we or the customer may terminate the agreement for any reason
upon 180 days prior written notice as to the initial term or 90 days prior
written notice as to any renewal term. In addition, either we or this customer
may terminate the agreement at any time subject to customary termination
provisions. Commercial shipments under this agreement have not as yet begun, and
the future benefit to the Company from this relationship is uncertain.

Sales and Marketing

     Our sales effort is currently focused on North America, Europe and Asia. As
of January 31, 2002 our sales and marketing organization included 55 employees,
including account managers, sales engineers and support personnel. In North
America, Europe and Asia, we sell our products through our direct sales force as
well as through system integrators. Our international direct sales force is
located in France, Belgium, Germany, Spain, Singapore and China.

     In support of our worldwide selling efforts, our marketing team targets
potential customers through in-depth market analysis. Our marketing objectives
include building market awareness and acceptance of our products as well as
expanding our customer base. Our customer acquisition strategy has focused on
targeting customers who are aggressively building network infrastructure and are
looking to leverage existing fiber assets to generate additional revenue from
broadband services. This focus has led to strategic supply agreements with
several MSOs, utilities, and to a lesser extent CLECs. We also plan to target
incumbent carriers as they expand the development of their metropolitan and
regional fiber networks. Marketing personnel coordinate our participation in
trade shows, seminars and industry events and conduct media relation's
activities with trade and general business publications. We participate in many
industry organizations responsible for developing standards that are used in
optical networks.

Customer Service and Support

     Our customer service and support team provide a critical component of our
customer satisfaction initiative. This team provides support to our customers
allowing them to successfully design and implement their optical networks. All
services can be customized to meet the needs our customers. Our staff is
experienced, and has the equipment necessary to support both installation and
problem resolution. A variety of installation service packages supports the
implementation from start up to upgrades and maintenance. Specialists are
available 7 days a week, 24 hours a day. We offer a Technical Assistance Center
as well as field services support. Multiple technical support service agreements
allow our customers to define the level of support they require. Our customer
service and support team




                                       9





<PAGE>

provides installation, maintenance and training programs addressing the product,
installation and maintenance processes and can be delivered at the customer
location or at our training facility.

     We currently provide service and support to our international customers on
a direct basis and are establishing service and support agreements throughout
the world. To date revenues from service and support agreements have not been
material. We intend to continue to develop our internal team to meet the needs
of our customers and will utilize strategic partners to allow us to provide
greater value when appropriate.

     We provide a total service solution. Our hardware products are warranted
against defects for a period of 12 to 36 months dependent on purchase
agreements, including technical support and parts repair/replacement. We also
offer support contracts for a fee to our customer base, thereby allowing our
customers to select a service plan tailored to their own particular needs.

Research and Development

     We have assembled a team of highly skilled engineers with extensive
experience in the fields of optical, mechanical, electrical and network
management design. We believe that our success in introducing DWDM optical
technology for use in the metropolitan and regional markets was a result of our
strength in research and development. As of January 31, 2002, 67 employees were
engaged in research and development efforts. Our research and development
efforts are focused on new product development as well as enhancing performance
and reliability of our existing products. We believe that our research and
development efforts are key in maintaining technical competitiveness, delivering
innovative products, and addressing the needs of the regional and metropolitan
market.

     Our engineering, research and development expenses were $13.7 million,
$23.9 million, and $11.7 million for the years ended January 31, 2002, January
31, 2001 and January 31, 2000, respectively. The Company plans to continue to
make substantial investments in research and development for both new product
development and enhancement of existing products.

Manufacturing and Quality

     We outsource the manufacturing of our products. We design our products and
perform system integration, quality control, final testing and configuration at
our San Diego, California and Fremont, California locations. Our San Diego
facility is ISO-9002 certified and we have begun the process of becoming
ISO9000/2000. By meeting such standards, we assure our customers that we meet
internationally recognized standards for quality, customer care and sound
management practices. We believe that outsourcing our manufacturing allows us to
conserve working capital, flexibly respond to changes in market demand and more
quickly deliver products to our customers.

     We currently purchase products from our contract manufacturers and other
suppliers on a purchase order basis. We generally do not enter long-term
contracts with our contract manufacturers or suppliers, and they are not
obligated to perform services for us for any specific period or at any specified
price, except as may be provided in a particular purchase order. We purchase a
limited number of key components used in the manufacturing of our products from
a limited number of suppliers and some of our components are purchased
exclusively from a single supplier on a purchase order basis.

Patent, Trademarks and Licenses

     We currently hold approximately 20 patents and have several patent
applications pending. Although we attempt to protect our intellectual property
rights through patents, trademarks, and copyrights, maintaining certain
technology as trade secrets and other measures, we cannot assure that any
patent, trademark, copyright or other intellectual property rights owned by us
will not be invalidated, circumvented or challenged, that such intellectual
property rights will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the
claims sought by us, if at all. We cannot assure that others will not develop
technologies that are similar or superior to our technology, duplicate our
technology or design around the patents that we own. In addition, effective
patent, copyright and trade secret protection may be unavailable or limited in
certain foreign countries in which we do business or intend to do business in
the future. We also have licensed and




                                       10





<PAGE>

may in the future license technologies from other companies on a non-exclusive
basis. For example, our CWDM product incorporates technology purchased from
Entrada Networks, Inc., a former affiliate of the Company, that we then enhanced
to complete a commercially feasible product.

     We believe that the future success of our business will depend on our
ability to translate the technological expertise and innovation of our personnel
into new and enhanced products. We cannot assure that the steps taken by us will
prevent misappropriation of our technology. In the future, we may take legal
action to enforce our patents and other intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could harm our business and operating results.

     As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.

Working Capital Practices

     We have historically maintained high levels of inventories to meet output
requirements of our customers and to ensure an uninterrupted flow of inputs from
suppliers. It is not our standard policy to grant customers the right to return
merchandise that performs according to specifications. Typical payment terms
require payment within thirty days from the date of shipment, however, for one
customer we extend a 180 day payment term.

     We perform ongoing credit evaluations of each customer's financial
condition and extend unsecured credit related to the sales of various products.
From time to time we receive financial instruments such as letters of credit for
payments for international customers. At January 31, 2002, accounts receivable
due from Cox Communications, Deutsche Telekom, iNOC and UPC accounted for 13.9%,
24.7%, 20.0%, and 19.8% of net receivables.

Our Backlog

     At January 31, 2002 the Company had minimal backlog. Our backlog consists
of orders confirmed with a purchase order for products to be shipped within
twelve months to customers with approved credit status. We do not believe that
backlog, as of any particular date, should be used as an indication of sales for
any future period for two reasons. First, orders are increasingly being booked
and shipped in a short period of time and therefore are never calculated in the
backlog amount at the end of any particular quarter. Second, customers have and
can change delivery schedules or cancel orders without a significant penalty.


Competition

     The market for optical networking equipment is extremely competitive and
subject to rapid technological change. We expect competition to intensify in the
future. Our primary competitors in the DWDM market include vendors of optical
networking and infrastructure equipment such as Nortel Networks, CIENA
Corporation, ONI Systems, Cisco Systems, Lucent Technologies, and Sycamore
Networks, as well as private companies that have been or will be focusing on our
target markets. Our primary competitors for our CWDM products include Adva,
Controlware, ONI Systems, LuxN and others. Many of our competitors have
significantly greater financial resources and are able to devote these greater
resources to the development, promotion, sales and support of their products. In
addition, many of our competitors have more extensive customer relationships
than we do, including relationships with our potential customers. We believe
each of our competitors has optical networking products in various stages of
development.




                                       11





<PAGE>

     We believe the principal competitive factors in the optical networking
market are:

     o    product performance, features, functionality and reliability;

     o    price/performance characteristics;

     o    timeliness of new product introductions;

     o    relationships with existing customers; and

     o    service, support and financing.

     We believe we compete favorably with our competitors with respect to most
of these factors.

     The competitors for Meret's legacy products include Pesa, Artel, RGB
Spectrum, Utah Scientific, and many other companies.

     Increased competition may result from further price reductions, reduced
gross margins and loss of market share, any of which could materially and
adversely affect our business, operating results and financial condition. There
can be no assurance that we will be able to compete successfully against current
and future competitors, or that competitive factors will not have a material
adverse effect on our business, operating results and financial condition.

Environmental Compliance

     We are required to file environmental compliance reports with the Federal
Food and Drug Administration regarding the emissions levels of our laser-based
products, which are used in fiber optics communications. All of our products
comply with required safety level standards.

Employees

     As of January 31, 2002, we had 217 employees of which 67 were in research
and development, 55 in sales and marketing, and the remainder in manufacturing
and in general and administrative functions. Of the 67 employees in research and
development 28 have masters degrees and 23 have doctorate degrees. We also
employ a number of part-time and temporary personnel from time to time in
various departments. Our future success will depend in part on our ability to
attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense. None of our employees are covered by
a collective bargaining agreement and we believe that our relations with our
employees are good.

Forward-Looking Statements - Cautionary Statement

     All statements other than statements of historical fact contained in this
Form 10-K, in our future filings with the Securities and Exchange Commission, in
our press releases and in our oral statements made with the approval of an
authorized executive officer are forward-looking statements. Words such as
"propose," "anticipate," "believe," "estimate," "expect," "intend," "may,"
"should", "could," "will" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, such statements
involve risk and uncertainties and no assurance can be given that actual results
will be consistent with these forward-looking statements. Important factors that
could cause actual results to differ materially from those forward-looking
statements include without limitation: our ability to successfully develop, sell
and market our optical networking and other products; our expectations
concerning factors affecting the markets for our products, such as demand for
increased bandwidth; the scope and duration of the economic slowdown currently
being experienced by many of our existing and prospective customers; our ability
to compete successfully with companies who are much larger than we are and who
have much greater financial resources at their disposal; our ability, or
failure, to complete strategic alliances and strategic opportunities such as
sales or spin-offs of subsidiaries or business units on terms favorable to us
for reasons either within or outside our control; our ability successfully to
finance our current and future needs for working capital; changed market
conditions, new business opportunities or other factors that might affect our



                                       12





<PAGE>

decisions as to the best interest of our shareholders; and other risks detailed
from time to time in our reports filed with the Securities and Exchange
Commission.

     We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the
following section. We specifically decline any obligation to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.


Factors That May Affect Future Results

     In connection with the safe harbor contained in the Private Securities
Reform Act of 1995 we are hereby identifying important factors that could
cause actual results to differ materially from those contained in any
forward-looking statements made by us or on our behalf. Any such statement is
qualified by reference to the following cautionary statements:

We will need additional funds to support operations in the future in order to
continue to enhance and expand our product offerings and to penetrate additional
market share in the regional and metropolitan marketplace. If we are unable to
obtain new investment, we will have to reduce or cease operations, or attempt to
sell some or all of our operations or to merge with another entity.

     The further development of our products as well as the expansion of
manufacturing capabilities or the establishment of additional sales, marketing
and distribution capabilities will require the commitment of substantial funds.
Our existing working capital will not be sufficient to meet these expansion
plans. Potential sources of additional funds include public or private offerings
of debt or equity securities, bank lines of credit or extensions of existing
arrangements by us or our Sorrento subsidiary. Additional financing may not be
available on terms favorable to us, or at all. Insufficient funds may require us
to delay, scale back or eliminate certain product development programs, or
attempt to merge with another entity or otherwise reduce or cease operations. We
also expect that, as a result of the slowdown in capital spending in the telecom
industry, we will need to reduce our expenses in the near future to bring them
in line with reduced revenues in order to conserve our working capital.
Moreover, without adequate financing, potential customers who otherwise would
select our products to purchase may decide to buy from other vendors who they
perceive to have greater financial stability.

The Series A Preferred Stock issued by our Sorrento Networks, Inc. subsidiary
("SNI"), and a preliminary injunction obtained by some of the holders of that
stock, could have a material adverse effect on our ability to raise the capital
that we need.

     Certain holders of SNI's Series A preferred stock obtained a preliminary
injunction in September 2001 from the Delaware Court of Chancery, which was
affirmed by the Delaware Supreme Court in January 2002. The injunction prohibits
SNI from issuing additional shares of Series A preferred stock and from
incurring debt without the consent of the holders of a majority of the
outstanding shares of Series A preferred stock. The Court of Chancery will
decide whether to make this injunction permanent at a trial that is not
currently scheduled. We cannot predict the outcome of that trial. The injunction
against SNI, our principal operating subsidiary, issuing Series A preferred
stock, makes it very difficult to fund SNI as its business operations require.
The Company, however, does have the right to make such capital contributions to
SNI to fund its operations as the Board may deem necessary. Capital
contributions do not increase the Company's ownership interest in SNI, but
rather increases the basis of our ownership interest. The Board has authorized
capital contributions to be made when necessary to fund the SNI operations, but
there can be no assurance that the Board will continue to authorize such
contributions in the future should other funding methods continue to be
unavailable.


                                       13





<PAGE>

The redemption rights of the Series A preferred stock of our Sorrento
subsidiary, Sorrento Networks, Inc., or SNI, could have a negative impact on the
Company's business.

     In April 2001, the holders of the Series A preferred stock exercised their
right to ask SNI to redeem their shares for approximately $49 million in cash.
Such request can only be paid from lawfully available funds of which SNI has
none available and would normally be generated from operating profits of the
business. SNI does not foresee any such profits in the near future. As a result,
the Company is in negotiations with the Holders of Series A Stock to allow them
to convert their Series A Stock to either the Company's common shares, preferred
shares or a combination of both. While negotiations have been under way for a
significant period of time, the Company has not reached an agreement with the
Series A Holders and there is no assurance that it will do so in the future.
Such uncertainty could impact the business negatively on both a short term and
long term basis.

We have a history of losses and expect to incur future losses.

     We have incurred operating losses during the years ended January 31, 2002,
2001 and 2000 of $37.2 million, $50.4 million and $10.0 million, respectively,
and as of January 31, 2002, we had an accumulated deficit of $161.3 million. We
expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large expenses in
the areas of sales and marketing, research and development, manufacturing, and
general and administrative expenses that are not covered by our current sales
volume and resulting gross margin. Currently, the majority of revenues are from
shipments of our optical networking product lines. In order for us to become
profitable, we will need to generate and sustain higher revenue while
maintaining reasonable expense levels.

Our history of losses and future losses could impact our ability to finance our
business, cause defaults under obligations to our Holders of Senior Debentures
and risk our ability to continue operating.

     The Company has incurred significant losses and may incur significant
losses in the future. Such losses could cause our equity balance to fall below
necessary levels to be in compliance with our Senior Convertible Debenture
agreements and impact the Company's ability to finance its future operations. In
addition, deficient equity could violate minimum listing requirements for our
publicly traded stock on Nasdaq and could cause significant decline in
shareholder value and stock price.

Your percentage of ownership and voting power, and the price of our common stock
may decrease because we may issue a substantial number of shares of common
stock, or securities convertible or exercisable into our common stock.

     We have the authority to issue up to 150 million shares of our common stock
and 2 million shares of our preferred stock without shareholder approval. We may
also issue options and warrants to purchase shares of our common stock. These
future issuances could be at values substantially below the price paid for our
common stock by current stockholders. We may conduct additional future offerings
of our common stock, preferred stock, or other securities with rights to convert
the securities into shares of our common stock, which may result in a decrease
in the value, or market price of our common stock. Further, the issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change of ownership without further vote or action by the stockholders and may
adversely affect the voting and other rights of holders of common stock.

Provisions of our charter documents and New Jersey law may have anti-takeover
effects that could prevent a change in control, which could negatively affect
the market price for our stock.

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

Our industry is highly competitive, and we may not have the resources required
to compete successfully.



                                       14





<PAGE>

     The market for optical networking equipment is extremely competitive. We
expect competition to intensify in the future. Our primary sources of
competition include vendors of optical networking and infrastructure equipment
such as CIENA Corporation, Cisco Systems, Lucent Technologies, Nortel Networks,
ONI Systems, Sycamore Networks, and ADVA AG Optical Networking as well as
private companies that have been or will be focusing on our target markets. The
competitors for Meret's legacy products include Pesa, Artel, RGB Spectrum, Utah
Scientific, and many other companies. We may also face competition from a number
of other companies that have announced plans for new products to address the
same network problems that our products address. Many of our current and
potential competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources than we do. Our competitors also
may have more extensive customer relationships than us, including relationships
with our current and potential customers. If we are unable to compete
successfully against our current and future competitors, we could experience
pricing pressures, reduced gross margins and order cancellations, any one of
which could seriously harm our business.

Our business may be seriously harmed if the market for optical networking
products in metropolitan and regional areas does not develop as we expect.

     Our current and future product offerings are focused on the needs of
providers that service regional and metropolitan areas. The market for optical
networking products in regional and metropolitan areas is not yet mature, and
we cannot be certain that a feasible market for our products will develop or be
sustainable. In addition, the market has suffered a cutback in capital spending
from both enterprise and carrier customers as a result of poor economic
conditions. If this market does not develop, or develops more slowly than we
expect or continues to be impacted by the reduction in capital spending, our
business may be seriously harmed. Furthermore, the optical networking industry
is subject to rapid technological change, and newer technology or products
developed by others could render our products less competitive or obsolete. In
developing our products, we have made, and will continue to make, assumptions
about the optical networking standards that our customers and competitors may
adopt.

     If the standards adopted are different from those which we have chosen to
support, market acceptance of our product would be significantly reduced and our
business will be seriously harmed.

Our future growth depends on our ability to attract new customers, and on our
customers' ability to sell additional services to their own customers.

     Most of our potential customers evaluate optical networking products for
deployment in large telecommunications systems that they are installing. There
is only a relatively limited number of potential customers for our products. If
we are not selected by a potential customer, our revenues and ability to grow
our business may be seriously harmed. Similarly, our growth depends on our
customers' success in selling communications services based on our products and
complementary products from others. Our success will depend on our ability to
effectively anticipate and adapt to customer requirements and offer products and
services that meet customer demands. Any failure of our current or prospective
customers to purchase products from us for any reason, including a downturn in
their business, would seriously harm our ability to grow our business.

If we fail to establish and successfully maintain strategic alliances, long-term
contracts and relationships with distributors and system integrators, our
ability to grow and be profitable may be seriously harmed.

     Strategic alliances and long-term contracts are an important part of our
effort to expand our sales opportunities and technological capabilities. To
date, we have entered into strategic alliances with AT&T Broadband, United
Pan-Europe Communications, INRANGE, Looking Glass, and Terabeam. In addition we
have a long-term contract with Cox Communications. We cannot be certain that our
existing alliances and long-term contracts will not be cancelled or that we will
be able to enter additional strategic alliances on terms that are favorable to
us. Our agreements to date with our strategic allies are non-exclusive, and we
anticipate that future agreements will also be on a non-exclusive basis. These
agreements are generally short term, have no minimum financial commitments on
either side and can be cancelled without significant financial consequence. In
addition, we cannot be certain that our existing and any future strategic
alliances will be successful. As we expand internationally, we will increasingly
depend upon distributors and system integrators. Our ability to grow and be
profitable may be seriously harmed if we fail to establish and maintain
strategic alliances, long-term contracts and relationships with distributors and
system integrators.



                                       15





<PAGE>

We rely on a small number of customers for most of our revenues and any loss,
cancellation, reduction or delay in sales to, or collections from, any single
customer could seriously harm our business.

     Our customer base is highly concentrated. Historically, orders from a
relatively limited number of customers accounted for most of our net sales.
During the year ended January 31, 2002, five customers accounted for 61.9% of
net sales and in fiscal year 2001, five customers accounted for 44.4% of our net
sales. We expect that, for the foreseeable future, sales to a limited number of
customers will continue to account for a high percentage of our net sales. We
currently do not have any long-term purchase commitments with any of our
customers, and we are subject to the varying purchase cycles of our customers.
Our concentrated customer base significantly increases the credit risks
associated with slow payments or non-payments by our customers. The loss or
delay of orders or slow or non-payment from, any of our largest customers could
adversely impact our business.

Our backlog at any point may not be a good indicator of expected revenues.

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

Our operating results are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors, causing our
stock price to decline.

     Our revenues and operating results will vary significantly from quarter to
quarter and year to year due to a number of factors, many of which are outside
of our control and any of which may cause our stock price to fluctuate. Some of
the factors that may affect us include changes in market demand for our optical
networking products, the cost and availability of components used in our
products, the timing and amount of customer orders, the length and
unpredictability of the sales and deployment cycles of our products, the timing
of new product introductions and enhancements by our competitors and ourselves,
changes in our pricing or the pricing of our competitors, our ability to attain
and maintain production volumes and quality levels of our products, and general
economic conditions as well as those specific to the telecommunications and
related industries.

If we are unable to comply with regulations affecting our customers' industries,
our revenues may be seriously harmed.

     Our customers are involved in industries that are subject to extensive
regulation by domestic and foreign governments. If we fail to conform our
products to these regulatory requirements, we could lose sales and our business
could be seriously harmed. Additionally, any failure of our products to comply
with relevant regulations could delay their introduction and require costly and
time-consuming engineering changes.

The time that our customers and potential customers require for testing and
qualification before purchasing our products can be long and variable, and may
require us to invest significant resources without any assurances of sales,
which may cause our results of operations to be unpredictable.

     Before purchasing our products, potential customers typically undertake a
lengthy evaluation, testing and product qualification process. In addition,
potential customers often require time-consuming field trials of our products.
Our sales effort requires the effective demonstration of the benefits of our
products to, and significant training of, potential customers. In addition, even
after deciding to purchase our products, our customers may take several years to
deploy our products. The timing of deployment depends on many factors, including
the sophistication of a customer and the complexity and size of a customer's
networks. Our sales cycle, which is the period from the time a sales lead is



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<PAGE>

generated until the recognition of revenue, can often be longer than one year.
The length and variability of our sales cycle is influenced by a variety of
factors beyond our control, including our customers' buildout and deployment
schedules, our customers' access to product purchase financing, our customers'
needs for functional demonstration and field trials, and the manufacturing lead
time for our products. Because our sales cycles are long and variable and may
require us to invest significant resources without any assurances of sales, our
results of operations may be unpredictable.

The GigaMux'r', EPC'TM', TeraManager'TM' and JumpStart'TM' are our only
currently available significant products, and if they are not commercially
successful, our revenue will not grow and we may not achieve profitability.

     If our customers and potential customers do not adopt, purchase and
successfully deploy our GigaMux'r',EPC'TM', TeraManager and JumpStart products
in large numbers, our revenue may not grow and our business, financial condition
and results of operations will be seriously harmed. Since the market for our
products is relatively new, future demand for our products is uncertain and will
depend on the speed of adoption of optical networking, in general, and optical
equipment in metro and regional networks, in particular.

If we are not able to develop and commercialize new or enhanced products, our
operating results and competitive position will be seriously harmed.

     Our growth depends on our ability to successfully fund and develop new and
enhanced products. The development of new or enhanced products is a costly,
complex and uncertain process that requires us to anticipate accurately future
technological and market trends. Our next generation of transport and network
management products, as well as our TeraMatrix'TM' line of wavelength switching
products, are currently under development. We cannot be sure whether these or
other new products will be successfully developed and introduced to the market
on a timely basis, or at all. We will need to complete each of the following
steps to successfully commercialize these and any other new products, complete
product development, qualify and establish component suppliers, validate
manufacturing methods, conduct extensive quality assurance and reliability
testing, complete software validation, and demonstrate systems interoperability.

     Each of these steps presents serious risks of failure, rework or delay, any
one of which could adversely affect the rate at which we are able to introduce
and market our products. If we do not develop these products in a timely manner,
our competitive position and financial condition could be adversely affected.

     In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so, we
may disrupt customer ordering patterns or may not be able to ensure that
adequate supplies of new products can be delivered to meet anticipated customer
demand. Any failure to effectively manage this transition may cause us to lose
current and prospective customers.

If our products do not interoperate with our customers' networks, installations
will be delayed or cancelled or our products could be returned.

     Many of our customers require that we design products to interoperate with
their existing networks, each of which may have different specifications and
utilize a variety of protocols. Our customers' networks contain multiple
generations of products that have been added over time as these networks have
grown and evolved. Our products must interoperate with all of the products
within these networks as well as future products in order to meet our customers'
requirements. If we are required to modify our product design to be compatible
with our customers' systems to achieve a sale, it may result in a longer sales
cycle, increased research and development expense and reduced margins on our
products. If our products do not interoperate with those of our customers'
networks, installations could be delayed, orders for our products could be
cancelled or our products could be returned, any of which could seriously harm
our business.

Our products may have errors or defects that we find only after deployment,
which could seriously harm our relationship with our customers and our
reputation.

     Our customers may discover errors or defects in our products, and our
products may not operate as expected. If we are unable to fix errors or other
problems that may be identified on a timely basis, we could experience losses of
or





                                       17





<PAGE>

delays in revenues and loss of market share, loss of customers, failure to
attract new customers or achieve market acceptance, diversion of engineering
resources, increased service and warranty costs, and legal actions by our
customers. Any failure of our current or planned products to operate as expected
could delay or prevent their adoption and seriously harm our relationship with
our customers and our reputation.

We depend upon contract manufacturers and any disruption in these relationships
may cause us to fail to meet the demands of our customers and damage our
customer relationships.

     We use contract manufacturers to manufacture and assemble our products in
accordance with our specifications. We currently have three U.S.-based contract
manufacturers. We do not have long-term contracts with any of them, and none of
them is obligated to perform services for us for any specific period or at any
specified price, except as may be provided in a particular purchase order. We
may not be able to effectively manage our relationships with these manufacturers
and they may not meet our future requirements for timely delivery or provide us
with the quality of products that we and our customers require.

     Each of our contract manufacturers also builds products for other
companies. We cannot be certain that they will always have sufficient quantities
of inventory available to fill our orders, or that they will allocate their
internal resources to fill these orders on a timely basis. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming and could result in a significant interruption in the supply of our
products. If we are required to change contract manufacturers, we may suffer
delays that could lead to the loss of revenue and damage our customer
relationships.


We rely on a limited number of suppliers and single suppliers for some of our
components, and our sales and operating results may be seriously harmed if our
supply of any of these components is disrupted.

     We and our contract manufacturers currently purchase several key components
of our products from single and limited sources. We purchase each of these
components on a purchase order basis and have no long-term contracts for these
components. In the event of a disruption in supply or if we receive an
unexpectedly high level of purchase orders, we may not be able to develop an
alternate source in a timely manner or at favorable prices. Any of these events
could hurt our ability to deliver our products to our customers and negatively
affect our operating margins. In addition, our reliance on our suppliers exposes
us to potential supplier production difficulties or quality variations. Any such
disruption in supply would seriously affect our present and future sales.

We expect the average selling prices of our products to decline, which may
reduce gross margins and revenue.

     Our industry has experienced significant erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, new
product introductions by our competitors or other factors. If we are unable to
achieve sufficient cost reductions and increases in sales volumes, the decline
in average selling prices will reduce our gross margins and revenue.

If we are unable to hire or retain highly skilled personnel, we may not be able
to operate our business successfully.

     Our future success depends upon the continued services of our key
management, sales and marketing, and engineering personnel, many of whom have
significant industry experience and relationships. Many of our personnel could
be difficult to replace. We do not have "key person" life insurance policies
covering any of our personnel. The loss of the services of any of our key
personnel could delay the development and introduction of, and negatively impact
our ability to sell, our products. Competition for highly skilled personnel is
intense in our industry, and we may not be able to attract and retain qualified
personnel, which could seriously harm our business.

If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.

     Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive claims of this kind in the future
as we seek to hire qualified personnel or that those claims will not result in
material litigation. We could incur substantial costs in defending ourselves or
our employees against such claims, regardless of their merits. In




                                       18




<PAGE>

addition, defending ourselves from such claims could divert the attention of our
management away from our operations.

We may be unable to protect our intellectual property, which could limit our
ability to compete.

     We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to, and distribution of,
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. If competitors gain access to our
technology, our ability to compete could be harmed.

We could become subject to litigation regarding intellectual property rights,
which could seriously harm our business and require us to incur significant
costs.

     In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may be a party to
litigation in the future to protect our intellectual property or as a result of
an allegation that we infringe upon others' intellectual property rights. Any
parties asserting that our products infringe upon their proprietary rights would
force us to defend ourselves and possibly our customers or manufacturers against
the alleged infringement. These claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. Additionally, any claims and lawsuits,
regardless of their merits, would likely be time-consuming and expensive to
resolve and would divert management time and attention.

     Any claims of infringement on the intellectual property rights of others
could also force us to do one or more of the following: stop selling,
incorporating or using our products that use the challenged intellectual
property, obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which may not be available to
us on reasonable terms, or at all, or redesign those products that use such
technology. If we are forced to take any of the foregoing actions, our business
may be seriously harmed. However, the Company intends to vigorously protect its
intellectual property against all material challenges.

If necessary licenses of third-party technology are not available to us or are
very expensive, our products could become obsolete.

     We have been and may be required to license technology from third parties
to develop new products or product enhancements. We cannot assure you that
third-party licenses will be available to us on commercially reasonable terms,
if at all. If we are required to obtain any third-party licenses to develop new
products and product enhancements, we could be required to obtain substitute
technology, which could result in lower performance or greater cost, either of
which could seriously harm the competitiveness of our products.

We are subject to various risks associated with international sales and
operations.

     Our international operations are subject to a number of risks, including
changes in foreign government regulations and telecommunications standards,
import and export license requirements, tariffs, taxes and other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, the burden of complying with a wide variety of foreign laws,
treaties and technical standards, difficulty in staffing and managing foreign
operations, and political and economic instability.

     The majority of our sales and expenses have been denominated in U.S.
dollars. However, in the future a larger portion of our sales and expenses may
be denominated in non-U.S. currencies. As a result, currency fluctuations
between the U.S. dollar and the currencies in which we do business could cause
foreign currency translation gains or losses that we would recognize in the
period incurred. We cannot predict the effect of exchange rate fluctuations on
our future operating results because of the number of currencies involved, the
variability of currency exposure and the potential volatility of currency
exchange rates. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.




                                       19





<PAGE>

If we do not effectively manage our growth, we may not be able to successfully
expand our business.

     Our business has experienced wide fluctuations in sales volume from quarter
to quarter, and which place a significant strain on our management systems and
resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and manufacturing processes and reporting systems, and will need to
continue to expand, train and manage our workforce worldwide. If we fail to
effectively manage our growth and address the above requirements, our ability to
pursue business opportunities and expand our business could be harmed.


Definitions

As used in this Annual Report on Form 10-K, the following terms have the
meanings indicated:

"ATM" means Asynchronous Transfer Mode, which is a type of networking technology
based on transferring data in cells or packets of a fixed size. The small,
constant cell size allows ATM equipment to transmit video, audio, and data over
the same network, and assure that no single type of data overtakes the line.
Current implementations of ATM support data transfer rates of 25 to 2.48 Gbps.

"Backbone" means a main segment of a network carrying large amounts of traffic.
Individual metro and interoffice rings are attached to the backbone.

"Bandwidth" means the capacity to move information down a communications
channel. Bandwidth is defined by the highest data rates that can be transmitted
by that channel and is commonly measured in bits per second (bps). For example,
Ethernet has a 10 Mbps bandwidth and OC-192 has 10 gigabits per second
bandwidth.

"Bridge" means a device that connects two or more networks of the same access
method (Ethernet to Ethernet or Token Ring to Token Ring) by making simple
forward/don't forward decisions on each data packet received from any of the
networks to which it is connected.

"Broadband" means technologies or networks that have the ability to transmit
high data rates.

"CLEC" means a Competitive Local Exchange Carrier.

"Concentrator" means the connection point, more sophisticated than a hub,
incorporating different types of cable connections, back-up power supply,
data-gathering capability for management purposes and possibly even bridge and
router features as well.

"CWDM" means Coarse Wavelength Division Multiplexing, which is a sophisticated
optoelectronics technology that uses multiple wavelengths of light spaced at
least 400 Ghz apart to increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.

 "DWDM" means Dense Wavelength Division Multiplexing, which is a sophisticated
optoelectronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.

"ESCON" - Enterprise System Connectivity - means a protocol for 200 Mbps signal
transmission speed over fiber optic cable.

"Ethernet" means a 10 Mbps speed network that runs over thick coaxial cable
(10BASE5), thin coaxial cable (10BASE2), twisted-pair (10BASE-T), and
fiber-optic cable. It is the most widely used LAN technology and the most
popular form of Ethernet is 10BASE-T. Ethernet is a network specification that
was developed at Xerox Corp's Palo Alto Research Center, and made into a network
standard by Digital, Intel, and Xerox.

"Fast Ethernet" means a 100 Mbps speed network that runs over thick coaxial,
twisted-pair, and fiber-optic cable. Fast Ethernet is 10 times faster than
Ethernet.

"FDDI" means a Fiber Distributed Data Interface and is a fiber optic network
that supports transmission speeds up to 100 Mbps.






                                       20





<PAGE>

"Fibre Channel" means a serial data transfer architecture standard conceived for
new mass storage devices and other peripheral devices that require very high
bandwidth connections. Bit rates for Fibre channel are either 1.06 Gbps or 2.1
Gbps.

"Gigabit Ethernet" means a 1000 Mbps speed network that runs fiber-optic cable
for wide area network connections.

 "HDTV" means high definition television, which is a new type of television that
provides much better resolution than current television. HDTV is slowly being
implemented into the broadcast networks.

"Hub" means a central connection device to which many network tributaries are
connected.

"ILEC" means Incumbent Local Exchange Carrier and is a telephone company that
provides local services and does not offer long distance services. All the
regional operating companies after the break-up of AT&T became ILECs.

"ISDN" means an Integrated Services Digital Network and is an all-digital
communications network that provides a wide range of services on a switched
basis. Voice, data and video can be simultaneously transmitted on one line from
a source.

"ISO" means International Standards Organization. Founded in 1946, ISO is an
international organization composed of national standards bodies from over 75
countries. ISO has defined a number of important computer standards, the most
significant of which is perhaps is OSI (Open Systems Interconnection), a
standardized architecture for designing networks.

"ISP" means an Internet Service Provider.

"ITU" means International Telecommunications Union, which is an
intergovernmental organization through which private and public organizations
develop telecommunications. The ITU was founded in 1865 and became a United
Nations agency in 1947 and it is responsible for adopting international tax
treaties, regulations and standards governing telecommunications.

"IXC" means an inter-exchange carrier, a long distance telephone company or a
carrier that specializes in connecting central offices of local service
providers. This carrier typically does not offer services to end users. AT&T,
MCI and Sprint are IXCs. A carrier that provides the backbone of competitive
local exchange carriers can also be considered as an IXC. Therefore, an IXC can
provide service in both metropolitan and in long haul networks.

"LAN" means a Local Area Network and is a high-speed communications system
designed to link computers for the purpose of sharing files, programs and
various devices such as printers and high-speed modems within a small geographic
area such as a workgroup, department or single floor of a multi-story building.
LANs may include dedicated computers or file servers that provide a centralized
source of shared files and programs.

"MSO" means a Multiple Service Operator which is typically a cable TV operator
that offers multiple services such as video, voice and data.

"Multiplexing" means a process that combines a number of lower speed data
transmissions into one high-speed data transmission by splitting that total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division). The opposite function of separating the data channels
into their original format is called demultiplexing.

"OC-1, OC-3, OC-12, OC-48, OC-192" means the SONET bit rates of 51.85Mbps, 155
Mbps, 622 Mbps, 2.5 Gbps and 10Gbps transmission speeds for signals over fiber
optic cables. The number in the end of the term corresponds to the equivalent
multiple of OC-1 capacity (e.g., OC-192 means equivalent to 192 times OC-1)

"OEMs" means original equipment manufacturers.

"Opto-Electro-Optical" means Optical-Electrical-Optical which describes the
conversion of optical signals to electric and back to optical. Typically,
devices performing this function in the electrical domain and the signals need
to be converted back to optical for transmission over optical fibers.

"Packet" means the "envelope" in which the network software places a message
being sent from one station to another station in a network. One of the key
features of a packet is that it contains the destination address in addition to
the data.






                                       21





<PAGE>

"POTS" means "plain old telephone service" which refers to the standard
telephone service over copper lines that most homes use. In contrast, telephone
services based on high-speed, digital communications lines, such as ISDN and
FDDI, are not POTS. The main distinction between POTS and non-POTS services is
speed and bandwidth. POTS is generally restricted to about 52Kbps.

"Protocol" means a standard developed by international standards bodies,
individual equipment vendors, and ad hoc groups of interested parties to define
how to implement a group of services in one or more layers of the OSI model. The
Open Systems Interconnect ("OSI") reference model was developed by the ISO to
define all the services a LAN should provide. Ethernet and Token Ring, for
example, are both protocols that define different ways to provide the services
called for in the Physical and Data Link Layers of the OSI model.

"PTT" means Postal, Telephone and Telegraph, and refers to a generic telephone
company outside the United States. Typically, a PTT is state owned and can
operate both local and long distance services.

"RBOC" means a Regional Bell Operating Company.

"Router" means a network translator that reads network-addressing information
within packets to provide greater selectivity in directing traffic over multiple
network segments. It is a more complex inter-networking device.

"SDH" means Synchronous Digital Hierarchy which is transmission protocol for
high speed transmission over fiber optic cable published in 1988 by the
Consultative Committee for International Telegraph and Telephony. It a hierarchy
similar to SONET but in this case the lowest bit rate channel is STM-1 (155
Mbps).

"SONET" means a transmission protocol for high-speed transmission over fiber
optic cable, which was introduced by Bell Communications in 1984 and quickly
accepted by American National Standards Institute.

"Switch" means a device that allows the network operator to vary and select
connections between network nodes at very high speeds.

"T-1" means a dedicated phone connection supporting data rates of 1.544 Mbps. A
T-1 line actually consists of 24 individual channels, each of which supports
64Kbps and can be configured to carry voice or data traffic. T-1 lines are
sometimes referred to as DS-1 lines.

"TCP/IP" means Transmission Control Protocol/Internet Protocol, which is a suite
of protocols used for communications between two or more devices.

"TDM" means time division multiplexing which is a multiplexing process that
combines a number of lower speed data transmissions into one high-speed data
transmission by allotting a common channel to several different transmitting
devices one at a time in sequence.

"Token Ring" means a 4 Mbps or 16 Mbps speed network that uses different
technology than Ethernet to co-ordinate the transmission of data among nodes.

"WAN" means a Wide Area Network and is a communications network that connects
geographically dispersed users. Typically, a WAN consists of two or more LANs.
The largest WAN in existence is the Internet.


Item 2.  Properties.

     We recently moved our headquarters to the San Diego, California facility
that we own consisting of approximately 36,000 square feet used for offices,
research and development and manufacturing. We also own a 47,000 square foot
facility in San Diego, California adjacent to our headquarters that is used for
offices, manufacturing and customer support.

     We occupy an additional 16,860 square feet used for office, research and
development and manufacturing activities under lease as detailed below:

<TABLE>
<CAPTION>
   Location                     Square Footage         Facility Type                   Expiration Date
   --------                     --------------         -------------                   ---------------
<S>                             <C>                    <C>                             <C>
   Santa Monica, California     6,000                  Office                          April 30, 2003
   Fremont, California          5,000                  Office/Manufacturing            July 31, 2003
   San Diego, California        3,000                  Office/R&D/Manufacturing        n/a - month to month
   Richardson, Texas            2,860                  Office                          September 30, 2003

</TABLE>




                                       22





<PAGE>



     We have two sales office located in the United States (San Diego and
Richardson), three sales offices located in Europe (The Netherlands, Belgium and
Germany) and two sales office located in Asia (China and Singapore) totaling
approximately 14,000 square feet. All such offices are leased for varying terms.

     We believe that suitable additional space will be available to us, when
needed, on commercially reasonable terms. See Note E to the Consolidated
Financial Statements contained in Part II herein for terms and amounts of
mortgages on the facility we own.


Item 3.  Legal Proceedings

     On September 10, 2001, holders of a portion of the outstanding Series A
Preferred Stock of our Sorrento subsidiary obtained a preliminary injunction
from the Delaware Court of Chancery prohibiting it from issuing further shares
of its Series A Preferred Stock or incurring any additional debt without the
consent of the holders of a majority of the currently outstanding shares of such
Series A Preferred Stock. On January 23, 2002, the Delaware Supreme Court
affirmed the granting of the preliminary injunction.

     On October 19, 2001, an amended complaint was filed in the injunction
action, adding as named defendants, the Company, our Meret subsidiary, certain
present and former officers and directors of the Company and our subsidiaries as
well as our investment bankers. The amended complaint also added, among other
things, claims for fraud, securities fraud, breach of fiduciary duty,
conspiracy, and intentional interference with contract as well as requesting the
appointment of a receiver for our Sorrento subsidiary, all which claims are
based on alleged wrongs committed in connection with or since the Series A
placement. Our Sorrento subsidiary and the original individual defendants have
all answered this amended complaint denying all allegations of wrongdoing. The
new defendants have all moved to dismiss the amended complaint. Management
believes the allegations contained in the amended complaint are without merit.

     On December 14, 2001, plaintiffs filed motions to sequester the common
stock of our Sorrento subsidiary owned by Meret and the Sorrento Series A
preferred stock that we own, as an alternative method of obtaining jurisdiction
over us and Meret in the Delaware litigation. Management also believes that
these motions are without merit.

     Currently, hearings on all pending motions have been taken off calendar
at the request of all parties, pending the resolution of ongoing settlement
discussions between the Company and the plaintiffs. While the Company is
encouraged at the progress of these negotiations, there can be no assurance
that a settlement will be reached.

     During June 2000, we entered into various agreements with Par Chadha, our
former CEO and Chairman, which, among other matters, provides for payments of
$250,000 per year for three years of consulting services and loans by us for
the exercise of previously granted options to acquire 1,178,500 options at
prices varying from $7.03 to $49.25 per share. As the members of our Board of
Directors at the time of his resignation ceased to represent more than 50%
of the Board in October 2000, all payments for consulting services were
accelerated and no future consulting services are required. During October
2000, Mr. Chadha exercised 71,112 options, applying the $500,000 accelerated
payment to the exercise. In addition, he exercised 507,388 options for which
we are contractually obligated to loan the $5,034,000 due on the exercise.
During September 2001, Mr. Chadha notified us that he does not have any
obligations under the agreements. We have notified him that we do not agree
with his interpretation of his repayment obligations under the terms of the
agreements.

     During December 2001, we entered into an agreement whereby the 507,388
option exercise was rescinded. Mr. Chadha returned the 507,388 shares to us for
cancellation and we cancelled the receivable due from him and restored the
original option agreements. This rescission agreement did not resolve any
underlying dispute as to the option loan repayment obligations. We anticipate
this dispute will be resolved through binding arbitration. Should




                                       23





<PAGE>

Mr. Chadha prevail in the arbitration, the Company may be required to issue him
1,178,500 shares of the Company's stock for no consideration.

     In April 2002, our former Chairman and CEO, Dr. Xin Cheng, filed a
claim in arbitration seeking, among other things, payment of $500,000 and
acceleration of the vesting of options pursuant to alleged contractual
obligations of our Sorrento subsidiary. The Company is disputing these claims.

     From time to time, we are involved in various other legal proceedings
and claims incidental to the conduct of our business. Although it is impossible
to predict the outcome of any outstanding legal proceedings, we believe that
such legal proceedings and claims, individually and in the aggregate, are not
likely to have a material effect on our financial position, results of
operations, or cash flows.


Item 4.  Submission of Matters to a Vote of Security Holders

     Our Annual Meeting of Stockholders was held on February 21, 2002. During
the Annual Meeting, the stockholders elected our nominees to the Company's Board
of Directors to serve for the term of one year or until their successors have
been elected and qualified with each nominee receiving no less than of the total
votes cast for the election of directors.

     In addition, the stockholders approved the following proposals:

<TABLE>
<CAPTION>
                                                                        Votes                              Broker
                                                    Votes For          Against          Abstentions       Non-Votes
                                                    ---------          -------          -----------       ---------
<S>                                                 <C>                  <C>               <C>            <C>
Ratification of the appointment of
     BDO Seidman, LLP as auditors                   11,111,316         629,573            10,731             n/a

</TABLE>














                                       24





<PAGE>



                                     PART II


Item 5. Market for Company's Common Equity and Related Stockholder Matters.

Our common stock traded on the Nasdaq Small Cap Market under the symbol FIBR
since 1994. On December 16, 1998, we commenced trading on the Nasdaq National
Market System under the same symbol.

The following table sets forth the high and low closing bid prices for our
common stock in the over-the-counter market from February 1, 2000 to January 31,
2002, based upon information obtained from Nasdaq. Quotations represent
inter-dealer prices; they do not include retail markups, markdowns, or
commissions; and, they may not represent actual transactions.

<TABLE>
<CAPTION>

         Fiscal 2000-2001                                                        High               Low
         ----------------                                                        ----               ---
         <S>                                                                     <C>              <C>
         Quarter from February 1, 2000 to April 30, 2000                        $144.88           $29.19
         Quarter from May 1, 2000 to July 31, 2000                               $86.00           $32.44
         Quarter from August 1, 2000 to October 31, 2000                         $74.50           $14.88
         Quarter from November 1, 2000 to January 31, 2001                       $40.88           $10.38

<CAPTION>

         Fiscal 2001-2002
         ----------------
         <S>                                                                     <C>              <C>

         Quarter from February 1, 2001 to April 30, 2001                         $25.50            $3.91
         Quarter from May 1, 2001 to July 31, 2001                               $16.19            $5.53
         Quarter from August 1, 2001 to October 31, 2001                          $8.02            $1.67
         Quarter from November 1, 2001 to January 31, 2002                        $5.06            $3.21

</TABLE>

On April 30, 2002, the average of the high and low bid quotation for our common
stock was $2.15 per share. There is no assurance that a market in our common
stock will continue.

As of April 30, 2002 (the latest practicable date) there were 795 shareholders
of record, including brokerage firms and nominees, of our common stock.

We have never paid any cash dividends on our common stock. The present policy of
the Board of Directors is to retain all available funds to finance the planned
level of operations. In light of the anticipated cash needs of our business, it
is not anticipated that any cash dividends will be paid to the holders of our
common or preferred stock in the foreseeable future.

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial data with respect
to our five most recent fiscal years ended January 31. The selected consolidated
statement of operations data set forth below for each of our three most recent
fiscal years, and the selected consolidated balance sheet data set forth at
January 31, 2002 and 2001, are derived from our consolidated financial
statements which have been audited by BDO Seidman, LLP, independent certified
public accountants, as indicated in their report which is included elsewhere in
this annual report. The selected consolidated statement of operations data set
forth below for each of the two fiscal years ended January 31, 1999 and 1998,
and the consolidated balance sheet data set forth below at January 31, 2000,
1999 and 1998 are derived from our audited consolidated financial statements not
included in this annual report. The selected consolidated financial data should
be read in conjunction with our consolidated financial statements, and the notes
thereto including Note A which discusses our significant acquisitions,
dispositions and discontinued operations, included elsewhere in this annual
report, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.


                                       25





<PAGE>

<TABLE>
<CAPTION>

                                                                    Fiscal Year Ended January 31,
                                                                    -----------------------------
                                                   2002           2001          2000           1999          1998
                                                   ----           ----          ----           ----          ----

<S>                                             <C>           <C>           <C>          <C>          <C>
Statement of Operations Data:

Net sales                                        $ 40,827       $ 44,641       $ 68,372      $ 58,362       $ 65,811

Net income (loss) from
     continuing operations                       $(43,136)      $(41,905)      $  2,410      $(11,069)      $(16,377)

Net income (loss) per share
   from continuing operations:
     Basic                                       $  (3.10)      $  (3.71)      $   0.17      $  (1.69)      $  (3.32)
     Diluted                                     $  (4.36)      $  (3.71)      $   0.15      $  (1.69)      $  (3.32)

Balance Sheet Data:
     Cash and cash equivalents                   $ 14,243       $  9,965       $ 13,511      $  3,480       $  1,422
     Working capital                                5,839         71,993        189,486        11,399          8,986
     Total assets                                  90,339        113,123        223,265        66,796         69,589
     Total debt (including short-term debt)        72,122         24,770         20,727        27,938         26,872
     Stockholders' equity                          18,217         39,733        202,538        38,858         42,717

</TABLE>

Item 7.  Management's Discussion and Analysis of Financial Condition and
                  Results of Operations

Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Other Risk Factors" section of this Annual
Report on Form 10-K, as well as the "Financial Risk Management" and "Future
Growth Subject to Risks" sections contained herein, which identify important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements.

The results of operations reflect our activities and our wholly-owned
subsidiaries; this consolidated group is referred to individually and
collectively as "We" and "Our".

Entrada Networks

On August 31, 2000, we completed a merger of our Entrada subsidiary with Sync
Research, Inc. a Nasdaq listed company. After the merger, our purchase of Sync
shares prior to the merger and our purchase of shares for cash from Entrada, we
owned 48.9% of the merged entity which changed its name to Entrada Networks.
Pursuant to our plans adopted prior to the merger, we distributed to our
shareholders' one-fourth shares of an Entrada share for each of our outstanding
shares and reserved a similar number for each unexercised option and warrant to
acquire our common stock outstanding on the record date. After the distribution
and reserve for options and warrants we own approximately 9.2% of Entrada common
shares outstanding as of January 31, 2002, and account for this remaining
interest as an "available for sale security" which is marked to market at the
end of each period. Additional information regarding Entrada is available from
its various filings with the Securities and Exchange Commission which are
available online at www.freeedgar.com and www.sec.gov or from the Securities and
Exchange Commission.


 NETsilicon or NSI

The results of NSI were included in our consolidated results only through
September 15, 1999. Additional information regarding NSI is available from its
various filings with the Securities and Exchange Commission which




                                       26





<PAGE>

are available online at www.freeedgar.com and www.sec.gov or from the Securities
and Exchange Commission. See "Results of Operations: Comparison of the Years
Ended January 31, 2000 and January 31, 1999."

Results of Operations: Comparison of the Years Ended January 31, 2002 and
January 31, 2001.

         Net sales. Our consolidated net sales decreased $3.8 million or 8.5% to
$40.8 million for fiscal 2002 when compared to net sales of $44.6 million for
fiscal 2001. Net sales for our Sorrento Networks Inc., the Company's primary
operating subsidiary, increased $9.6 million or 36% to $36.0 million for fiscal
2002 as compared to net sales of $26.4 million in fiscal 2001. Net sales for
Meret Optical segment decreased $1.5 million or 23.8% in fiscal 2002 to $4.8
million as compared to net sales of $6.3 million in fiscal year 2001. Entrada
Networks, an operating subsidiary which the Company spun-off in August 2000,
had a revenues of $11.9 million in fiscal 2001 whereas no revenues were
reported for Entrada Networks in fiscal year 2002.

         Gross profit. Cost of sales consists principally of the costs of
components, subcontract assembly from outside manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
margin percent on a consolidated basis decreased to 22.8% for fiscal 2002 from
29.5% in fiscal 2001. Consolidated gross profit was $9.3 million, a decrease of
29.2% for fiscal 2002 from $13.2 million for fiscal 2001. Gross margin percent
and gross profit were impacted negatively by increases in inventory reserves and
sales that were made at lower gross profit than the prior year. Gross profit for
our Sorrento subsidiary decreased to $7.7 million in fiscal 2002, as compared to
$9.1 million in fiscal 2001, a decrease of 16.2%. An increase in inventory
reserves accounts for $3.7 million of the decrease in gross profit. The gross
profit of our Meret Optical segment decreased by $941,000 from the prior fiscal
year and was primarily the result of the revenue volume decrease. The remaining
change in gross profit related to Entrada Networks.


         Selling and marketing. Selling and marketing expenses consist primarily
of employee compensation and related costs, commissions to sales
representatives, tradeshow expenses and travel expenses. We continue to manage
our expenditures for sales and marketing in relation with the expansion of our
domestic and international sales channels and the establishment of strategic
relationships. We expect sales commissions to increase as our sales volume
increases since many of our sales personnel earn a portion of their total
compensation from commissions based on sales volume. Our consolidated selling
and marketing expenses decreased to $16.2 million, or 39.6% of net sales, for
fiscal 2002 from $17.2 million, or 38.5% or net sales for fiscal 2001.

         Engineering, research and development. Engineering, research and
development expenses consist primarily of compensation related costs for
engineering personnel, facilities costs, and materials used in the design,
development and support of our technologies. All research and development costs
are expensed as incurred. We continue to manage our research and development
costs in relation to the changes in our sales volume and available capital
resources in our development efforts to enhance existing products and introduce
new products to our product offering. Our consolidated engineering, research and
development expenses decreased to $13.7 million, or 33.4% of net sales, for
fiscal 2002 from $23.9 million, or 53.6% of net sales, for fiscal 2001. The
decrease can primarily be attributed to decreases in product development
material and personnel related costs.

         General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and allocable occupancy costs. Consolidated general and
administrative expenses decreased to $12.7 million, or 31.3% of net sales, for
fiscal 2002 from $18.1 million, or 40.6% of net sales, for fiscal 2001. The
decrease in general and administrative expenses can be attributed to reductions
in investment banking, professional fees and personnel related costs.

         Other operating expenses. Other operating expenses for both fiscal 2002
and 2001 included approximately $400,000 of amortization of purchased technology
related to acquisitions included in Meret. During the fiscal year ended January
31, 2002, we recorded a $2.7 million valuation allowance against option
receivables from our former CEO and Chairman. During the fiscal year ended
January 31, 2001, approximately $2.1 million of these costs were attributable to
the closure of one of Entrada's facilities and valuation reserves recorded
against distributor receivables and capitalized software costs of Entrada.



                                       27





<PAGE>

         Other income (charges). Other income (charges) from continuing
operations decreased to $6.0 million charges for fiscal 2002 from $8.5 million
income for fiscal 2001. Investment income declined by $6.9 million during the
fiscal year ended January 31, 2002 from the comparable period last year due to
reduced investments of our cash surplus in short-term investments, lower
interest rates as well as reduced interest received on customer financing
receivables. The increase of $2.4 million in interest expense for the fiscal
year ended January 31, 2002 from the prior fiscal year is primarily due to the
interest incurred on our newly issued convertible debentures which was partially
offset by a decline in our short term borrowings. The $1.9 million of interest
on these debentures included the stated 9.75% interest of $1,309,000 which is
paid in common stock, amortization of issuance costs of $82,000, and
amortization of the fair value of the warrants issued to the purchasers and
placement agent and the deemed beneficial conversion feature of $911,000. Other
charges increased by $99,000 during the fiscal year ended January 31, 2002 from
the prior fiscal year resulting primarily from favorable gains on foreign
currency exchanges. Gains on marketable securities decreased by $5.1 million for
the fiscal year ended January 31, 2002 from the prior fiscal year. Approximately
$4.0 million of this decrease relates to the gain on our sale of NSI shares
during the prior fiscal year. The remaining $1.1 million decrease results
from an impairment allowance of $178,000 on our available for sale investment in
Entrada and $1,020,000 in realized losses on the sale of 1,051,000 shares of
Entrada.

         Income taxes. There was no provision for income taxes for fiscal years
2002 and 2001. We have carry forwards of domestic federal net operating losses,
which may be available, in part, to reduce future taxable income in the United
States. However, due to potential adjustments to the net operating loss carry
forwards as provided by the Internal Revenue Code with respect to future
ownership changes, future availability of the tax benefits is not assured. In
addition, we provided a valuation allowance in full for our deferred tax assets,
as it is our opinion that it is more likely than not that some portion or all of
the assets will not be realized.


Sorrento Networks

         Net sales. Net sales increased to $36.0 million, or 36.1%, for fiscal
2002 from $26.5 million for fiscal 2001. The increase in net sales was primarily
due to an increase in the number of deployments of systems to both new and
existing customers. In fiscal 2002, eleven customers accounted for 94.3% of our
net sales compared with seven customers which accounted for 91.1% in fiscal
2001. In addition to the number of new customer and existing customer orders
achieved in fiscal year 2002, we continued to increase its product
offering by enhancements to existing products and the introduction of new
products which also contributed to the increase in net sales in fiscal year
2002. We plan to continue to enhance our existing product line and
develop new products to increase sales. Our ability to achieve this goal will
depend on continued sales and available working capital that can be allocated to
our development efforts.

         Gross profit. Gross profit was $7.7 million for fiscal 2002, a decrease
of 16.2% from $9.1 million for fiscal 2001. Gross margin decreased to 21.2% of
net sales for fiscal 2002 from 34.3% for fiscal 2001. The gross margin
percentage decrease resulted from the shipment of lower margin products to
multiple customers with long-term purchase commitments or strategic alliance
agreements in fiscal 2002 as well as an increase in the valuation allowance
recorded against inventory of $4.0 million.

         Selling and marketing. Sales and marketing expenses increased to $15.7
million, or 43.7% of net sales, for fiscal 2002 from $14.0 million, or 52.8% of
net sales, for fiscal 2001. The increase in sales and marketing expenses
resulted from increased travel expenses, trade show participation, and
advertising expenses. The number of sales and marketing personnel decreased to
38 at January 31, 2002 from 65 at January 31, 2001.

         Engineering, research and development. Engineering, research and
development expenses decreased to $13.2 million, or 36.7% of net sales, for
fiscal 2002 from $20.4 million, or 77.0% of net sales, for fiscal 2001. The
decrease in engineering, research and development expenses was the result of
decreased expenditures associated with the decrease in engineering personnel and
decreases in employee relocation and recruiting expenses and reduction in
material related development expenses. The number of engineering personnel
decreased to 67 at January 31, 2002 from 91 at January 31, 2001.

         General and administrative. General and administrative expenses
decreased to $6.9 million, or 19.0% of net sales, for fiscal 2002 from $9.0
million, or 34.0% of net sales, for fiscal 2001. The decrease in general and



                                       28





<PAGE>

administrative expenses reflects the reduction of executive and administrative
personnel and lower operating expenses. The number of general and administrative
personnel decreased to 15 at January 31, 2002 from 32 at January 31, 2001.

         Deferred and other stock compensation. Deferred and other stock
compensation for the fiscal year ended January 31, 2002 includes $812,000 of
amortization of deferred stock compensation resulting from the value of stock
options granted to consultants compared to $1.9 million for the prior fiscal
year. In connection with the grants of stock options with exercise prices
determined to be below the fair value of our common stock on the date of grant,
Sorrento recorded deferred stock compensation of $2.6 million, which is being
amortized on an accelerated basis over the vesting period of the options.


Meret Optical Communications

Net sales. Net sales decreased to $4.8 million, or 23.8%, for fiscal 2002 from
$6.3 million for fiscal 2001. The decrease in net sales was primarily due to
changes in product demand in the RF Synthesis product family. The majority of
this decrease was recognized in the fourth quarter of this year.

Gross profit. Gross profit decreased to $1.7 million, or 34.6%, for fiscal 2002
from $2.6 million for fiscal 2001. Gross margin as a percentage of net sales
decreased to 34.8% for fiscal 2002 compared to 41.6% for the comparable period
last year. The decrease in the gross margin percentage from the prior year
resulted from the reduction is RF Synthesis sales which generates a higher gross
margin.

Selling and marketing. Sales and marketing expenses remained basically unchanged
at $435,000, or 9.0% of net sales, for fiscal 2002, compared to $437,000, or
6.9% of net sales, for fiscal 2001. Major expense changes by category within the
sales and marketing function included an increase in commissions to external
sales representatives that was offset by reduced personnel costs as a result of
reductions in the sales force.

Engineering, research and development. Meret incurred engineering expenses
during fiscal 2002 of $417,000, or 8.7% of net sales compared to $177,000, or
2.8% for the comparable period last year. The increase for the fiscal year ended
January 31, 2002 relates to the addition of three engineers to support our
development of our new coarse wavelength division multiplexing products and the
enhancement of existing products.

General and administrative. General and administrative expenses decreased to
$200,000, or 4.2% of net sales during fiscal 2002 from $595,000, or 9.4% of net
sales for the comparable period last year. The decrease in general and
administrative expenses during fiscal 2002 resulted from reductions in bad debt
allowances and bank fees.

Results of Operations: Comparison of the Years Ended January 31, 2001 and
January 31, 2000

Net sales. Our consolidated net sales from continuing operations decreased to
$44.6 million, or by 34.8%, for fiscal 2001 from $68.4 million for fiscal 2000.
Net sales for our Sorrento Networks segment increased by $14.0 million for
fiscal 2001 from fiscal 2000. Net sales for Meret Optical segment decreased by
approximately $682,000 in fiscal 2001 from the same comparable period last year.
The remaining change was related to NSI and Entrada.

Gross profit. Cost of sales consists principally of the costs of components,
subcontract assembly from outside manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
profit decreased to $13.2 million, or by 58.5%, for fiscal 2001 from $31.8
million for fiscal 2000. Gross profit for our Sorrento Networks segment
increased to $9.1 million or 28.2% in fiscal 2001 and, our Meret Optical segment
decreased by $242,000. The remaining change was related to NSI and Entrada.
Gross margin decreased to 29.5% for fiscal 2001 from 46.5% for fiscal 2000. The
decrease in our gross margin during fiscal 2001, resulted from a change in the
customer mix for our Sorrento subsidiary. During fiscal 2000, high margin
products were being shipped to a single customer. During fiscal 2001, products
were being shipped to multiple customers at a lower margin than last year.




                                       29





<PAGE>

Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses and travel expenses. We intend to increase expenditures for
sales and marketing including the recruitment of additional sales and marketing
personnel, the expansion of our domestic and international distribution channels
and the establishment of strategic relationships. In addition, we expect sales
commissions to increase as we increase our sales volume. Our consolidated
selling and marketing expenses increased to $17.2 million, or 38.5% of net
sales, for fiscal 2001 from $16.9 million, or 24.7% of net sales for fiscal
2000.

Engineering, research and development. Engineering, research and development
expenses consist primarily of compensation related costs for engineering
personnel, facilities costs, and materials used in the design, development and
support of our technologies. All research and development costs are expensed as
incurred. We expect research and development costs to increase substantially as
we continue to develop our technologies and future products. Our consolidated
engineering, research and development expenses increased to $23.9 million, or
53.6% of net sales, for fiscal 2001 from $11.7 million, or 17.1% of net sales,
for fiscal 2000.

General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and allocable occupancy costs. Increases in general and
administrative expenses are planned as we strengthen our infrastructure to
provide sufficient administrative support for the growth of our businesses.
Consolidated general and administrative expenses increased to $18.1 million, or
40.6% of net sales, for fiscal 2001 from $12.8 million, or 18.7% of net sales,
for fiscal 2000.

Other operating expenses. Other operating expenses for both fiscal 2001 and 2000
include approximately $400,000 of amortization of purchased technology related
to acquisitions included in Meret. During the fiscal year ended January 31,
2001, approximately $2.1 million of these costs were attributable to the closure
of one of Entrada's facilities and valuation reserves recorded against
distributor receivables and capitalized software costs.

Other income (charges). Other net income (charges) from continuing operations
decreased to $8.5 million income for fiscal 2001 from $12.4 million income for
fiscal 2000. During fiscal 2001, we had recognized gains of $3.7 million on the
sales of shares from our investment with one of Sorrento's customers. We also
recognized $1.4 million and $330,000 in interest income and dividend income
respectively. In addition, we had a recognized gain of $3.9 million related to
the sale of a portion of our investment in NETsilicon. These gains were offset
by interest expense incurred on borrowings from our lines of credit, short term
borrowing facilities and long term debt. During the fiscal year ended January
31, 2000, we recognized a gain of $14.0 million related to the sale of a portion
of our investment in NETsilicon in connection with its initial public offering
completed on September 15, 1999.

Income taxes. There was no provision for income taxes for fiscal years 2001 and
2000. We have carry forwards of domestic federal net operating losses, which may
be available, in part, to reduce future taxable income in the United States.
However, due to potential adjustments to the net operating loss carry forwards
as provided by the Internal Revenue Code with respect to future ownership
changes, future availability of the tax benefits is not assured. In addition, we
provided a valuation allowance in full for our deferred tax assets as it is our
opinion that it is more likely than not that some portion or all of the assets
will not be realized.


Sorrento Networks

Net sales. Net sales increased to $26.5 million, or 112.0%, for fiscal 2001 from
$12.5 million for fiscal 2000. The increase in net sales was primarily due to an
increase in the deployments of our systems by new and existing customers. In
fiscal 2001, seven customers accounted for 91.1% of our net sales compared with
three customers accounting for 88.4% in fiscal 2000.

Gross profit. Gross profit increased to $9.1 million, or 28.2%, for fiscal 2001
from $7.1 million for fiscal 2000. Gross margin decreased to 34.3% of net sales
for fiscal 2001 from 56.8% for fiscal 2000. The gross margin percentage decrease
resulted from the shipment of higher margin products to a single customer in
fiscal 2000 and lower margin product shipments to multiple customers with long
term purchase commitments or strategic alliance agreements in fiscal 2001.



                                       30





<PAGE>

Selling and marketing. Sales and marketing expenses increased to $14.0 million,
or 52.8% of net sales, for fiscal 2001 from $5.6 million, or 44.8% of net sales
for fiscal 2000. The increase in sales and marketing expenses resulted from
personnel additions to the sales and marketing staff, increased travel expenses,
trade show participation, and advertising expenses. This increase is also
attributable to expenses related to the opening of five foreign sales offices
located in China, Singapore, Germany, Belgium and the United Kingdom. The number
of sales and marketing personnel increased to 65 at January 31, 2001 from 30 at
January 31, 2000.

Engineering, research and development. Engineering, research and development
expenses increased to $20.4 million, or 77.0% of net sales, for fiscal 2001 from
$3.4 million, or 27.2% of net sales, for fiscal 2000. The increase in
engineering, research and development expenses was the result of increased
expenditures associated with the continuing development of our existing products
as well as future technologies, increases in engineering personnel and,
increases in employee relocation and recruiting expenses. The number of
engineering personnel increased to 91 at January 31, 2001 from 23 at January 31,
2000.

General and administrative. General and administrative expenses increased to
$9.0 million, or 34.0% of net sales, for fiscal 2001 from $3.8 million, or 30.4%
of net sales, for fiscal 2000. The increase in general and administrative
expenses reflects the hiring of additional executive and administrative
personnel and higher operating expenses necessary to strengthen our
infrastructure to support our continuing growth. The number of general and
administrative personnel increased to 32 at January 31, 2001 from 16 at January
31, 2000.

Deferred and other stock compensation. Deferred and other stock compensation for
the year ended January 31, 2001 includes $1.7 million of amortization of
deferred stock compensation and $184,000 of expense resulting from the value of
stock options granted to consultants. In connection with the grants of stock
options with exercise prices determined to be below the fair value of our common
stock on the date of grant, Sorrento recorded deferred stock compensation of
$2.6 million, which is being amortized on an accelerated basis over the vesting
period of the options.


Meret Optical Communications

During the periods prior to January 31, 2000, Meret was an integral portion of
the "Optical Networking" business unit which also included Sorrento. As of
January 31, 2000, we separated Meret from the Optical Networking business
segment. For periods prior to January 31, 2000, amounts reported for the Meret
segment of our business may not be indicative of the results of operations that
would have resulted had Meret been operated as a stand-alone entity.

Net sales. Net sales decreased slightly to $6.3 million, or 10.0%, for fiscal
2001 from $7.0 million for fiscal 2000. The decrease in net sales was primarily
due to changes in product demand in the legacy product family.

Gross profit. Gross profit decreased slightly to $2.6 million, or 10.4%, for
fiscal 2001 from $2.9 million for fiscal 2000. Gross margin as a percentage of
net sales increased slightly to 41.6% for fiscal 2001 compared to 41.0% for the
same comparable period last year. The increase in the gross margin percentage
from the prior year resulted from changes in the mix of products shipped.

Selling and marketing. Sales and marketing expenses decreased to $437,000, or
6.9% of net sales, for fiscal 2001 from $1.4 million, or 20.0% of net sales, for
the same comparable period last year. Overall selling and marketing expenses
decreased as revenue decreased.

Engineering, research and development. Meret incurred engineering expenses
during fiscal 2001 of $177,000. No engineering expenses were incurred during the
fiscal year ended January 31, 2000. After Meret's separation from the Optical
Networking segment, we increased engineering expenditures to update older
products and we will continue to increase engineering spending in the future to
support existing as well as new products.

General and administrative. General and administrative expenses decreased to
$595,000, or 9.4% of net sales during fiscal 2001 from $640,000, or 9.1% of net
sales for the same comparable period last year. After Meret's separation from
the Optical Networking segment, the need for general and administrative
operations was minimal.



                                       31




<PAGE>

Liquidity and Capital Resources

We finance our operations through a combination of internal funds, investments
and debt and equity financing. At January 31, 2002, our working capital was $5.9
million including $28.1 million of investments in marketable securities and
$14.2 million in cash and cash equivalents. In addition, $48.8 million of Series
A Holder's obligation as a result of their exercised right of redemption has
been re-classified at year end January 31, 2002, as a current liability as
compared to mezzanine in the Company's liability and owner's equity. The Series
A liability can only be paid through lawfully available funds that would
normally be generated from SNI profitable operations, which the Company does not
currently have available or foresee availability in the near future.

The amounts included in our statement of cash flows for fiscal 2001 are not
comparable to our fiscal 2000 amounts due to the inclusion of Entrada and
NETsilicon for less than a full year. Readers should refer to Entrada's
NETsilicon's annual reports on Form 10-K for information concerning Entrada and
NETsilicon.

Our operations used cash flows of $31.8 million during fiscal 2002 as compared
to fiscal 2001 wherein the company incurred a cash flow deficit of $51.7 million
from continuing operations. The decrease in cash flows used by operations in
fiscal 2002 was primarily the result of decreases in accounts receivable,
combined with the increase in reserves for inventory and accounts receivable,
the use of stock for the payment of interest on debentures and the loss on sale
of marketable securities. This favorable impact on cash used for operations was
partially offset by the negative cash impact of the Company's larger net
operating loss and the use of cash to decrease our accounts payable. In addition
to the foregoing there were less significant changes associated with changes in
amortization and depreciation and other current liabilities.

The Company has incurred significant losses and negative cash flows from
operations for the past two years. Sorrento Networks, Inc., the Company's
principal operating subsidiary has primarily been the operating entity
responsible for these high losses and negative cash flows. The losses have been
generated as SNI continues to develop its technology, marketing and sales and
operations in its effort to become a major supplier of metro and regional
optical networks world-wide. The Company has funded its operations primarily by
the sale of securities and the issuance of debt. There can be no assurance that
similar funding will be available in the future. Further, with the downturn in
the economic environment and decreases in capital spending by telecom carriers,
the Company anticipates that its current and future revenues will be negatively
impacted. As a result, the Company will need to either raise additional capital
in the future or substantially decrease its operating costs and capital spending
in order to fund its operations. There can be no assurance that our available
cash, future funding or reduction in operating costs will be sufficient to fund
our operations in the future.

Our standard payment terms range from net 30 to net 90 days. Receivables from
international customers have frequently taken longer to collect. For some of the
customers of our optical networking products payment is required within 180 days
from the date of shipment. In addition, the downturn in the telecom market has
impacted many of the telecom carriers ability to purchase or pay for outstanding
commitments within standard payment terms. There can be no assurance that either
current or future receivables will not be impacted negatively by this
economic environment.

We do not provide long-term financing to customers buying our equipment,
however, we did provide long-term equipment financing to an optical networking
customer during fiscal 2000 and the purchase agreement with this customer
provides for invoiced installation and other deployment expenses not to exceed
10% of the equipment cost. The terms of this financing provide that the customer
may convert any balances outstanding longer than 90 days into a level payment
35-month term note at 11% per annum interest. We financed $3.3 million of
receivables, including deployment expenses, during fiscal 2000 for this
customer. During the fourth quarter of fiscal 2000 we exchanged $3.0 million of
the then unpaid balance shares of the customer's 8% convertible preferred stock,
an approximately 6% interest on a fully diluted basis. The remaining balance of
the note and accrued interest of $344,000 was paid in cash. During fiscal 2000
we made sales of $5.5 million and reimbursed deployment expenses of $120,000 to
this customer.

In November 2000, we sold all our shares of our investment in one of
Sorrento's customers for $9.9 million and $320,000 in accumulated, unpaid
dividends. Of the total $10.3 million due from the purchaser, approximately
7.7% or $787,000 was held in a segregated escrow



                                       32





<PAGE>

account for one year. The gain of $3.7 million on the sale of the shares is
included in investment income in the accompanying income statement in fiscal
2001.

During fiscals 2001 and 2000 we made sales of $5.7 million and $5.5 million
respectively, to this customer under a long-term equipment financing agreement.
The purchase agreement with this customer provides for invoiced installation and
other deployment expenses not to exceed 10% of the equipment cost. The terms of
the financing agreement provide that the customer may convert any balances
outstanding longer than 90 days into a level 35-month term note at 11% per annum
interest. We financed $5.9 million, including deployment expenses of $210,000,
during fiscal 2001 for this customer which was paid in full including accrued
interest during January 2001. We financed $3.3 million of receivables, including
deployment expenses of $120,000, during fiscal 2000 for this customer and $3.
million of the then unpaid note was exchanged for our equity interest in the
customer. The remaining balance of the note and accrued interest of $344,000 was
paid in cash.

Our investing activities during fiscal 2002 used cash flows of $4.0 million.
Cash used in investing activities during fiscal year 2002 included purchases of
property and equipment of $3.2 million and $900,000 in purchases of other
assets. This was offset by $144,000 of cash received from the sale of marketable
securities and other investments. In fiscal 2001 used cash flows in
investing activities of $12.5 million including $7.0 million in cash balances at
Entrada as of August 31, 2000 when it ceased to be a subsidiary, following the
merger with Sync Research. We purchased property and equipment of $14.4 million,
invested $3.3 million in Entrada and $3.2 million in one of Sorrento's
customers. During fiscal 2001, we received $4.2 million from the sale of 350,000
of our NSI shares and $819,000 from the purchasers of our discontinued
operations. We received $9.2 million offset by our investment of $3.2 million
from the investment in one of Sorrento's customers and payment of $1.8 million
on a note receivable. Our financing activities during fiscal 2002 provided the
Company $40.1 million and consisted primarily of financing activities from the
sale of common stock in March, 2001 of 1,525,9995 shares which generated
proceeds of $9.6 million and a convertible debenture financing in August, 2001
which raised $29.7 million. In addition to the sale of common stock and
convertible debentures, the Company received $1.1 million from proceeds of stock
option and warrant exercises of $.9 million and long term debt of $.02 million.
Offsetting these amounts were repayments of short-term and long term debt of $.3
million.

In fiscal 2001 the Company provided cash flows of $60.6 million which consisted
primarily of $46.6 million in net proceeds from a private placement by Sorrento
of its convertible preferred stock, $7.9 million in net proceeds from a private
placement by Entrada of its common stock, $3.9 million in proceeds from option
and warrant exercises, $2.4 million in proceeds from long term debt offset by
repayments of short and long term debt. The financing activities of continuing
operations during fiscal 2000 provided cash flows of $14.3 million which
consisted primarily of $6.9 million in net proceeds from a private placement of
our common stock, and $8.2 million in proceeds from option and warrant exercises
offset by preferred stock dividends paid in cash and treasury stock purchases.

We have a line of credit which totals $2.0 million which was reduced to $1.0
million subsequent to January 31, 2002. Outstanding borrowings against this
lines of credit were $1.0 million at January 31, 2002. Our credit line is
collateralized by accounts receivable, inventory and equipment.

During fiscal 2000 we completed one sale of our common stock receiving net
proceeds of $6.9 million and issued 1,048,440 shares of our common stock in
conversions of preferred stock issued in prior years. At January 31, 2000 the
liquidation preference of the outstanding preferred stock is $6.5 million and
none of the shares are currently convertible. (See Notes I and J to the
Consolidated Financial Statements contained in Part II herein.)

During March 2000, our Sorrento subsidiary completed a private placement of
8,596,333 shares of its Series A Convertible Preferred Stock to a group of
investors receiving net proceeds of approximately $46.6 million. Each share of
our Sorrento subsidiary's Series A Preferred Stock is convertible into one share
of its common stock at the option of the holder may vote on an "as converted"
basis except for election of directors, and has a liquidation preference of
$5.45 per share. The shares are automatically converted into Sorrento's common
stock upon an underwritten public offering by Sorrento with an aggregate
offering price of at least $50 million. Since Sorrento did not complete a $50
million public offering by March 1, 2001, the holders of more than 50% of the
then outstanding Series A shares may request to be redeemed at the shares then
adjusted liquidation preference.




                                       33





<PAGE>

In April, 2001 a majority of Series A Shareholders exercised their right to
redeem the Series A Preferred Stock. Such request can only be made out of funds
deemed to be lawfully available or for sale pro rata portion as to which a
lesser amount of lawfull available funds would exist. The Company at the
current time does not have such funds which would normally be generated from
operating profits of the subsidiary, Sorrento Networks, Inc.

On August 31, 2000, we completed a merger of Entrada with Sync Research, Inc., a
Nasdaq listed company in which we received 4,244,155 shares of the merged entity
which changed its name to Entrada Networks, Inc. and changed its symbol to ESAN.
We purchased 93,900 shares of Sync in the open market during June and July, 2000
for $388 and on August 31, 2000 purchased an additional 1,001,818 shares
directly from Entrada for $3,306. After these transactions we owned 48.9% of
Entrada Networks and we have accounted for our interest on our balance sheet at
cost as of January 31, 2001.

On December 1, 2000, we distributed 3,107,155 of our Entrada shares to our
shareholders of record as of November 20, 2000. The distribution was made at the
rate of one-fourth (0.25) of an Entrada share for each of our outstanding
shares. At exercise, options and warrants to acquire our common shares which
were granted and unexercised as of November 20, 2000 will receive a similar
number of Entrada shares. Prior to January 31, 2001 we distributed 20,182 of our
Entrada shares upon the exercise of options and as of January 31, 2001 have
reserved 1,080,283 shares for future exercises of options and warrants. The cost
basis of these reserved shares and related liability to the option and warrant
holders is included in the investment in former subsidiary and dividends payable
in the accompanying balance sheet. The aggregate distribution of our Entrada
shares including the shares reserved for option and warrant holders has been
accounted for at our original cost of $5,122. In addition we have granted
options to purchase 410,000 of our Entrada shares for $3.19 per share (the
merger price) to several of our then officers and consultants.

We anticipate that our available cash resources, and marketable securities
available for sale together with any necessary cost reductions will be
sufficient to meet our presently anticipated capital requirements for the next
year. Nonetheless, our future capital requirements may vary materially from
those now planned including the need for additional working capital to
accommodate planned growth, hiring and infrastructure needs. There can be no
assurances that our working capital requirements will not exceed our ability to
generate sufficient cash internally to support our requirements and that
external financing will be available or that, if available, such financing can
be obtained on terms favorable to us and our shareholders.




Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to our valuation of inventory and our allowance for uncollectable
accounts receivable. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.


We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:


o Inventory is evaluated on a continual basis and reserve adjustments are made
based on management's estimate of future sales value, if any, of specific
inventory items. Reserve adjustments are made for the difference between the
cost of the inventory and the estimated market value and charged to operations
in the period in which the facts that give rise to the adjustments become known.


o Accounts receivable balances are evaluated on a continual basis and allowances
are provided for potentially uncollectable accounts based on management's
estimate of the collectability of customer accounts. If the financial condition
of a customer were to deteriorate, resulting in an impairment of their ability
to make payments, an




                                       34





<PAGE>

additional allowance may be required. Allowance adjustments are charged to
operations in the period in which the facts that give rise to the adjustments
become known.


Effects of Inflation and Currency Exchange Rates

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

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

Impact of Recent Accounting Pronouncements

         In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Restatement of previously issued
annual financial statements is not permitted, however, comparative financial
information for earlier periods shall reflect required reclassifications in
presentation. SFAS 144 requires long-lived assets of continuing and discontinued
operations be measured at the lesser of carrying amount or fair value less
estimated selling costs. The assets and liabilities of discontinued operations
shall be presented separately in the asset and liability sections of the balance
rather than shown as net realizable value. We do not believe the adoption of
SFAS 144 will have a material effect on our financial position or results of
operations.

         In August 2001, the Financial Accounting Standards Board issued SFAS
143, "Accounting for Asset Retirement Obligations" effective for fiscal years
beginning after June 15, 2002. SFAS 143 requires the recognition of the fair
value of liabilities for asset retirement obligations to be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. We do not believe the adoption of SFAS
143 will have a material effect, if any, on our financial position or results of
operations.

         In June 2001, the Financial Accounting Standards Board finalized SFAS
141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that we
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. Upon adoption of SFAS 142, it
requires that we reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

         SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purpose
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test nine months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.



                                       35





<PAGE>


Other Matters

See Item 3. "Legal Proceedings" contained herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to financial market risks, including changes in interest
rates and foreign currency rates. Our exposure to interest rate risk is the
result of our need for periodic additional financing for our large operating
losses and capital expenditures associated with establishing and expanding our
operations. The interest rate that we will be able to obtain on debt financing
will depend on market conditions at that time, and may differ from the rates we
have secured on our current debt. Additionally, the interest rates charged by
our present lenders adjust on the basis of the lenders' prime rate.

         Almost all of our sales have been denominated in U.S. dollars. A
portion of our expenses are denominated in currencies other than the U.S. dollar
and in the future a larger portion of our sales could also be denominated in
non-U.S. currencies. As a result, currency fluctuations between the U.S. dollar
and the currencies in which we do business could cause foreign currency
translation gains or losses that we would recognize in the period incurred. We
cannot predict the effect of exchange rate fluctuations on our future operating
results because of the number of currencies involved, the variability of
currency exposure and the potential volatility of currency exchange rates. We
attempt to minimize our currency exposure risk through working capital
management and do not hedge our exposure to translation gains and losses related
to foreign currency net asset exposures.

         We do not hold or issue derivative, derivative commodity instruments or
other financial instruments for trading purposes. Investments held for other
than trading purposes do not impose a material market risk.

         We believe that the relatively moderate rate of inflation in the United
States over the past few years and the relatively stable interest rates incurred
on short-term financing have not had a significant impact on our sales,
operating results or prices of raw materials. There can be no assurance,
however, that inflation or an upward trend in short-term interest rates will not
have a material adverse effect on our operating results in the future should we
require debt financing in the future.

Item 8. Financial Statements and Supplementary Data.

The information required by Item 8 is set forth in Item 13 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

None.


                                       36




<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Company



On April 30, 2002, the Company's directors and executive officers were:

<TABLE>
<CAPTION>
               Name                     Age               Position
               ----                     ---               --------
      <S>                               <C>        <C>
       Phillip W. Arneson               65         Chief Executive Officer, President, and Chairman
                                                       of the Board (ii)
       Xin Cheng, Ph.D.                 46         Director
       Donne F. Fisher                  63         Director (i),(ii)
       Robert L. Hibbard                49         Director (i),(ii)
       Gary M. Parsons                  52         Director (i)
       Joe R. Armstrong                 53         Chief Financial Officer
       Christopher E. Sue               39         Vice President, Finance
       Richard L. Jacobson              59         Sr. Vice President, Legal and Secretary
       Sunil Rajadhyksha                48         President, Meret Communications, Inc.
</TABLE>

     (i) member of the Audit Committee
     (ii) member of the Compensation Committee

The Company's By-Laws provide that the members of the Board of Directors be
elected annually by the Shareholders of the Company for one-year terms. Each
director who is not an employee of the Company or its subsidiaries receives
$1,000 for each Board of Directors or committee meeting attended. Directors who
serve as the chairman of a committee receive an additional $500 for each
committee meeting attended. The Board of Directors has two committees: Audit and
Compensation. There are no family relationships between any directors and
officers.

Phillip W. Arneson, 65, has been President and Chief Operating Officer since
October 2001 and has served as one of our directors since October 2000. From
1996 to 2001, Mr. Arneson held the position of Executive Vice President for
privately held Frandsen Corporation, a diversified financial and manufacturing
company where he was responsible for growing the enterprise through
acquisitions, internal growth, and strategic partnerships. Additionally, he
served as President of two of its operating companies. Mr. Arneson has served
several public and private technology companies in executive management,
holding positions as Chief Executive Officer, President and Group Vice
President as well as having extensive experience as a director of such
companies. From 1982 to 1986, he served as Executive Vice President of Allied
Signal's Electronic Sector and from 1983 to 1986 as Chief Executive Officer of
its subsidiary, Amphenol Corp. In 1986, Mr. Arneson's technology group
garnered the prestigious IR-100 award for the development of an integrated
fiber optics phase modulator. Mr. Arneson holds a B.S. in Electrical
Engineering from the University of Minnesota's Institute of Technology.

Xin Cheng, Ph.D., 45, was our Chairman and Chief Executive Officer
from September 2000 to March 2002. He was the President and a director
of the Company from September 1995 to March 2002, and was Secretary from June
1993 to February 1997. Dr. Cheng served as the Chief Executive Officer and
Chairman of Sorrento Networks Inc., and Meret subsidiaries for fiscal 2002. In
1995, Dr. Cheng founded the optical networking division of the Company. From
1988 to 1990, Dr. Cheng served as Senior Staff Scientist and from 1990 to 1993
as a Director of Advanced Technology for Amoco Technology Company, a photonics
technology development company and a subsidiary of Amoco Oil Corporation. While
at Amoco, Dr. Cheng led their development of the WDM-based fiber optic
high-resolution computer graphics link, a high-dynamic range microwave fiber
optic system, a fiber optic HDTV transmission system, multiple fiber optic
serial digital video transmission systems as well as other technologies. Dr.
Cheng holds a Ph.D. and M.S. in Electrical Engineering from the University of
California, Irvine, and a B.S. degree in Physics from Nanjing University, China.

Donne F. Fisher, 63, has served as one of our directors since November 2001 and
is chairman of our Audit Committee. Mr. Fisher is currently President of Fisher
Capital Partners, Ltd., a private venture capital and




                                       37






<PAGE>


investment company he founded in 1991. From 1982 to 1996, Mr. Fisher held
various executive officer positions with Tele-Communications, Inc. ("TCI") and
its subsidiaries including Executive Vice President and Treasurer. He was a TCI
director from 1980 until 1999 when TCI merged into AT&T Corporation. Since his
retirement in 1996, Mr. Fisher has been a consultant to TCI, now AT&T Broadband.
Mr. Fisher also serves as a director of Liberty Media Corporation, a former
subsidiary of AT&T, and General Communications, Inc., a diversified
telecommunications provider.

Robert L. Hibbard, 49, has served as one of our directors since November 2001.
Mr. Hibbard is an attorney and management consultant in private practice in
which he handles a wide variety of commercial matters including technology
licensing and the structuring of merger and acquisitions transactions. From 1997
to 1999, Mr. Hibbard was Chief Executive Officer of Kim Technologies
International, Inc., a privately held developer of electromechanical "super"
capacitors for wireless applications. From 1994 to 1997, Mr. Hibbard was Vice
President and General Counsel at Allied Signal Engines, and from 1987 to 1994,
Assistant General Counsel at Allied Signal Aerospace. Mr. Hibbard was a director
of Amphenol Corporation, a developer and manufacturer of connectors and
interconnect systems.

Gary M. Parsons, 52, has served on our Board of Directors since October 2000.
Since 1996, Mr. Parsons has held the position of Chairman of the Board for XM
Satellite Radio Holdings, Inc., and in October 2001 was named Chairman and Chief
Executive Officer of Mobile Satellite Ventures, LLP. From 1996 to April 2002,
Mr. Parsons served in a variety of executive positions, including Chairman of
Motient Corporation, a wireless data firm. On January 10, 2002, Motient filed a
voluntary bankruptcy petition, and emerged restructured on May 1, 2002. From
1990 to 1996, Mr. Parsons held a number of executive positions at MCI
Communications, Inc., including Executive Vice President, Chief Executive
Officer of MCImetro, Inc., and President of MCI's Southern Division. From 1984
to 1990, Mr. Parsons held the responsibilities of Executive Vice President at
Telecom*USA, a fiber-optic and long distance venture subsequently acquired by
MCI. Mr. Parsons holds a B.S. in Electrical and Computer Engineering from
Clemson University and a MBA from the University of South Carolina.

Joe R. Armstrong has served as our Chief Financial Officer since January 2001.
He brings over 25 years of corporate finance, investor relations, treasury,
legal and management experience to the Company, having spent 15 years with State
Of The Art, a leading provider of accounting software. As chief financial
officer, vice president, finance and secretary of State Of The Art, he managed
two rounds of venture capital financing, the company's initial public offering
and several significant acquisitions and mergers. Prior to joining us, Mr.
Armstrong most recently served as CFO for The Bohlin Company. Previously, he was
director of marketing finance and financial planning for MAI Basic Four
Corporation and a certified public accountant for Vicenti, Lloyd and Stutzman, a
regional public accounting firm. Mr. Armstrong holds both bachelors and masters
degrees in business from Utah State University.

Christopher E. Sue has been our Vice President, Finance since September 1997.
From January 1996 to September 1997, he served as Osicom's Chief Financial
Officer. Mr. Sue served as Secretary of Osicom from February 1997 to September
1997 and from November 1998 to March 2000. Mr. Sue has served as Meret's Chief
Financial Officer since December 1995. From 1993 to 1995, he was Accounting
Manager at Haskel International, Inc., and from 1990 to 1993 he was Assistant
Controller at Sun Computers, Inc. From 1986 to 1990, Mr. Sue was employed by
KPMG Peat Marwick in both its audit and management consulting practices. Mr. Sue
is a certified public accountant and holds a B.S. in Accounting and Information
Systems from Biola University. Mr. Sue has resigned from his position effective
May 17, 2002.

Richard L. Jacobson has been our Senior Vice President, Legal and Secretary
since July 2000. Mr. Jacobson was a partner with the law firm of Fulbright &
Jaworski, LLP from 1990 to 2000 where his practice consisted primarily of
securities litigation and SEC enforcement matters. Prior to joining Fulbright in
1988 he was in private practice in Palo Alto, California, from 1986 to 1988, and
in Washington, D.C., from 1980 to 1986. From 1977 to 1979, Mr. Jacobson worked
for the SEC, where he was a member of the Trial Unit in the Enforcement Division
and served as Special Counsel to the Chairman. He served as a law clerk for
Ninth Circuit Judge Walter Ely from 1970 to 1971 and then clerked for Associate
United States Supreme Court Justice William O. Douglas from 1971 to 1972. Mr.
Jacobson holds a J.D. from the University of Southern California and a S.B. from
the University of Chicago.

Sunil Rajadhyksha has served as President and Chief Operating Officer of our
Meret Optical business unit since January 2002. From October 2000 to January
2002, he served as Meret's Technology Director. From 1997 to





                                       38






<PAGE>


September 2000, Mr. Rajadhyksha provided engineering and software design
services to Osicom as a consultant including embedded and network management
software projects both directly and through a private company, Codec
Corporation, which he founded in 1997. He is currently a director of Codec. Mr.
Rajadhyksha was the founder and managing director of Software Exports Pvt. Ltd.,
a foreign private software development company from 1996 to 2000. He is a of
director Codec Communications Pvt. Ltd., a foreign private software development
company, which he founded in 1991 and also of Embedded Resource Pvt. Ltd., a
foreign private software development company specializing in embedded software,
which he founded in 1998. Mr. Rajadhyksha has over twenty years of technical and
management experience in networking software, hardware and telecommunications.
Mr. Rajadhyksha holds a B.S. from University of Pune in telecommunications and
electronics.



Our other key employees, all of whose positions are with our Sorrento
subsidiary, include:

<TABLE>
<CAPTION>
               Name                       Age                     Position
               ----                       ---                     --------
        <S>                              <C>              <C>
         Darin Clause                     33              Vice President, Strategic Sales
         Subrata Datta                    39              Vice President, Engineering
         Demetri Elias, Ph.D.             58              Vice President, Marketing
         Susan Hamlin                     39              Vice President, Sales (North America)
         Jin-Yi Pan, Ph.D.                42              Vice President, Systems Architecture
         Mark Thurman                     52              Vice President, Operations
         Li-Ran Wu                        49              Vice President, Management Software
         Jeff Phillips                    32              Vice President, Corporate Development
</TABLE>


Darin Clause has served as Sorrento's Vice President, Strategic Sales since
September 2000 and joined us in December 1999 as Director, Sales Development.
Prior to joining us, Mr. Clause was employed with Pirelli as a Senior Product
Manager from 1996 to 1999, where he was responsible for implementation of indoor
cabling and connectivity business lines for the CATV, CLEC, Utility and IXC
markets and multiple channels. From 1994 to 1996, Mr. Clause was a Project and
Sales Engineer for Sumitomo Electric Lightwave, where he was responsible for
fiber optic passive component sales. Mr. Clause holds a B.S. in Mechanical
Engineering from Clemson University.

Subrata Datta has served as Sorrento's Vice President, Engineering since
November 2000 and joined Sorrento upon our acquisition of Distributed Systems
International, Inc. in 1996. From 1996 to 1999 he was responsible for all
engineering development for the LAN adapter and hub/switch products. Prior to
joining Sorrento, Mr. Datta helped develop the ANSI FDDI and FDDI-II standards
and design network components and system-level products for DSI. Prior to DSI,
Mr. Datta had extensive design experience while working at AT&T Bell
Laboratories on the 3B20 Duplex computer system, based on highly fault tolerant
architectures, high-reliability and stringent up-time requirements. Before
working for AT&T Bell Laboratories, Mr. Datta worked for IBM's Yorktown Research
Center where he focused on FDDI development for their RS6000 workstation
systems. Mr. Datta holds a M.S. and B.S. in Electrical Engineering from the
Cooper Union School of Engineering.

Demetri Elias, Ph.D. has served as Sorrento's Vice President, Marketing since
October 2000 and joined Sorrento in April 2000 as Director, Product Line
Management. Prior to joining Sorrento, Dr. Elias was with Nortel Networks, a
leading optical equipment developer, for over 22 years holding positions in
research and development, consulting, product management and marketing. In his
most recent Nortel Networks assignments he served as Director, Product Line
Management and Director, Strategic Marketing on optical networking products. Dr.
Elias holds a Ph.D. in Electrical Engineering from McGill University, Montreal,
Canada.

Susan Hamlin has served as Sorrento's Vice President, Sales (North America)
since September 2000 and joined Sorrento in November 1999 as Regional Vice
President of Sales. Ms. Hamlin is also responsible for Sorrento's customer
service group. During her tenure at Pirelli Cables and Systems, Ms. Hamlin was
Director of Sales from 1998 to 1999 and responsible for overseeing sales to
CATV, CLEC, Utility and IXC markets. From 1997 to 1998, Ms. Hamlin was National
Sales Manager - Distribution at Pirelli where she established and implemented
Pirelli's sales efforts into the distribution and OEM markets. From 1985 to
1996, Ms. Hamlin held a succession of sales and marketing management positions
with AT&T/Lucent Technologies where she was responsible for strategic planning,
market development and sales to the Regional Bell Operating Companies. Ms.
Hamlin holds a B.S. in




                                       39






<PAGE>


Management Information Systems from Bradley University in Peoria, Illinois and
completed executive management programs at Harvard University and the Wharton
School of Business.

Jin-Yi Pan, Ph.D., has served as the Vice President, System Architecture, of
Sorrento since February 2000. From 1996 to 1999, Dr. Pan was a senior research
engineer at Nokia Research Center, the corporate research arm of Nokia
Corporation responsible for developing networking system architectures,
equipment and software. From 1993 to 1996, Dr. Pan served as a researcher at
Bell Communications Research, or Bellcore, the research center created to
service the regional bell operating companies in the areas of software,
networking standards and architecture. At Bellcore, he participated in the
development of network system architecture and protection scheme for MONET, the
government funded national optical networking consortium. Dr. Pan holds a Ph.D.
in Electrical Engineering from the City University of New York and a B.S. in
Optics from Zhejiang University, China.

Marc Thurman has served as Sorrento's Vice President, Operations since April
2001. Mr. Thurman oversees our manufacturing and operations, supply chain
management, and quality assurance functions. He brings to us nearly 25 years of
manufacturing operations, supply chain management and quality assurance
experience on leading edge technologies and products for the computer and
telecommunication markets. Mr. Thurman's previous experience includes service
since 1971, in various functions at Packard Bell NEC, ComCrypt Systems, IDEA
Courier, Inc., Sidereal Corporation, Intel Corporation, RTE Corporation, and
Western Electric. In his most recent position, Mr. Thurman had manufacturing
responsibilities including internal production, contract manufacturing (EMS) and
third party manufacturing (TPM), supporting revenues of $2 billion. Mr. Thurman
holds a B.S. in Electrical Engineering from Oregon State University as well as
an M.B.A. degree from University of Portland.

Li-Ran Wu has served as Sorrento's Vice President, Management Software since
November 2000 and joined Sorrento in October 1999. Before joining Sorrento, Mr.
Wu was a senior consultant and Lead Systems Engineer at Hitachi Telecom where he
developed second-generation SONET equipment to complement WDM and OXC products
within the OTN. He also developed the WDM information model that was published
in 1998. Prior to working at Hitachi, Mr. Wu was with Nortel Networks, Racal
Datacom and Taiwan Telecom. While at Nortel he developed a SONET UPSR-based
communication messaging protocol. Mr. Wu holds an M.S. in Electrical Engineering
from North Carolina State University and a B.S. in Computer Science from Chiao
Tung University. He has also completed work on his doctoral thesis at the
Georgia Institute of Technology.

Jeff Phillips has served as Sorrento's Vice President, Corporate Development
since January 2001. From 1995 to 2000, Mr. Phillips was a Vice President at US
Bancorp where he focused on financing for telecom related technology concerns
and advisory assignments. Prior to joining US Bancorp, Mr. Phillips was a
financial analyst/strategist with Hillebrand GmbH, a European investment group.
Mr. Phillips began his career as a floor trader at the London International
Financial and Futures and Options Exchange (LIFFE) where he focused on Deutsche
Mark denominated financial derivatives. Mr. Phillips holds a B.A. in Economics
from the University of California at Berkeley.




                                       40







<PAGE>



Item 11. Executive Compensation

The following tables set forth the annual compensation for the Company's Chief
Executive Officer ("CEO") for the fiscal year ended January 31, 2002, and for
the four most highly compensated executive officers of the Company, other than
the CEO, who were serving as executive officers at the end of our fiscal year
and whose salary and bonus exceeded $100,000.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                          Annual Compensation                  Long-Term Compensation
                                     --------------------------------  -----------------------------------
                                                            Other      Restricted  Securities    Long-Term        All
                                                           Annual         Stock    Underlying    Incentive       Other
                                     Salary     Bonus   Compensation    Award(s)     Options       Plan      Compensation
Name and Principal Position  Year     ($)        ($)        ($)           ($)          (#)        Payouts      ($)(A)(B)
---------------------------  ----   -------    ------   ------------   ----------  ----------    ----------  -------------
<S>                          <C>    <C>        <C>       <C>            <C>         <C>           <C>         <C>
Xin Cheng, Chairman,(C)      2002   250,291         -           -               -            -           -            -
   Chief Executive Officer   2001   239,217         -           -               -      175,000           -            -
                             2000   180,000     8,365           -               -      100,000           -            -

Christopher E. Sue, VP(D)    2002   168,500         -           -               -            -           -         16,659
   Finance                   2001   155,880         -           -               -      110,000           -            -
                             2000   134,904    27,947           -               -       15,000           -            -

John A. Mason, Sr. VP(E)     2002   200,000         -           -               -            -           -            -
   Business Development      2001   151,878         -           -               -       42,500           -            -
   President, Sorrento Europe

Richard L. Jacobson, Sr. VP  2002   251,802         -           -               -            -           -            -
   Legal and Secretary       2001   140,850         -           -               -      154,000           -        42,746

S. Rajadhyskha, President    2002   192,055         -           -               -            -           -
   Meret
</TABLE>


     (A) Other compensation for Mr. Sue represents vacation accrual buy-out,

     (B) Other compensation for Mr. Jacobson represents relocation related
         expenses reimbursed by us.

     (C) Employment with the company ended on March 1, 2002

     (D) Mr. Sue resigned from the Company effective May 17, 2002

     (E) Mr. Mason resigned from the Company in March 2002


Long-Term Incentive Plans

The Company has no long-term incentive plans other than our various stock option
plans.



                                       41






<PAGE>


Option Grants - Year Ended January 31, 2002

        There were no option grants or shares acquired on exercise of options
for the year ended January 31, 2002 for any of the Named Executive Officers.

The following table sets forth information concerning each exercise of stock
options during the year ended January 31, 2002 by each of the Named Executive
Officers and the January 31, 2002, value of unexercised options.


   Aggregated Option Exercises in Fiscal Year 2002 and January 31, 2002
                               Option Values

<TABLE>
<CAPTION>
                                                               Number of
                           Shares                        Securities Underlying         Value of Unexercised
                          Acquired                        Unexercised Options          In-the-Money Options
                             On           Value          at Fiscal Year-End (#)      at Fiscal Year-End ($)(A)
                          Exercise      Realized       --------------------------   ---------------------------
        Name                (#)           ($)          Exercisable  Unexercisable   Exercisable    Unexercisable
        ----              --------       -------       -----------  -------------   -----------    -------------
<S>                       <C>           <C>            <C>           <C>            <C>             <C>
Xin Cheng                      -               -          478,001             -                -              -

Christopher E. Sue             -               -          181,999             -                -              -

John A. Mason                  -               -          105,001             -                -              -

Richard L. Jacobson            -               -          154,000             -                -              -

Sunil Rajadhyksha              -               -           35,000             -                -              -
</TABLE>

(A)  Options are "in-the-money" if, on January 31, 2002, the market price of the
     Common Stock ($3.58) exceeded the exercise price of such options. The value
     of such options is calculated by determining the difference between the
     aggregate market price of the Common Stock covered by such options on
     January 31, 2002, and the aggregate exercise price of such options.

Employment Agreements

     In September 2001, we entered into an employment agreement effective
October 2001 with Mr. Arneson which provides for a salary of $210,000 per year,
a signing bonus of $30,000 paid in six monthly installments, a temporary living
allowance of $2,000 per month for two years and 125,000 options to acquire our
common stock vesting over two years. This agreement may be terminated for cause.
However, should Mr. Arneson be terminated without cause during the first year of
employment he will receive a lump-sum severance payment of six month's salary
and vesting of all his options. The lump-sum severance payment increases to one
year's salary after the first anniversary of his employment with us. In the
event of a change of control, merger or sale of the Company, Mr. Arneson is
entitled to receive an immediate payment equal to one year's salary and vesting
of all his options.

     Further, on March 1, 2002 Mr. Arneson assumed the role of Chairman,
President and Chief Executive Officer of the Company. On April 30, 2002, our
Board of Directors approved an employment agreement with Mr. Arneson regarding
the terms of his employment as Chairman, Chief Executive Officer and President.
The agreement provides for an annual compensation of $250,000. The agreement
also calls for the vesting, as of March 1, 2002, of the 125,000 options granted
Mr. Arneson on September 17, 2001, and the granting of 475,000 additional stock
options at a strike price equal to the closing price of the Company's common
stock on Nasdaq on March 1, 2002, which shares are to vest at the rate of 20,000
shares per month beginning on April 1, 2002, continuing for 12 months, when
100,000 additional shares vest, and beginning on May 1, 2003, 22,500 shares will
vest each month. This grant is also entitled to antidilution protections if
certain categories of events occur on or before December 31, 2002. The
employment is at will; however, if Mr. Arneson should be terminated without
cause or resign in certain circumstances, he would receive a lump sum severance
payment of two years' base salary and vesting of all stock options, and he would
be required to provide exclusive consulting services for two years following his
termination. The agreement also calls for the reimbursement of living expenses
at the rate of $2,750.00 per month while Mr. Arneson remains employed.

     On January 25, 2002, the then Board of Directors of Meret Optical
Communications, Mr. Cheng and Mr. Sue, approved an employment agreement with Mr.
Rajadhyksha appointing him President of Meret and raising his



                                       42






<PAGE>


annual salary to $210,000 per year. In addition to the increase in salary there
were provisions for severance benefits based upon termination without cause or
change in control of the Company. Severance benefits for termination without
cause or change in control provisions allow Mr. Rajadhyksha to receive a lump
sum payment of up to one year's salary and the vesting of all his options to
acquire the Company's common stock.

     On March 1, 2002 Dr. Cheng's employment with the Company ended. In April
2002, Dr. Cheng filed a claim in arbitration seeking, among other things,
payment of $500,000 and acceleration of the vesting of options pursuant to
alleged contractual obligations of our Sorrento subsidiary. The Company is
disputing these claims.

     The Board of Directors of Osicom approved a two-year employment contract
with Mr. Mason ending May 2002, which provided for a base salary of $130,900 per
year and vesting of all his options to acquire our common stock granted prior to
February 1, 2000. This contract may be terminated for cause. However, should Mr.
Mason be terminated without cause or resign in certain circumstances prior to
the end of the contract term he will receive a continuation of his base salary
and benefits for two years, vesting of all his options to acquire our common
stock, and he is required to provide consulting services to us during the two
years following his termination. In March 2002 Mr. Mason notified the Company
that he was resigning with cause, relying on an agreement between Mr. Mason and
Dr. Cheng in April 2001 that allowed him to resign for cause at any time prior
to the expiration of his employment agreement as a result of having been
relocated more than 35 miles from his prior employment location. Mr. Mason's
resignation under these circumstances entitled him to receive two year salary
and benefit continuation and immediate stock vesting.

     The Board of Directors of Osicom approved a two-year employment contract
with Mr. Sue ending May 2002, which provides for a salary of $168,500 per year
and the vesting of all his options to acquire our common stock granted prior to
February 1, 2000. This contract may be terminated for cause. However, should Mr.
Sue be terminated without cause or resign in certain circumstances prior to the
end of the contract term he will receive a continuation of his salary and
benefits for two years, vesting of all his options to acquire our common stock
and he is required to provide consulting services to us during that period. On
May 8, 2002 Mr. Sue resigned from his position effective May 17, 2002 alleging
entitlement to the foregoing salary continuation and other benefits. The Company
does not believe Mr. Sue is entitled to any such benefits.

     The Board of Directors of Osicom entered into a two-year contact with Anne
Wallace, Director of Financial Reporting, ending May 22, 2002 which provided her
compensation of $200,000 per year, plus benefits and living expenses while on
location at the Company's Santa Monica facility. This contract may be terminated
for cause. However, should Ms. Wallace be contact be terminated without good
reason, or if she resigns for good reason, she will receive a continuation of
compensation and benefits for two years, and vesting of all her options to
acquire our common stock. On May 8, 2002 Ms. Wallace gave notice to the Company
that she has resigned for good reason, thus alleging entitlement to the
foregoing compensation and benefits. The Company does not believe Ms. Wallace is
entitled to any such benefits.

     The Board of Directors of Osicom entered into a two-year employment
contract with Mr. Nimrod Johnson, Corporate Controller, ending May 22, 2002,
which provides for a salary of $97,307 per year and the vesting of all his
options to acquire our common stock. This contract may be terminated for cause.
However, should Mr. Johnson be terminated without cause or resign in certain
circumstances prior to the end of the contract term he will receive a
continuation of his salary and benefits for two years, vesting of all his
options to acquire our common stock and he is required to provide consulting
services to us during that period. On May 9, 2002 Mr. Johnson resigned from his
position effective May 17, 2002 alleging entitlement to the foregoing salary
continuation and other benefits. The Company does not believe Mr. Johnson is
entitled to any such benefits.

     The Board of Directors of Osicom approved a two-year employment contract
with Mr. Jacobson ending in July 2002, which provides for a salary of $250,000
per year. This contract may be terminated for cause. However, should Mr.
Jacobson be terminated without cause or resign in certain circumstances prior to
the end of the contract term he will receive a continuation of his salary and
benefits for two years, vesting of all his options to acquire our common stock,
and he is required to provide consulting services to us during two years
following his termination.





                                       43






<PAGE>


     On September 30, 2001, we executed a two year consulting agreement
with Leonard Hecht whereby Mr. Hecht is be paid a salary at $250,000 per year
plus benefits and the vesting of all his options to acquire our common stock.

     In September 2000, the Company's Board of Directors approved a two year
consulting agreement with Rohit Phansalkar whereby he is paid a salary of
$250,000 per year plus benefits and the vesting of all his options to acquire
our commons stock.

Compliance with Section 16(a) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers and persons who own more
than ten percent of a registered class of the Company's equity securities to
file reports of beneficial ownership and changes in beneficial ownership with
the Securities and Exchange Commission (the "Commission"). The rules promulgated
by the Commission under Section 16(a) of the Exchange Act require those persons
to furnish the Company with copies of all reports filed with the Commission
pursuant to Section 16(a).

     Based solely upon a review of Forms 3, Forms 4 and Forms 5 and amendments
thereto furnished to us pursuant to Rule 16(a)(3)(e) during the year ended
January 31, 2002, and written representations of certain of our directors and
officers that no Forms 4 were required to be filed, we believe that all
directors, executive officers and beneficial owners of more than 10% of the
Common Stock have filed with the Commission on a timely basis all reports
required to be filed under Section 16(a) of the Exchange Act.





                                       44






<PAGE>



Item 12. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth certain information as of April 30, 2002,
regarding the ownership of the Common Stock by (i) each Director and nominee for
Director of the Company; (ii) each of the present executive officers named in
the Executive Officer section above; (iii) each of the executive officers named
in the Summary Compensation Table, following; (iv) each person known to the
Company to beneficially own 5% or more of Common Stock; and (v) all Directors
and executive officers of the Company as a group. Except as indicated, all
persons named as beneficial owners of Common Stock have sole voting and
investment power with respect to the shares indicated as beneficially owned by
them. All persons named have an address at c/o Sorrento Networks Corporation,
9990 Mesa Rim Road, San Diego, California 92121, unless otherwise indicated.



<TABLE>
<CAPTION>
            Common Stock
            ------------                        Number of        Percentage of
      Name of Beneficial Owner (A)               Shares       Outstanding Shares(O)
      ----------------------------               ------       ---------------------
<S>                                                <C>             <C>
   Phillip W. Arneson (C)                          156,667
   Xin Cheng, Ph.D. (B)                            525,735
   Donne F. Fisher (D)                              35,000              *
   Robert L. Hibbard (E)                            35,000              *
   Gary M. Parsons (F)                              11,667              *
   Joe R. Armstrong (G)                             63,375              *
   Richard L. Jacobson (H)                         161,523              *
   Christopher E. Sue (I)                          173,339              *
   John Mason (J)                                  105,001              *
   Sunil Rajadhyksha (K)                            21,875              *
   Qila, LLC (L)                                 1,364,549
       15332 Antioch Street
       Pacific Palisades, CA 90272
   All Directors, Nominees and
       Executive Officers as a Group             1,288,849
</TABLE>

-------------------
*    Less than 1%

(A)  All information with respect to beneficial ownership of the shares is based
     upon filings made by the respective beneficial owners with the Securities
     and Exchange Commission or information provided by such beneficial owners
     to the Company.

(B)  Includes exercisable options held by Dr. Cheng to acquire 426,515 shares of
     common stock and exercisable options to acquire 51,486 shares of common
     stock held as custodian or trustee for minor children, as to which
     beneficial ownership is disclaimed. On March 7, 2000, Dr. Cheng was granted
     options to acquire 5,000,000 shares of our Sorrento subsidiary's common
     stock at $5.45 as the Chairman, CEO and founder of our Sorrento subsidiary.
     Pursuant to an outstanding conversion offer, Dr. Cheng may elect to convert
     the Sorrento subsidiary options into options to acquire our common stock at
     a ratio of 3.9 for 1. Pursuant to the December 1999 stock purchase
     agreement with FIBR Holdings, LLC the shares of common stock purchased by
     it including any shares transferred to its members are required to be voted
     for the nominees recommended by the Board of Directors; in the event FIBR
     Holdings, LLC or its affiliates do not vote for the five nominees proposed,
     the Board of Directors may do so. As of January 10, 2002 there are 47,704
     shares of our common stock held by FIBR Holdings, LLC and its transferee
     members.

                                              (footnotes continued on next page)



                                       45






<PAGE>


(footnotes continued from previous page)

(C)  Includes exercisable options held by Mr. Arneson to acquire 156,667 shares
     of common stock.

(D)  Includes options to acquire 35,000 shares of common stock held by Mr.
     Fisher that are exercisable within 60 days. Any shares received upon
     exercise of these options prior to the November 20, 2002 vesting date are
     subject to repurchase by the Company. On March 7, 2000, Mr. Fisher was
     granted options to acquire 100,000 shares of our Sorrento subsidiary's
     common stock at $5.45 under its option plan for his services as an advisor
     to it. Pursuant to an outstanding conversion offer, Mr. Fisher may elect to
     convert the Sorrento subsidiary options into options to acquire our common
     stock at a ratio of 3.9 for 1. Mr. Fisher is President of Fisher Capital
     Partners which holds 183,486 shares of our Sorrento subsidiary's Series A
     Convertible Preferred Stock. Mr. Fisher is a director of Liberty Media
     Corporation which owns an 72% economic interest representing a 94% voting
     interest in UnitedGlobalCom, Inc. ("UGC"). Belmarken Holding, B.V., an
     indirect subsidiary of UGC, holds 3,027,523 shares of our Sorrento
     subsidiary's Series A Convertible Preferred Stock. Liberty Media also holds
     convertible debt of United Pan-Europe Communications, N.V., a subsidiary of
     UGC, which it has agreed to exchange for additional shares in UGC.

(E)  Includes options to acquire 35,000 shares of common stock held by Mr.
     Hibbard that are exercisable within 60 days. Any shares received upon
     exercise of these options prior to the November 13, 2002 vesting date are
     subject to repurchase by the Company.

(F)  Includes exercisable options held by Mr. Parsons to acquire 11,667 shares
     of common stock.

(G)  Includes options to acquire 63,375 shares of common stock held by Mr.
     Armstrong that become exercisable within 60 days.

(H)  Includes exercisable options held by Mr. Jacobson to acquire 152,500 shares
     of common stock, 333 options that become exercisable within 60 days, and
     8,690 shares held in a 401K plan.

(I)  Includes exercisable options held by Mr. Sue to acquire 171,999 shares of
     common stock that become exercisable within 60 days, and 1,340 shares held
     in a 401K plan.

(J)  Includes exercisable options held by Mr. Mason to acquire 105,001 shares of
     common stock that become exercisable within 60 days.

(K)  Includes options to acquire 21,875 shares of common stock held by Mr.
     Rajadhyksha that become exercisable within 60 days. On March 7, 2000, Mr.
     Rajadhyksha was granted an option to acquire 400,000 shares of our Sorrento
     subsidiary's common stock at $5.45 per share under its option plan for his
     services as a consultant. Pursuant to an outstanding conversion offer, Mr.
     Rajadhyksha may elect to convert the Sorrento subsidiary options into
     options to acquire our common stock at a ratio of 3.9 for 1.

(L)  Represents holdings reported by Qila, LLC and RII Partners, Inc. on January
     14, 2002 on Form 13-D, "General Statement of Beneficial Ownership".
     Includes exercisable options to acquire 757,387 shares of common stock held
     by R II Partners, Inc., exercisable options to acquire 350,001 shares of
     common stock held by RT Investments, Inc., 25,334 shares held by the Par
     and Sharon Chadha Family Trust, and 6,527 shares held by the RRC Pension
     Trust. Mr. and Mrs. Chadha disclaim ownership in all these shares.

(M)  For each beneficial owner, the "Percentage of Outstanding Shares" equals
     each owner's actual holdings of shares plus shares represented by
     unexercised options and warrants held, divided by total shares outstanding
     of the Company at April 30,, 2002, of 14,543,298 plus the unexercised
     options and warrants detailed above of the referenced holder only. In other
     words, individual percentages of the listed holders will not add to the
     group total because the calculations are made separately for each holder.




                                       46






<PAGE>


Item 13. Certain Relationships and Related Transactions.

     In November 2001, we acquired in a like kind exchange furniture having
an approximate current value of $8,000 from Digital Boardwalk, Inc. ("DBI")
which is an affiliate of Par Chadha, our former Chairman and CEO. Also, during
the fourth quarter of fiscal 2002, our Meret subsidiary retained DBI to consult
on various matters, for which DBI charged a consulting fee of approximately
$49,000, and our Sorrento subsidiary retained DBI to consult on a matter for
which DBI charged a consulting fee of approximately $7,000.

     During July, 2000 we agreed to loan $300,000 for three years at the
applicable federal rate provided for in Internal Revenue Code Section 1274 to
Mr. Jacobson in connection with accepting employment as our Senior Vice
President, Legal. This is a full recourse loan and Mr. Jacobson has pledged his
options to acquire our common stock and any options he may receive from any of
our subsidiaries as collateral. Mr. Jacobson has received $300,000 in advances
under this loan agreement for which the interest rate is 6.6%.

     During June 2000, we entered into various agreements with Par Chadha, our
former CEO and Chairman, which, among other matters, provides for payments of
$250,000 per year for three years of consulting services and loans by us for
the exercise of previously granted options to acquire 1,178,500 options at
prices varying from $7.03 to $49.25 per share. As the members of our Board of
Directors at the time of his resignation ceased to represent more than 50% of
the Board in October 2000, all payments for consulting services were accelerated
and no future consulting services are required. During October 2000, Mr. Chadha
exercised 71,112 options, applying the $500,000 accelerated payment to the
exercise. In addition, he exercised 507,388 options for which we are
contractually obligated to loan the $5,034,000 due on the exercise. During
September 2001, Mr. Chadha notified us that he does not have any obligations
under the agreements. We have notified him that we do not agree with his
interpretation of his repayment obligations under the terms of the agreements.

     During December 2001, we entered into an agreement whereby the 507,388
option exercise was rescinded. Mr. Chadha returned the 507,388 shares to us for
cancellation and we cancelled the receivable due from him and restored the
original option agreements. This rescission agreement did not resolve any
underlying dispute as to the option loan repayment obligations. We anticipate
this dispute will be resolved through binding arbitration. Should Mr. Chadha
prevail in the arbitration, the Company may be required to issue him 1,178,500
shares of the Company's stock for no consideration.

     During fiscal 2002, we paid a total of $55,218 to Phillip W. Arneson as a
Director of the Company. The amounts paid included $23,500 for consulting work
performed for a special Committee of the Board, $20,760 for various other
consulting services including outsourcing advice and organizational matters,
attendance fees of $6,000 for Board and Committee meetings and $4,958 in
reimbursable expenses. Consulting fees were paid at a rate equal to normal fees
for attendance at Board meetings.

     During fiscal 2001, we entered into employment agreements with Mr. Hecht,
Mr. Phansalkar, Mr. Sue, and Mr. Jacobson which provide for loans to the
employees to exercise stock options to acquire our common stock and the stock of
our subsidiaries including any required tax withholdings due upon exercise. The
loans are for a period not to exceed two years at the applicable federal rate,
are full recourse and require the pledge of shares issued upon exercise. As of
April 30, 2002 no such loans are outstanding.

     During fiscal 2000 we paid $40,000 to Renn Zaphiropoulos, a then director,
for management consulting services.

     During fiscal 1998, we made 8% demand loans totaling $165,000 to Chrysalis
Capital Group, which was repaid with interest in April 1999. The loans were
collateralized by 20,408 shares of our common stock. During fiscal 2000 and
1999, we paid $190,070 and $25,000, respectively, in fees to Chrysalis Capital
Group for services rendered in connection with various amended loan and security
agreements. Leonard Hecht was a director when such transactions occurred and
owns, directly and indirectly, 100% of the outstanding capital stock of
Chrysalis Capital Group.

     During fiscal 2000 FIBR Holdings, LLC purchased 679,483 unregistered shares
of our common stock for $7,500,000. In connection with this placement Humbert B.
Powell, III, then a director, received a finder's fee of $300,000. Andersen
Weinroth Capital Corp. ("AW") received a placement fee of $300,000 in connection
with this placement and Rohit Phansalkar, who subsequently became one of our
directors, and later became our Chairman and Chief Executive Officer, was a
partner of AW at that time. FIBR Holdings, LLC had the right to nominate one
member of the Board of Directors to serve until the annual shareholders' meeting
in 2001 and had the right to




                                       47







<PAGE>


participate in any stock offering by our Sorrento Subsidiary, to the extent of
$7,500,000 subject to certain limitations. Mr. Phansalkar was nominated by AW
and joined our Board of Directors on January 6, 2000.

     On March 3, 2000, our Sorrento subsidiary completed a sale of 8,596,333
shares of its Series A Convertible Preferred Stock to a group of investors
receiving net proceeds of approximately $46.6 million. Of these shares,
1,467,891 shares were purchased for $8,000,000 pursuant to the previously
contracted right of participation by entities in which Mr. Phansalkar was
partner or member. In addition, AW received a placement fee of $1,950,000 paid
through the issuance by Sorrento of 357,799 shares of its Series A Convertible
Preferred Stock. Mr. Phansalkar disclaims beneficial ownership of these shares
except to the extent of his beneficial ownership of each entity. In addition,
Renn Zaphiropoulos, a former director, purchased 45,872 of these shares for
$250,000.



                                       48







<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Exhibits and Consolidated Financial Statement Schedules

     1. Financial Statements: (see index to financial statements at page F-1)

        Independent Certified Public Accountants' Reports

        Consolidated Balance Sheets at January 31, 2002 and 2001

        Consolidated Statements of Operations for the Years Ended January 31,
           2002, 2001 and 2000

        Consolidated Statements Comprehensive Income for the Years Ended January
           31, 2002, 2001 and 2000

        Consolidated Statement of Stockholders' Equity for the Years Ended
           January 31, 2002, 2001 and 2000

        Consolidated Statements of Cash Flows for the Years Ended January 31,
           2002, 2001 and 2000

        Notes to Consolidated Financial Statements

     2. Exhibits:

        2.    Stock Purchase Agreement dated as of June 1, 1996 between Osicom
              and BWA (A)

        3.1   Restated Certificate of Incorporation dated June 14, 1988 (B)

        3.2   Amended and Restated By-Laws of Registrant (C)

        3.6   Series D Preferred Stock Certificate of Designation (E)

        3.9   Certificate of Amendment to the Certificate of Incorporation dated
              January 16, 1998 - (G)

        3.10  Certificate of Amendment to the By-Laws dated January 30, 1998 -
              (G)

        3.11  Corrected Certificate of Incorporation of Sorrento Networks,
              Inc. (P)

        3.12  Certificate of Designation of Series F Preferred Stock (Q)

        4.1   1988 Stock Option Plan - (H)

        4.2   Amended and Restated 1997 Incentive and Non-Qualified Stock Option
              Plan -(G)

        4.3   1997 Directors Stock Option Plan - (I)

        4.4   2000 Stock Incentive Plan - (J)

        4.5   2000 Employee Stock Purchase Plan - (J)

        4.6   2000 Stock Option/Stock Issuance Plan of Sorrento Networks,
              Inc. (P)

        4.7   Form of Senior Convertible 9.75% Debenture due August 2, 2004 (Q)

        4.8   Form of Warrant dated August 2, 2001 (Q)

        10.1  Line of Credit Agreement with Coast Business Credit dated May 28,
              1995 and Modification dated January 31, 1996 (K)

        10.5  Agreement dated June 12, 2000 with Par Chadha - (O)

        10.7  Agreement dated May 22, 2000 with Rohit Phansalkar - (O)

        10.8  Agreement dated May 22, 2000 with Christopher E. Sue - (O)

        10.9  Agreement dated August 22, 2000 with Leonard N. Hecht (P)





                                       49






<PAGE>


        10.10 Agreement dated May 22, 2000 with John A. Mason (P)

        10.10 Agreement dated July 12, 2000 with Richard L. Jacobson (P)

        10.11 Agreement dated March 1, 2002 with Phillip W. Arneson filed
              herewith

        10.13 Securities Purchase Agreement dated as of August 1, 2001 (Q)

        10.14 Escrow Agreement dated as of August 1, 2001 (Q)

        10.15 Registration Rights agreement dated as of August 2, 2001 (Q)


        21    Subsidiaries of the Registrant - filed herewith

        23.1  Consent of BDO Seidman LLP - filed herewith

        23.2  Consent of Arthur Andersen & Co., L.L.P. - filed herewith

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

        The foregoing are incorporated by reference from the Registrant's
        filings as indicated:

        A     Form S-4 dated September 6, 1996

        B     Form 10-QSB for the quarter ended July 31, 1996

        C     Form 10-K for the year ended January 31, 1988

        D     Form 10-K for the year ended January 31, 1993

        E     Form S-3 dated February 25, 1997

        F     Form 10-KSB for the year ended January 31, 1997

        G     Proxy Statement dated December 1, 1999

        H     Proxy Statement dated May 13, 1988

        I     Proxy Statement dated November 21, 1997

        J     Proxy Statement dated December 11, 2000

        K     Form 10-KSB for year ended January 31, 1996

        L     Form 8-K dated February 2, 1996

        M     Form 8-K dated September 12, 1996

        N     Form 8-K dated September 23, 1996

        O     Form 10-Q for the quarter ended October 31, 2000

        P     Form 10-K for the year ended January 31, 2001

        Q     Form 8-K dated August 3, 2001

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

        NOTE: Certain previously filed exhibits are no longer being incorporated
              by reference (and therefore not numerically listed) as the
              underlying documents have either expired or are no longer material
              or relevant.

(b) Reports on Form 8-K

    January 24, 2002 Delaware Supreme Court ruling




                                       50







<PAGE>



                          SORRENTO NETWORKS CORPORATION
                                AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                Page
                                                                                             ----------
<S>                                                                                          <C>
Independent Certified Public Accountants' Reports                                            F-2 to F-3

Consolidated Balance Sheets as of January 31, 2002 and 2001                                      F-4

Consolidated Statements of Operations and Comprehensive Income for the years ended
         January 31, 2002, 2001 and 2000                                                         F-5

Consolidated Statements of Shareholders' Equity for the years ended
         January 31, 2002, 2001 and 2000                                                     F-6 to F-8

Consolidated Statements of Cash Flows for the years ended
         January 31, 2002, 2001 and 2000                                                         F-9

Notes to Consolidated Financial Statements                                                  F-10 to F-36
</TABLE>



                                       F-1







<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Shareholders of
Sorrento Networks Corporation


We have audited the accompanying consolidated balance sheets of Sorrento
Networks Corporation (a New Jersey corporation) and subsidiaries (the "Company")
as of January 31, 2002 and 2001 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years ended
January 31, 2002, 2001 and 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of a foreign subsidiary which statements
reflect net assets of $1,632,000 as of January 31, 2000 and total revenues of
$20,819,000 for the year ended January 31, 2000. These amounts are included in
the net investment in and results of discontinued operations in the accompanying
financial statements. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for such subsidiary, is based solely on the reports of the
other auditors.

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

In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of January 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years ended January 31, 2002,
2001 and 2000 in conformity with generally accepted accounting principles, in
the United States of America.


/s/ BDO Seidman LLP

BDO Seidman LLP
Los Angeles, California
March 22, 2002



                                       F-2








<PAGE>




                                                           ARTHUR ANDERSEN


                                                      Arthur Andersen & Co.
                                                      21st Floor Edinburgh Tower
                                                      The Landmark
                                                      15 Queen's Road Central
                                                      Hong Kong


REPORT OF INDEPENDENT PUBLIC ACCOUNTS


To:  Uni Precision Industrial Limited and Subsidiaries


We have audited the accompanying balance sheets of Uni Precision Industrial
Limited and Subsidiaries (the "Group), incorporated in Hong Kong, as of January
31, 2000 and the related statements of income, cash flows, and changes in
shareholders' equity for the year ended January 31, 2000, expressed in Hong Kong
dollars. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Group as of January 31,
2000, and the results of its operations and cash flows for the year ended
January 31, 2000 in conformity with generally accepted accounting principles in
the United States of America.


/s/ Arthur Andersen & Co.


Hong Kong,
March 3, 2000





                                      F-3




<PAGE>

SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousands)

<TABLE>
<CAPTION>

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

                                                                                   January 31, 2002  January 31, 2001
--------------------------------------------------------------------------------------------------------------------

<S>                                                                                      <C>             <C>
ASSETS

CURRENT ASSETS
     Cash and equivalents                                                               $ 14,243      $   9,965
     Accounts receivable, net (Notes D, J and S)                                           8,081         16,000
     Inventory, net (Notes B, D and S)                                                    18,810         14,601
     Prepaid expenses and other current assets (Note N)                                    1,252            813
     Investment in marketable securities (Note B)                                         28,120         50,258
--------------------------------------------------------------------------------------------------------------------
         TOTAL CURRENT ASSETS                                                             70,506         91,637
--------------------------------------------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT, NET (Notes C, D and E)                                            17,411         16,600
--------------------------------------------------------------------------------------------------------------------

OTHER ASSETS
     Purchased technology, net (Note B)                                                      652          1,023
     Other assets (Notes A, B and N)                                                       1,671          2,556
     Investment in former subsidiary (Note A)                                                 99          1,307
--------------------------------------------------------------------------------------------------------------------
         TOTAL OTHER ASSETS                                                                2,422          4,886
--------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                            $ 90,339      $ 113,123
====================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Short-term debt (Note D)                                                           $  1,043      $   1,342
     Current maturities of long term debt (Note E)                                           362            422
     Accounts payable                                                                      5,575          8,382
     Accrued liabilities and other current liabilities                                     8,887          9,498
     Due on redeemption of preferred security of subsidiary (Note J)                      48,800              -
--------------------------------------------------------------------------------------------------------------------
         TOTAL CURRENT LIABILITIES                                                        64,667         19,644
--------------------------------------------------------------------------------------------------------------------

Long-term debt and capital lease obligations  (Note E)                                     3,867          3,819
Debentures payable, net of unamortized costs and discounts (Note F)                        3,489              -
Dividends payable (Note A)                                                                    99          1,307
--------------------------------------------------------------------------------------------------------------------
         TOTAL LIABILITIES                                                                72,122         24,770
--------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Notes F, G and H)

MINORITY INTEREST
     Preferred stock, 8,954 shares issued and outstanding; liquidation
     preference (Note J)                                                                       -         48,620

STOCKHOLDERS' EQUITY (Note I)
     Preferred stock, $.01 par value; liquidation preference $1,353                            1              1
     Common stock, $.30 par value; 150,000 shares authorized; 14,209 shares issued
         14,200 shares outstanding at January 31, 2002; 12,608 shares issued and
         12,599 shares outstanding at January 31, 2001                                     4,263          3,782
     Additional paid-in capital                                                          151,443        114,994
     Note receivable from option exercise (Note N)                                             -         (5,034)
     Deferred stock compensation                                                            (255)          (880)
     Accumulated deficit                                                                (161,326)      (118,010)
     Accumulated unrealized gain on maketable securities                                  24,160         44,949
     Treasury stock, at cost; 9 shares at January 31, 2002 and
         January 31, 2001, respectively                                                      (69)           (69)
--------------------------------------------------------------------------------------------------------------------
         TOTAL STOCKHOLDERS' EQUITY                                                       18,217         39,733
--------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $ 90,339      $ 113,123
====================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-4





<PAGE>

SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                          Twelve Months Ended
                                                                                              January 31
                                                                               --------------------------------------
                                                                                 2002          2001          2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>             <C>
NET SALES (Notes B and J)                                                      $ 40,827      $  44,641       $ 68,372

COST OF SALES                                                                    31,507         31,470         36,590
---------------------------------------------------------------------------------------------------------------------
         GROSS PROFIT                                                             9,320         13,171         31,782
---------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
     Selling and marketing                                                       16,165         17,200         16,914
     Engineering, research and development                                       13,656         23,928         11,695
     General and administrative                                                  12,770         18,110         12,753
     Deferred compensation                                                          812          1,908              -
     Other operating expenses                                                     3,071          2,440            371
---------------------------------------------------------------------------------------------------------------------
         TOTAL OPERATING EXPENSES                                                46,474         63,586         41,733
---------------------------------------------------------------------------------------------------------------------

LOSS FROM OPERATIONS                                                            (37,154)       (50,415)        (9,951)
---------------------------------------------------------------------------------------------------------------------

OTHER INCOME (CHARGES)
     Investment income (loss)                                                    (1,368)         5,507            236
     Interest expense                                                            (3,311)          (918)        (1,864)
     Other income (charges)                                                         (99)             -             19
     Gain on sale of marketable securities (Note A)                              (1,204)         3,921         13,970
---------------------------------------------------------------------------------------------------------------------
         TOTAL OTHER INCOME (CHARGES)                                            (5,982)         8,510         12,361
---------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE INCOME TAX                                                          (43,136)       (41,905)         2,410

LOSS FROM DISCONTINUED OPERATIONS
     (NET OF INCOME TAX PROVISION OF $-0-, $-0-, AND $246)                            -              -        (12,419)

ESTIMATED LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS                                 -              -        (11,644)
---------------------------------------------------------------------------------------------------------------------
NET LOSS                                                                       $(43,136)     $ (41,905)      $(21,653)
=====================================================================================================================

INCOME (LOSS) PER COMMON SHARE (Note M)

     BASIC
         WEIGHTED AVERAGE COMMON SHARES
             OUTSTANDING  (RESTATED, IN THOUSANDS)                               13,966         11,855          9,631
         NET INCOME (LOSS) PER COMMON SHARE:
             Continuing operations                                                (3.10)         (3.71)          0.17
             Discontinued operations                                                n/a            n/a          (2.50)
---------------------------------------------------------------------------------------------------------------------
BASIC NET LOSS PER COMMON SHARE                                                $  (3.10)     $   (3.71)      $  (2.33)
=====================================================================================================================


     DILUTED
         WEIGHTED AVERAGE COMMON SHARES
             OUTSTANDING  (RESTATED, IN THOUSANDS)                               16,175         11,855         10,605
         NET INCOME (LOSS) PER COMMON SHARE:
             Continuing operations                                                (4.36)         (3.71)          0.15
             Discontinued operations                                                n/a            n/a          (2.27)
---------------------------------------------------------------------------------------------------------------------
DILUTED NET LOSS PER COMMON SHARE                                              $  (4.36)     $   (3.71)      $  (2.12)
=====================================================================================================================

COMPREHENSIVE INCOME AND ITS COMPONENTS CONSIST OF
     THE FOLLOWING:
         Net loss                                                              $(43,136)     $ (41,905)      $(21,653)
         Unrealized gains (losses) from marketable securities:
             Unrealized holding gains (losses) arising during the period        (20,789)      (123,486)       164,514
             Reclassification adjustment for gains included in net income             -          3,921              -
---------------------------------------------------------------------------------------------------------------------
NET COMPREHENSIVE INCOME (LOSS)                                                $(63,925)     $(161,470)      $142,861
=====================================================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-5





<PAGE>

SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES
For the Year Ended January 31, 2002

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                        COMMON             PREFERRED        ADDITIONAL    NOTES      DEFERRED
                                         STOCK               STOCK           PAID IN   RECEIVABLE     STOCK
                                 Shares         Amount  Shares     Amount    CAPITAL     OPTIONS    COMPENSATION
-----------------------------------------------------------------------------------------------------------------
<S>                              <C>          <C>            <C>     <C>    <C>         <C>           <C>
Balance at
     January 31, 2001            12,608       $  3,782       2       $1     $114,994    $(5,034)      $(880)

Debentures
     private placement
     (Notes F)                      478                                       28,414

Stock option and
     warrant exercises
     (Notes I, J and M)            (403)            23                        (1,321)     5,034

Unrealized losses on
     available for sale
     securities (Note B)

Deferred stock compensation
     of subsidiary (Note B)                                                      187                   (187)

Expenses paid with stock
     issuances (Note I)                                                          (18)

Amortization of deferred stock
     compensation (Note B)                                                                              812

Private placement
     subsidiary (Note J)          1,526            458                         9,187

Deemed dividend
     (Note I)

Net loss

-----------------------------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2002            14,209         $4,263       2       $1     $151,443    $    --       $(255)
=================================================================================================================

<CAPTION>

----------------------------------------------------------------------------------------------
                                                   TREASURY         ACCUMULATED      TOTAL
                                   ACCUMULATED       STOCK          UNREALIZED   STOCKHOLDERS'
                                     DEFICIT    Shares     Amount      GAIN          EQUITY
----------------------------------------------------------------------------------------------

<S>                                <C>              <C>     <C>      <C>           <C>
Balance at
     January 31, 2001              $(118,010)       9       $(69)    $ 44,949      $ 39,733

Debentures
     private placement
     (Notes F)                                                                       28,414

Stock option and
     warrant exercises
     (Notes I, J and M)                                                               3,736

Unrealized losses on
     available for sale
     securities (Note B)                                              (20,789)      (20,789)

Deferred stock compensation
     of subsidiary (Note B)                                                               -

Expenses paid with stock
     issuances (Note I)                                                                 (18)

Amortization of deferred stock
     compensation (Note B)                                                              812

Private placement
     subsidiary (Note J)                                                              9,645

Deemed dividend
     (Note I)                           (180)                                          (180)

Net loss                             (43,136)                                       (43,136)

-------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2002              $(161,326)       9       $(69)    $ 24,160      $ 18,217
===========================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.



                                      F-6




<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES
For the Year Ended January 31, 2001

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)

<TABLE>
<CAPTION>

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

                                       COMMON                PREFERRED           ADDITIONAL     NOTES          DEFERRED
                                        STOCK                  STOCK              PAID IN     RECEIVABLE        STOCK
                                Shares          Amount   Shares        Amount     CAPITAL      OPTIONS       COMPENSATION
-------------------------------------------------------------------------------------------------------------------------

<S>                              <C>            <C>            <C>        <C>      <C>           <C>           <C>
Balance at
     January 31, 2000            11,483         $3,445         5          $1       $102,418      $     -       $     -

Preferred stock conversions
     (Note I)                       167             50        (3)          -            (50)

Stock option and
     warrant exercises
     (Notes J, K and M)             919            276                                8,619       (5,034)

Unrealized losses on
     available for sale
     securities (Note B)

Deferred stock compensation
     of subsidiary (Note B)                                                           2,788                     (2,788)

Amortization of deferred stock
     compensation (Note B)                                                                                       1,908

Distribution of shares of
     subsidiary (Note A)

Deemed dividend
     (Note J)

Dividends paid (Note I)              39             11                                1,219

Net loss

-------------------------------------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2001            12,608         $3,782         2          $1       $114,994      $(5,034)      $  (880)
=========================================================================================================================

<CAPTION>
--------------------------------------------------------------------------------------------------

                                                    TREASURY            ACCUMULATED     TOTAL
                                 ACCUMULATED         STOCK              UNREALIZED   STOCKHOLDERS'
                                   DEFICIT      Shares      Amount        GAIN          EQUITY
--------------------------------------------------------------------------------------------------

<S>                                  <C>            <C>        <C>      <C>           <C>
Balance at
     January 31, 2000                $(67,771)      9          $(69)    $ 164,514     $ 202,538

Preferred stock conversions
     (Note I)                                                                                 -

Stock option and
     warrant exercises
     (Notes J, K and M)                                                                   3,861

Unrealized losses on
     available for sale
     securities (Note B)                                                 (119,565)     (119,565)

Deferred stock compensation
     of subsidiary (Note B)                                                                   -

Amortization of deferred stock
     compensation (Note B)                                                                1,908

Distribution of shares of
     subsidiary (Note A)               (5,122)                                           (5,122)

Deemed dividend
     (Note J)                          (1,982)                                           (1,982)

Dividends paid (Note I)                (1,230)                                                -

Net loss                              (41,905)                                          (41,905)

--------------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2001               $(118,010)      9          $(69)    $  44,949     $  39,733
==================================================================================================

</TABLE>
See accompanying notes to consolidated financial statements.


                                      F-7





<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES
For the Year Ended January 31, 2000

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)

<TABLE>
<CAPTION>

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

                                      COMMON                 PREFERRED                ADDITIONAL
                                      STOCK                    STOCK                   PAID IN   ACCUMULATED
                              Shares           Amount    Shares        Amount          CAPITAL     DEFICIT
-------------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>            <C>         <C>        <C>         <C>
Balance at
     January 31, 1999              8,924         $2,677         12          $1         $85,183     $(48,479)

Common stock placements,
     net (Note J)                    679            204                                  6,658

Preferred stock conversions
     (Note I)                      1,048            314         (7)                       (314)

Stock option and
warrant exercises
     (Notes J and K)                 820            246                                  8,298

Expenses paid with stock
     issuances (Note J)                3              1                                     58

Costs attributed to
     stock issuances                                                                       (81)

Treasury stock purchases

Unrealized gains on
available for sale
securities (Note B)

Pre-acquisition deficit
and additional paid in
capital reltaed to former
subsidiary (Note A)                                                                      2,433        3,028

Deemed dividend
     (Note H)                                                                              103         (103)

Dividends paid (Note I)                9              3                                     80         (564)

Net loss                                                                                            (21,653)

-------------------------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2000             11,483   $      3,445          5          $1        $102,418     $(67,771)
=============================================================================================================

<CAPTION>

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

                                     TREASURY            ACUMULATED      TOTAL
                                      STOCK              UNREALIZED  STOCKHOLDERS'
                               Shares       Amount          GAIN         EQUITY
----------------------------------------------------------------------------------

<S>                             <C>        <C>         <C>            <C>
Balance at
     January 31, 1999               80         $(524)     $             $ 38,858

Common stock placements,
     net (Note J)                                                          6,862

Preferred stock conversions
     (Note I)                                                                  -

Stock option and
warrant exercises
     (Notes J and K)               (16)          119                       8,663

Expenses paid with stock
     issuances (Note J)            (75)          489                         548

Costs attributed to
     stock issuances                                                         (81)

Treasury stock purchases            20          (153)                       (153)

Unrealized gains on
available for sale
securities (Note B)                                        164,514       164,514

Pre-acquisition deficit
and additional paid in
capital reltaed to former                                                      -
subsidiary (Note A)                                                        5,461

Deemed dividend
     (Note H)                                                                  -

Dividends paid (Note I)                                                     (481)

Net loss                                                                 (21,653)

----------------------------------------------------------------------------------------------
BALANCE AT
     JANUARY 31, 2000                9         $ (69)     $164,514      $202,538
==============================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.




                                      F-8







<PAGE>

SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                            Year Ended January 31,
                                                                                 -------------------------------------------
                                                                                    2002             2001            2000
----------------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES

       Net income (loss) from continuing operations                               $(43,136)        $(41,905)         $2,410
----------------------------------------------------------------------------------------------------------------------------

       Adjustments to reconcile net loss to net cash used in
            operating activities:
                 Intangible assets valuation allowances (Note B)                         -              435           1,742
                 Depreciation and amortization                                       2,794            4,386           4,624
                 Accounts receivable, option receivables and inventory reserves      9,309            6,347           2,674
                 Expenses paid through issuances of securities                       1,309                -             548
                 (Gain)loss on sale of marketable securitites                        1,204           (7,622)        (13,970)
                 Non-cash interest on debentures (Note F)                              994                -               -
                 Deferred and other stock compensation (Note B)                        812            1,908               -
                 Other non-cash                                                        794                -               -
            Changes in assets and liabilities net of effects of business entity
                 divestitures:
                      Increase in accounts receivable                                6,360          (15,597)           (839)
                      Increase in inventories                                       (8,247)         (11,201)         (3,963)
                      (Increase) decrease in other current assets                     (438)           1,191          (1,196)
                      Increase(decreae) in accounts payable                         (2,729)           4,951           1,942
                      Increase (decrease) in accrued expenses                         (751)           5,303           3,729
                      Increase  (decrease) in other current liabilities                (63)             122            (437)
----------------------------------------------------------------------------------------------------------------------------
            NET CASH USED IN OPERATING ACTIVITIES                                  (31,788)         (51,682)         (2,736)
----------------------------------------------------------------------------------------------------------------------------

            NET CASH PROVIDED BY DISCONTINUED OPERATIONS                                 -                -             953

----------------------------------------------------------------------------------------------------------------------------
            NET CASH USED IN OPERATING ACTIVITIES                                  (31,788)         (51,682)         (1,783)
----------------------------------------------------------------------------------------------------------------------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
       Purchase of property and equipment                                           (3,235)         (14,413)         (2,133)
       Software development costs (Note B)                                               -                -            (886)
       Cash received from sale of marketable securities and
        other investments (Notes A and B)                                              144           13,393          13,717
       Expenditures for investments                                                      -           (7,111)              -
       Purchase of other assets (Note B)                                              (895)               -          (3,597)
       Other receivables (Note M)                                                        -            2,621             557
       Cash of former subsidiary (Note A)                                                -           (6,961)              -
       Advances to affiliates, net of repayments (Note A)                                -                -          (3,371)
       Investing acitivities of discontinued operations                                  -                -          (5,519)
----------------------------------------------------------------------------------------------------------------------------
            NET CASH USED IN INVESTING ACTIVITIES                                   (3,986)         (12,471)         (1,232)
----------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from short-term debt, net of repayments (Note D)                      (172)             (56)           (690)
       Proceeds from long-term debt (Note E)                                            26            2,412             988
       Repayment of long-term debt (Note E)                                            (39)             (99)           (266)
       Proceeds from debentures ( Note F)                                           29,749                -               -
       Proceeds from convertible preferred stock issued by subsidiary (Note J)           -           46,638               -
       Proceeds from common stock issued by subsidiary (Note I)                          -            7,851               -
       Proceeds from common stock (Note I)                                           9,645                -           6,862
       Proceeds from stock option and warrant exercises (Notes I, J and K)             861            3,861           8,165
       Dividends paid                                                                    -                -            (481)
       Treasury stock purchases                                                          -                -            (153)
       Other                                                                           (18)               -             (81)
       Financing activities of discontinued operations                                   -                -          (1,298)
----------------------------------------------------------------------------------------------------------------------------
            NET CASH PROVIDED BY FINANCING ACTIVITIES                               40,052           60,607          13,046
----------------------------------------------------------------------------------------------------------------------------

INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS                                      4,278           (3,546)         10,031

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                      9,965           13,511           3,480
----------------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                          $14,243         $  9,965        $ 13,511
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.




                                      F-9




<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

Sorrento Networks Corporation (formerly Osicom Technologies, Inc.) (the
"Company," "We," "Our," or "Us") through our subsidiaries designs, manufactures
and markets integrated networking and bandwidth aggregation products for
enhancing the performance of data and telecommunications networks. Our products
are deployed in telephone companies, Internet Service Providers, governmental
bodies and the corporate/campus networks that make up the "enterprise" segment
of the networking marketplace. We have facilities in San Diego, California,
Santa Monica, California and Fremont, California. In addition, we have various
sales offices located in the United States and Europe. Our former subsidiary,
Entrada Networks moved its facilities to Irvine, California. Our former
subsidiary, NETsilicon, Inc., is located in Waltham, Massachusetts. We market
and sell our products and services through a broad array of channels including
worldwide distributors, value added resellers, local and long distance carriers
and governmental agencies.

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

A. THE COMPANY, BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS

         The Company, incorporated in New Jersey on July 7, 1981 as Osicom
Technologies, Inc., operates as a holding company for its various subsidiaries
and their divisions, more fully described below. The companies and assets
acquired have been integrated in accordance with product lines: Sorrento
Networks (regional and metropolitan optical networking products), Meret Optical
(distance extension networking equipment), Entrada Networks (storage area
networks as well as remote access and internetworking equipment), and
NETsilicon, Inc. (formerly Embedded Networking Solution products). For reference
purposes acquired businesses have been identified by legal entity, which is not
indicative of our operational integration.

         Sorrento Networks - This segment consists of Sorrento Networks, Inc.
("Sorrento"). Sorrento develops and markets end-to-end intelligent optical
networking solutions for regional and metropolitan applications.

         Meret Optical - This segment consists of Meret Communications, Inc.
("Meret" doing business as Meret Optical Communications), and Sciteq
Communications, Inc. ("Sciteq"). Meret designs, manufactures, and markets
distance extension networking equipment. Sciteq designs and markets products
based on radio frequency synthesis technologies.

         Entrada Networks - This segment consisted of Osicom Technologies, a
Delaware corporation (formerly known as Cray Communications, Inc., "Cray"),
Rockwell Network Systems ("RNS", a division of Cray), and Distributed Systems
International, Inc. ("DSI"). Entrada Networks develops, manufactures and markets
an extensive range of communications products and systems for storage area
networks, remote access and internetworking markets. On August 31, 2000, we
completed a merger of Entrada with Sync Research, Inc. ("Sync"), a Nasdaq listed
company in which we received 4,244,155 shares of the merged entity which changed
its name to Entrada Networks, Inc. and changed its symbol to ESAN. We purchased
93,900 shares of Sync in the open market during June and July, 2000 for $388 and
on August 31, 2000 purchased an additional 1,001,818 shares directly from
Entrada for $3,306. After these transactions and Entrada's issuance of
additional shares to outside investors in connection with the merger we owned
48.9% of Entrada Networks. Accordingly , the accompanying financial statements
reflect the results of operations of Entrada through August 31, 2000.

         Pursuant to a plan adopted by our Board of Directors prior to the
merger we distributed 3,107,155 of our Entrada shares on December 1, 2000 to our
shareholders of record as of November 20, 2000. The distribution was made at the
rate of one-fourth (0.25) of an Entrada share for each of our outstanding
shares. At exercise, options




                                      F-10






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

and warrants to acquire our common shares which were granted and unexercised as
of November 20, 2000 will receive a similar number of Entrada shares. Prior to
January 31, 2001 we distributed 20,182 of our Entrada shares upon the exercise
of options and as of January 31, 2002 and 2001 have reserved 826,000 and
1,080,283 shares respectively for future exercises of options and warrants. The
cost basis of these reserved shares and related liability to the option and
warrant holders is included in the investment in former subsidiary and dividends
payable in the accompanying balance sheet. The aggregate distribution of our
Entrada shares including the shares reserved for option and warrant holders has
been accounted for at our original cost of $5,122. In addition we have granted
options to purchase 410,000 of our Entrada shares for $3.19 per share (the
merger price) to several of our then officers and consultants.

         The remaining 326,034 Entrada shares owned by us are accounted for as
an "available for sale security". Under this accounting, these shares are
marked-to-market at the end of each reporting period. The difference between our
basis and the fair market value, as reported on Nasdaq, is a separate element of
stockholders' equity and is included in the computation of comprehensive income.
More information concerning Entrada is available in its public filings with the
Securities and Exchange Commission.

         NETsilicon - This segment consists of NETsilicon, Inc. ("NSI"). On
September 15, 1999 NSI completed an initial public offering in which 6,037,500
shares of its common stock were sold (3,537,500 shares by NSI and 2,500,000
shares by us). NSI received net proceeds of $22,249 and we received net proceeds
of $15,382. In addition, NSI repaid advances due us of $5,884. In connection
with the initial public offering by NSI our remaining 55.4% interest became
non-voting shares. Accordingly, the accompanying financial statements reflect
the results of operations of NSI through September 14, 1999 at which time our
remaining interest is accounted for as an "available for sale security." Under
this accounting, the 7.5 million shares of NSI held by us are marked-to-market
at the end of each reporting period with the difference between our basis and
the fair market value, as reported on Nasdaq, reported as a separate element of
stockholders' equity and is included in the computation of comprehensive income.

         In October 2000, we sold 350,000 shares of our investment in NSI for
$4,219. The purchasers had the right to receive additional NSI shares from us if
the three day average high for the NSI common stock, as quoted on Nasdaq, at
December 31, 2000 was less than the price paid to us by the purchasers but not
less than $8.00 per share. We issued an additional 177,344 shares of NSI to the
purchasers, reducing the price per share we received to $8.00 per share. Our
former Chairman and CEO purchased 100,000 of these shares of NSI for $1,164 and
received an additional 45,546 shares pursuant to the price protection provision.
As a result of this transaction, our remaining interest is approximately 7.0
million shares of NSI, or 50.6% as of January 31, 2002 and 2001, and continues
to be accounted for as a marked-to-market security. More information concerning
NSI is available in its public filings with the Securities and Exchange
Commission.

         On February 13, 2002 NSI completed a merger with Digi International,
Inc. In connection with the merger, we exchanged our 6,972,656 shares of NSI for
2,324,683 shares of Digi International, Inc. and $13,574 in cash.

         Discontinued Operations - Our Far East business unit, consisting of Uni
Precision Industrial Limited ("Uni"), has been accounted for as a discontinued
operation pursuant to our formal adoption on May 15, 1999 of a plan to sell this
division. As of January 31, 2000, we sold Uni to a group led by its Hong
Kong-based management for $2,500 in cash in repayment of our advances to Uni and
a $3,000 non-voting redeemable preferred security. This security has not been
considered in the estimated proceeds from disposal due to the uncertainty of
future collection. Net assets disposed and amounts due from the purchasers, at
their expected realizable values, are included in other assets in the
accompanying balance sheets. During the year ended January 31, 2001 we received





                                      F-11






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

payments of $819. Due to the continuing economic downturn in Asia and the
decline in the value of marketable securities held as collateral from the
purchasers, we recorded a $700 reserve against the remaining balance due of
$1,688 during fiscal 2001. During fiscal 2002, we recorded a $988 reserve to
write-down the remaining receivable balance.

         During the year ended January 31, 2000, we recorded a reduction to the
estimated realizable value of the net assets of this discontinued operation of
$11,644 which has been separately presented as the estimated loss on the
disposal of discontinued operations in the accompanying income statement. Net
assets of discontinued operations at January 31, 2000 consist of:

<TABLE>
<CAPTION>
                                                                                        2000
                                                                                        ----
                  <S>                                                                 <C>
                  Cash                                                                  $ 398
                  Accounts receivable, net                                              2,862
                  Inventory, net                                                        2,135
                  Other current assets                                                    367
                  Property, plant and equipment, net                                    7,962
                  Excess cost over net assets acquired                                      -
                  Other non-current assets                                                342
                                                                                       ------
                      Total assets                                                     14,066
                                                                                       ------
                  Accounts payable and other current liabilities                        4,444
                  Short-term debt                                                         791
                  Long-term debt, current portion                                         448
                  Long-term debt, non-current portion                                     918
                  Deferred income taxes                                                     -
                  Intercompany payable                                                  5,833
                                                                                       ------
                      Total liabilities                                                12,434
                                                                                       ------
                      Net assets to be disposed of                                      1,632
                  Less: valuation adjustment                                           (1,632)
                                                                                       ------
                                                                                            -
                  Recoverable receivable                                                2,833
                                                                                      -------
                      Due from disposal of discontinued operations                    $ 2,833
                                                                                      =======
</TABLE>


         Operating results of this discontinued operation for the year ended
January 31, 2000 is shown separately in the accompanying income statement. The
operating results of this discontinued operation for the year ended January 31,
2000 consist of:

<TABLE>
<CAPTION>
                                                                                        2000
                                                                                        ----
                  <S>                                                                <C>
                  Net sales                                                          $ 20,819
                  Gross profit                                                          5,022
                  Loss from operations                                                (11,948)
                  Net loss                                                            (12,419)
</TABLE>

         Cash flows of this discontinued operation for the year ended January
31, 2000 is shown separately in the accompanying statement of cash flows. The
cash flows provided by (used in) this discontinued operation for the year ended
January 31, 2000 consist of:

<TABLE>
<CAPTION>
                                                             2000
                                                             ----
<S>                                                        <C>
Operating activities                                       $   953
Investing activities                                        (5,519)
Financing activities                                        (1,298)
</TABLE>



                                      F-12






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation - The balance sheets and the consolidated
statement of operations for the years ended January 31, 2002 and 2001 and the
consolidated statement of operations for the year ended January 31, 2000 reflect
our accounts and all subsidiaries controlled by us after the elimination of
significant intercompany transactions and balances. The consolidated statement
of operations for the year ended January 31, 2001 includes the results of
Entrada through August 31, 2000 after which date we no longer controlled
Entrada. The consolidated statement of operations for the year ended January 31,
2000 includes the results of NSI through September 15, 1999 after which date we
no longer controlled NSI. (See Note A). The consolidated group is referred to
individually and collectively as the "Company," "We," "Our," or "Us".

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

         Cash and Cash Equivalents - All cash on hand and in banks, certificates
of deposit and other highly-liquid investments with original maturities of three
months or less, when purchased are considered to be cash equivalents.

         Accounts and Notes Receivable - In the normal course of business, we
extend unsecured credit to our customers related to the sales of various
products. Typically credit terms require payment within thirty days from the
date of shipment. For some of the customers of our optical networking products
payment is required within 180 days from the date of shipment and at January 31,
2002 $1,601 of net receivables are due within 180 days. We evaluate and monitor
the creditworthiness of each customer on a case-by-case basis.

         Allowance for Doubtful Accounts - We provide an allowance for doubtful
accounts based on our continuing evaluation of our customers' credit risk. We
generally do not require collateral from our customers.

         Inventory - Inventory, comprised of raw materials, work in process,
finished goods and spare parts, are stated at the lower of cost (first-in,
first-out method) or market. Inventories at January 31, 2002 and 2001 consist
of:


<TABLE>
<CAPTION>
                                                                     2002             2001
                                                                   --------         --------
                  <S>                                              <C>               <C>
                  Raw material                                      $14,593           $10,201
                  Work in process                                       879             4,310
                  Finished goods                                      9,806             2,882
                                                                    -------           -------
                                                                     25,278            17,393
                  Less: Valuation reserve                            (6,468)           (2,792)
                                                                    -------           -------
                                                                    $18,810           $14,601
                                                                    =======           =======
</TABLE>


         Marketable Securities - Marketable securities, which consist of equity
securities that have a readily determinable fair value and do not have sale
restrictions lasting beyond one year from the balance sheet date, are classified
into categories based on our intent. Investments not classified as held to
maturity, those for which we have the intent and ability to hold, are classified
as available for sale. Our investments in NETsilicon and Entrada are classified
as available for sale and are carried at fair value, based upon quoted market
prices, with net unrealized gains reported as a separate component of
stockholders' equity until realized. Unrealized losses are charged against
income when a decline in fair value is determined to be other than temporary. At
January 31, 2002, and 2001 marketable securities were as follows:




                                      F-13






<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                   Cost            Unrealized Gains        Market Value
                                                   ----            ----------------        ------------
         <S>     <C>                             <C>                     <C>                  <C>
         January 31, 2002:
                  NETsilicon                      $3,938                  $24,142             $28,080
                  Entrada                             22                       18                  40
                                                  ------                  -------             -------
                                                  $3,960                  $24,160             $28,120
                                                  ======                  =======             =======
         January 31, 2001:
                  NETsilicon                      $3,938                  $42,303             $46,241
                  Entrada                          1,371                    2,646               4,017
                                                  ------                  -------             -------
                                                  $5,309                  $44,949             $50,258
                                                  ======                  =======             =======
</TABLE>


         Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. We believe that there are no material
differences between the recorded book values of our financial instruments and
their estimated fair value.

         Property and Equipment - Property and equipment are recorded at
historical cost. Depreciation and amortization are provided over the estimated
useful lives of the individual assets or the terms of the leases if shorter
using accelerated and straight-line methods. Useful lives for property and
equipment range from 3 to 15 years. Depreciation of land improvements and
buildings is computed using the straight-line method over 39 years.

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

         Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. We measure impairment loss by
comparing the fair market value, calculated as the present value of expected
future cash flows, to its net book value. Impairment losses, if any, are
recorded currently.

         Software Development - Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred, otherwise, development costs that will become an integral part of our
products are deferred in accordance with Statement of Financial Accounting
Standards Nos. 2 and 86. The deferred costs are amortized using the
straight-line method over the remaining estimated economic life of the product
or the ratio that current revenues for the product bear to the total of current
and anticipated future revenues for that product. Amortization expense for the
years ended January 31, 2002, 2001 and 2000 was $0, $1,046 and $1,841,
respectively, over 3 to 5 years. Accumulated amortization was $398 as of January
31, 2002 and 2001.

         The recoverability of capitalized software costs are reviewed on an
ongoing basis primarily based upon projections of discounted future operating
cash flows from each software product line. The excess amount, if any, of the
remaining net book value over the calculated amount is fully reserved. During
the quarters ended April 30, 2000 and January 31, 2000 we recorded reductions to
the net book value of our capitalized software development costs of $435 and
$1,742, respectively, recorded as engineering expense, to reflect the decline in
the net realizable value of these assets as a result of changing market
conditions.




                                      F-14






<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

         Purchased Technology - Technology assets were acquired in connection
with the acquisition of Sciteq. These assets were analyzed during and after the
close of the acquisition. The discounted projected future cash flow from proven
technology and software are capitalized and amortized over their remaining
estimated economic life (7 years) using the straight-line method. Accumulated
amortization was $1,994 and $1,623 at January 31, 2002 and 2001, respectively.

         We assess the recoverability of purchased technology primarily by
determining whether the amortization of the net book value of purchased
technology over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of the impairment, if
any, of the net book value of the excess cost over net assets acquired is
measured by determining the fair value of these assets primarily based on
projected discounted future operating cash flows from the purchased technologies
using a discount rate commensurate with our cost of capital.

         Research and Development - We expense research and development costs as
incurred in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 2, "Accounting for Research and Development Costs". Research and development
costs are costs associated with products or processes for which technological
feasibility has not been proven and future benefits are uncertain. In-process
research and development purchased by us includes the value of products and
processes in the development stage and have not reached technological
feasibility; this amount is expensed at the date of purchase.

         Other investments - Other investments, included in other assets,
include non-marketable securities held in other companies including a privately
held competitive local exchange carrier. During the fourth quarter of fiscal
2000 we exchanged $3,000 of trade receivables due us from this customer for
333,334 shares of its convertible preferred stock, a 5.9% equity interest on a
fully diluted basis. These shares were entitled to a cumulative preferred
dividend of $240 per year, were entitled to nominate one member to the
customer's board of directors, vote as part of single class for one member of
its board of directors and were convertible into 333,334 shares of its common
stock. During March and September 2000 we purchased an additional 269,608 shares
of this customer's convertible preferred stock for $3,235, bringing our equity
interest on a fully diluted basis to 9.7%. These shares were entitled to a
cumulative preferred dividend of $259 per year and are convertible into 269,608
shares of its common stock.

         In November 2000, we sold all our shares for $9,937 and $320 in
accumulated, unpaid dividends. Of the total $10,257 due from the purchaser,
approximately 7.7% or $787 is held in a segregated escrow account for one year.
The gain of $3,701 on the sale of the shares is included in investment income in
the accompanying income statement. Due to a dispute, a $787 reserve against the
remaining escrow balance was recorded during the fiscal year ended January 31,
2002.

         During the years ended January 31, 2001 and 2000 we made sales of
$5,746 and $5,496 respectively, to this customer under a long-term equipment
financing agreement. The purchase agreement with this customer provides for
invoiced installation and other deployment expenses not to exceed 10% of the
equipment cost. The terms of the financing agreement provide that the customer
may convert any balances outstanding longer than 90 days into a level 35-month
term note at 11% per annum interest. We financed $5,971, including deployment
expenses of $210, during fiscal 2001 for this customer which was paid in full
including accrued interest during January 2001. We financed $3,328 of
receivables, including deployment expenses of $120, during fiscal 2000 for this
customer and $3,000 of the then unpaid note was exchanged for our equity
interest in the customer. The remaining balance of the note and accrued interest
of $344,000 was paid in cash.

         Revenue Recognition - We generally recognize product revenue when the
products are shipped, all substantial contractual obligations, if any, have been
satisfied, and the collection of the resulting receivable is





                                      F-15






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

reasonably assured. Revenue from installation is recognized as the services are
performed to the extent of the direct costs incurred. To date, installation
revenue has not been material. Revenue from service obligations, if any, is
deferred and recognized over the life of the contract. Inventory or
demonstration equipment shipped to potential customers for field trials is not
recorded as revenue. We accrue for warranty costs, sales returns and other
allowances at the time of shipment. Although our products contain a software
component, the software is not sold separately and we are not contractually
obligated to provide software upgrades to our customers.

         Warranty and Customer Support - We typically warrant our products
against defects in materials and workmanship for a period of one to five years
from the date of sale and a provision for estimated future warranty and customer
support costs is recorded when revenue is recognized. To date, warranty and
customer support costs have not been material.

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

         Advertising - We expense advertising expenditures as incurred.

         Income and Loss Per Common Share - Basic income and loss per common
share is computed by dividing net income or loss available to common
shareholders by the weighted average number of common shares outstanding during
each period presented. Diluted EPS is based on the weighted average number of
common shares outstanding as well as dilutive potential common shares, which in
our case consist of convertible securities outstanding, shares issuable under
stock benefit plans, and shares issuable pursuant to warrants. In computing
diluted EPS, net income or loss available to common shareholders is adjusted for
the after-tax amount of interest expense recognized in the period associated
with convertible debt. Potential common shares are not included in the diluted
loss per share computation for the years ended January 31, 2002 and 2001 as they
would be anti-dilutive. All references in the financial statements of common
shares and per share data give effect to the 1-for-3 stock split effective July
24, 1998. (See Note M).

         Foreign Currency Translation - Our foreign operations have been
translated into U.S. dollars in accordance with the principles prescribed in
SFAS No. 52, "Foreign Currency Translation". For the periods presented the
current rate method was used whereby all assets and liabilities are translated
at period end exchange rates, and the resultant translation adjustments would
have been included as a separate component of stockholders' equity had such
adjustments been material. Revenues and expenses are translated at the average
rates of exchange prevailing throughout the period, and the resultant gains and
losses are included in net earnings.

         Stock-Based Compensation - We account for employee-based stock
compensation utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options issued to employees is measured
as the excess, if any, of the fair market price of our common stock at the date
of grant over the amount an employee must pay to acquire the stock. The amount
of deferred stock compensation appears as a separate component of stockholders'
equity and is being amortized on an accelerated basis by charges to operations
over the vesting period of the options in accordance with the method described
in Financial Accounting Standards Board Interpretation No. 28. All such amounts
relate to options to acquire common stock of our Sorrento subsidiary granted by
it to its employees; during the fiscal years ended January 31, 2002 and 2001, we
amortized $625 and $1,724 of the total $2,604 initially




                                      F-16






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

recorded for deferred stock compensation. (See Note J).

         For non-employees, we compute the fair value of stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for stock-Based Compensation," and Emerging Issues Task Force
(EITF) 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." All
such amounts relate to options to acquire common stock of our Sorrento Networks
subsidiary granted by it to its consultants; during the fiscal years ended
January 31, 2002 and 2001, we recorded $187 and $184 for options granted to
consultants. (See Note J).

         The FASB issued Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an Interpretation of APB Opinion No.
25. FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of
an employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 2,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of this standard had no
material effect on our financial position or results of operations.

         Computer Software for Internal Use - The Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," is effective for
financial statements with fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software developed
or obtained for internal use. The SOP requires that we continue to capitalize
certain costs of software developed for internal use once certain criteria are
met. The adoption of SOP 98-1 had no effect on our financial position or results
of operations.

         Start-up Costs - Statement of Opinion 98-5, "Reporting on the Costs of
Start-up Activities," is effective for financial statements for fiscal years
beginning after December 31, 1998. The SOP provides guidance and examples of the
types of expenses associated with one-time (start-up) activities which under
this SOP must be expensed as incurred. The adoption of SOP 98-5 had no effect on
our financial position or results of operations.

         In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Restatements of previously issued
annual financial statements is not permitted, however, comparative financial
information for earlier periods shall reflect required reclassifications in
presentation. SFAS 144 requires long-lived assets of continuing and discontinued
operations be measured at the lesser of carrying amount or fair value less
estimated selling costs. The assets and liabilities of discontinued operations
shall be presented separately in the asset and liability sections of the balance
rather than shown as net realizable value. We do not believe the adoption of
SFAS 144 will have a material effect on our financial position or results of
operations.

         In August 2001, the Financial Accounting Standards Board issued
SFAS 143, "Accounting for Asset Retirement Obligations" effective for fiscal
years beginning after June 15, 2002. SFAS 143 requires the recognition of the
fair value of liabilities for asset retirement obligations to be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. We do not believe the adoption of SFAS
143 will have a material effect, if any, on our financial position or results of
operations.





                                      F-17






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

         In June 2001, the Financial Accounting Standards Board finalized SFAS
141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that we
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. Upon adoption of SFAS 142, it
requires that we reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

         SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purposes
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test nine months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.

C. PROPERTY AND EQUIPMENT

         Property and equipment of the Company consisted of the following
components as of January 31, 2002 and 2001:


<TABLE>
<CAPTION>
                                                                                       2002              2001
                                                                                     --------          --------
                  <S>                                                                <C>               <C>
                  Manufacturing, engineering and plant equipment and software         $15,354          $13,884
                  Office furniture and fixtures                                         4,359            2,717
                  Land and building                                                     6,650            6,650
                  Leasehold and building improvements                                   1,294            1,186
                                                                                     --------          -------
                    Total property and equipment                                       27,657           24,437
                  Less: Accumulated depreciation                                      (10,246)          (7,837)
                                                                                     --------          -------
                    Net book value                                                   $ 17,411          $16,600
                                                                                     ========          =======
</TABLE>

         Depreciation expense for fiscal 2002, 2001 and 2000 was $2,422, $3,404
and $2,413, respectively.

D. SHORT TERM DEBT

         Short term debt at January 31, 2002 and 2001 consisted of the
following:

<TABLE>
<CAPTION>
                                                                                       2002              2001
                                                                                     --------          -------
                 <S>                                                               <C>                <C>
                  Floating interest rate loan (2.5% over Coast's prime rate)
                    secured by all the tangible assets of Meret; weighted
                    average interest rate for the year ended January 31, 2002
                    was 22.0%                                                         $ 1,043          $ 1,342
                                                                                     ========          =======
</TABLE>


         Meret has a line of credit of $2,000 from Coast Business Credit
("Coast"); the line of credit is collateralized by substantially all the assets
of Meret including accounts receivable, inventory and property and equipment. We
have guaranteed this line to the extent of $1,000. This line of credit provides
for interest at 2.5%



                                     F-18






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

over the bank's prime rate but not less than 8% (8% at January 31, 2002) with a
minimum monthly interest of $8. Advances are limited to 80% of eligible accounts
receivable and 40% of eligible inventory limited to $740; this line also
provides for a $500 letter of credit sub-line. Subsequent to January 31, 2002,
the Loan and Security Agreement was amended reducing the line of credit to
$1,000, adjusting the advance rate for eligible inventory to 20%, limited to
$370, eliminating minimum monthly interest with an expiration date of July 1,
2002. The highest amount outstanding was $1,259 and $3,001 during fiscal years
2002 and 2001, respectively. The average amount outstanding was $1,122 and
$1,419 during fiscal years 2002 and 2001, respectively.

         The Company is in compliance with its debt covenants at January 31,
2002.

E. LONG TERM DEBT

         Long term debt at January 31, 2002 and 2001 consisted of the following:

<TABLE>
<CAPTION>

                                                                                        2002             2001
                                                                                      -------          --------
                  <S>                                                                 <C>              <C>
                  Variable rate 30 year mortgage note payable (5.5% over
                    LIBOR rate); interest rate at January 31, 2002 was 8.95%           $1,283           $1,296
                  Fixed rate 30 year mortgage note payable;
                    interest rate at January 31, 2002 was 7.6%                          2,385            2,410
                  Obligations under finance leases (See Note G)                           561              535
                                                                                       ------           ------
                                                                                        4,229            4,241
                  Less: Current portion                                                   362              422
                                                                                       ------           ------
                                                                                       $3,867           $3,819
                                                                                       ======           ======
</TABLE>


         On March 25, 1996, Meret purchased land and building in San Diego,
California for $1,779 in cash. On April 24, 1996, Meret entered into a mortgage
agreement with a lender in the amount of $1,331 amortized over 30 years with an
adjustable interest rate of 5.5% over the LIBOR rate, adjusted bi-annually.
Monthly principal and interest payments are $11. The interest rate at January
31, 2002 was 8.95%. Net book value of the property securing this mortgage was
$1,593 and $1,623 at January 31, 2002 and 2001, respectively.

         In October 2000, we completed our purchase of a 41,000 square foot
facility immediately adjacent to our existing San Diego, California facility.
The purchase price was $4,805 including the assumption of existing indebtedness
of $2,417. Monthly principal and interest payments are $18 and at the end of the
30 year term on January 1, 2010 the remaining balance of $2,109 is due. The loan
has a fixed interest rate of 7.6%. Net book value of the property securing this
mortgage was $5,394 and $5,411 at January 31, 2002 and 2001, respectively.

         Long term debt including capitalized leases at January 31, 2002 is
payable by year as follows:

<TABLE>
                  <S>                                             <C>
                  2003                                             $  362
                  2004                                                234
                  2005                                                104
                  2006                                                 54
                  2007                                                 59
                  2008 and later                                    3,416
                                                                   ------
                                                                   $4,229
                                                                   ======
</TABLE>




                                      F-19







<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

F. DEBENTURES

         Debentures - During August 2001, we completed a private placement of
our 9.75% convertible debentures receiving net proceeds of $29,749. The
debentures, due August 2, 2004, have a face value of $32,200 which is
convertible into our common stock at $7.21 per share. At maturity we may elect
to redeem the debentures for cash and we have the option of paying the interest
on these debentures in shares of our common stock. In addition the purchasers
received four year warrants to acquire an additional 3,351,840 shares of our
common stock at $7.21 per share and the placement agent received five year
warrants to acquire 111,651 shares of our common stock at $7.21 per share.
Subject to certain exceptions, if we issue shares of our common stock, equity
securities, options or warrants at a price less than $7.21 per share or at a
discount to the then market price the conversion price and warrant exercise
price are subject to adjustment.

         In accordance with Emerging Issues Task Force ("EITF") No. 00-27 we
have accounted for the fair value of warrants issued to the purchasers and
placement agent and the fair value of the deemed beneficial conversion feature,
which results solely as a result of the required accounting, of the debenture as
a reduction to the face value of the debentures with an offsetting increase to
additional paid in capital. These amounts as well as the issuance costs paid in
cash will be amortized as additional interest expense over the period the
debentures are outstanding. Interest expense during the year ended January 31,
2002 of $2,567 included the stated 9.75% interest of $1,575 which is paid in
common stock, amortization of issuance costs of $81 and amortization of the fair
value of the warrants issued to the purchasers and placement agent and the
deemed beneficial conversion feature of $911. We issued 487,211 shares of our
common stock in payment of $1,307 interest. At January 31, 2002 debentures
payable consists of:


<TABLE>
         <S>                                                   <C>
         Face Value                                            $ 32,200
         Issuance costs                                          (2,451)
         Value of warrants and deemed beneficial
              Conversion feature                                (27,252)
                                                               --------
                  Debenture book value at issuance                2,497
         Accumulated amortization of
              Issuance costs                                         81
              Value of warrants and deemed beneficial
                  conversion feature                                911
                                                               --------
                                                               $  3,489
                                                               ========
</TABLE>


G. LEASES AND OTHER COMMITMENTS

         Rental expense under operating leases was $1,256, $1,277 and $1,533 for
the years ended January 31, 2002, 2001 and 2000, respectively. The table below
sets forth minimum payments under capital and operating leases with remaining
terms in excess of one year, at January 31, 2002:

<TABLE>
<CAPTION>
                                                                               Capital        Operating
                                                                               Leases          Leases
                                                                               ------          ------
                  <S>                                                           <C>            <C>
                  2003                                                          $359           $1,737
                  2004                                                           203              233
                  2005                                                            56                3
                  2006                                                             -                3
                  2007                                                             -                3
                                                                                ----           ------
                                                                                $618           $1,979
                                                                                               ======
</TABLE>




                                      F-20






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

<TABLE>
                  <S>                                                <C>
                  Less: Amount representing interest                  (57)
                                                                     ----
                  Present value of minimum annual rentals            $561
                                                                     ====
</TABLE>


         The net book value of equipment under capital leases was $1,071 and
$714 at January 31, 2002 and 2001, respectively.

         We currently reimburse Entrada on a prorata basis for space in its San
Diego facility utilized by Meret. During the twelve and five months ended
January 31, 2002 and 2001, we paid $48 and $15 to Entrada under this month to
month agreement.

         In March 2001, our Meret subsidiary entered into a $2.7 million
supplier agreement. The agreement requires a minimum monthly cash outlay of
$50,000 extending over a period of fifty four months. The remaining balance at
January 31, 2002 of $2.0 million is expected to end in March 2005. The product
being acquired is a component used in a product for one of Meret's customers
for which there is a five year sales contract.

         We entered into a two year employment contract in May 2000, with Rohit
Phansalkar, our immediate past Chairman and Chief Executive Officer ending May
2002, which provides for a salary of $250 per year. He resigned as our CEO in
September 2000, in order that the CEO of our Sorrento subsidiary, Dr. Xin Cheng,
became our CEO and Chairman of the Board. His contract requires us to continue
his salary and benefits for two years, during which he is available to provide
consulting services to us.

         Four of our officers, an employee and consultant have two year
employment agreements ending in May, July and August 2002, which provide for
salaries totaling $1,096 per year. These contracts may be terminated for cause.
However, should any of these individuals be terminated without cause or resign
in certain circumstances they will receive a continuation of their salary and
benefits for two years, and they are required to provide consulting services to
us during that period. In addition, these agreements provide for loans to
exercise previously granted stock options to acquire our common stock and the
stock of our subsidiaries including any required tax withholdings due upon
exercise. The loans are for a period not to exceed two years at the then
applicable federal rate, are full recourse and require the pledge of shares
issued upon exercise. No amounts have been loaned to these persons to date.

H. LITIGATION

         On September 10, 2001, holders of a portion of the outstanding Series A
Preferred Stock of our Sorrento subsidiary obtained a preliminary injunction
from the Delaware Court of Chancery prohibiting it from issuing further shares
of its Series A Preferred Stock or incurring any additional debt without the
consent of the holders of a majority of the currently outstanding shares of such
Series A Preferred Stock. On January 23, 2002, the Delaware Supreme Court
affirmed the granting of the preliminary injunction.

         On October 19, 2001, an amended complaint was filed in the injunction
action, adding as named defendants, the Company, our Meret subsidiary, certain
present and former officers and directors of the Company and our subsidiaries as
well as our investment bankers. The amended complaint also added, among other
things, claims for fraud, securities fraud, breach of fiduciary duty,
conspiracy, and intentional interference with contract as well as requesting the
appointment of a receiver for our Sorrento subsidiary, all which claims are
based on alleged wrongs committed in connection with or since the Series A
placement. Our Sorrento subsidiary and the original individual defendants have
all answered this amended complaint denying all allegations of wrongdoing.






                                      F-21






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

The new defendants have all moved to dismiss the amended complaint. Management
believes the allegations contained in the amended complaint are without merit.

         On December 14, 2001, plaintiffs filed motions to sequester the common
stock of our Sorrento subsidiary owned by Meret and the Sorrento Series A
preferred stock that we own, as an alternative method of obtaining jurisdiction
over us and Meret in the Delaware litigation. Management also believes that
these motions are without merit.

         Currently, hearings on all pending motions have been taken off calendar
at the request of all parties, pending the resolution of ongoing settlement
discussions between the Company and the plaintiffs. While the Company is
encouraged at the progress of these negotiations, there can be no assurance that
a settlement will be reached.

         During June 2000, we entered into various agreements with Par Chadha,
our former CEO and Chairman, which, among other matters, provides for payments
of $250,000 per year for three years of consulting services and loans by us for
the exercise of previously granted options to acquire 1,178,500 options at
prices varying from $7.03 to $49.25 per share. As the members of our Board of
Directors at the time of his resignation ceased to represent more than 50% of
the Board in October 2000, all payments for consulting services were accelerated
and no future consulting services are required. During October 2000, Mr. Chadha
exercised 71,112 options, applying the $500,000 accelerated payment to the
exercise. In addition, he exercised 507,388 options for which we are
contractually obligated to loan the $5,034,000 due on the exercise. During
September 2001, Mr. Chadha notified us that he does not have any obligations
under the agreements. We have notified him that we do not agree with his
interpretation of his repayment obligations under the terms of the agreements.

         During December 2001, we entered into an agreement whereby the 507,388
option exercise was rescinded. Mr. Chadha returned the 507,388 shares to us for
cancellation and we cancelled the receivable due from him and restored the
original option agreements. This rescission agreement did not resolve any
underlying dispute as to the option loan repayment obligations. We anticipate
this dispute will be resolved through binding arbitration. Should Mr. Chadha
prevail in the arbitration, the Company may be required to issue him 1,178,500
shares of the Company's stock for no consideration.

         In April 2002, our former Chairman and CEO, Dr. Xin Cheng, filed a
claim in arbitration seeking, among other things, payment of $500 and
acceleration of the vesting of options pursuant to alleged contractual
obligations of our Sorrento subsidiary. The Company is disputing these claims.

         From time to time, we are involved in various other legal proceedings
and claims incidental to the conduct of our business. Although it is impossible
to predict the outcome of any outstanding legal proceedings, we believe that
such legal proceedings and claims, individually and in the aggregate, are not
likely to have a material effect on our financial position, results of
operations, or cash flows.

I. STOCKHOLDERS' EQUITY

         The Company is authorized to issue the following shares of stock:
                  150,000,000 shares of Common Stock ($.30 par value)
                  2,000,000 shares of Preferred Stock ($.01 par value) of which
                     the following series have been designated:





                                      F-22






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

                      2,500 shares of Preferred Stock, Series A
                      1,000 shares of Preferred Stock, Series B
                      10,000 shares of Preferred Stock, Series C
                      3,000 shares of Preferred Stock, Series D
                      1,000,000 shares of Preferred Stock, Series E

         The Company has outstanding the following shares of preferred stock:

<TABLE>
<CAPTION>
                                                  Shares                Par       Liquidation
                                                Outstanding            Value       Preference
                                                -----------            -----       ----------
                  <S>                            <C>                  <C>           <C>
                  Series D                        1,353                $ 1             $1,353
                                                  -----                ---             ------
                                                  1,353                $ 1             $1,353
                                                  =====                ===             ======
</TABLE>

         The Series A preferred stock was issued in August, 1992 in exchange for
$2,500 of trade debt. The Series A preferred stock accrued cumulative dividends
at 6% and was convertible into common stock (i) at the option of the holder at
the market price of our common stock provided the market price equals or exceeds
$202.50, and (ii) at our option at 110% of the market price our common stock.
These shares of preferred stock were redeemable at our option at $1,000 per
share. During October 2000 we elected to convert all the outstanding Series A
shares and during November 2000 we issued 80,276 shares of our common stock in
conversion of the preferred shares and 39,509 shares of our common stock in
payment of the accrued, unpaid dividends of $1,230.

         We recorded a deemed dividend of $1,459 during the quarters ended July
31 and October 31, 1998 with respect to our Series C preferred stock. This
amount represents the difference between the liquidation value of the Series C
preferred stock and the estimated market value of the common shares issuable
upon conversion as of the issue date of the Series C preferred shares assuming
that all such shares were convertible beginning 90 days from issuance. We also
paid dividends in cash of $481 during the year ended January 31, 2000 with
respect to the Series C preferred stock.

         In November, 1998, we assigned to an unrelated third party the right to
redeem 2,000 shares of the Series C preferred stock. The assignee redeemed the
shares for $2,500. In consideration for the assignee's acceptance of new terms
with respect to conversion and other features of the Series C preferred stock,
we issued an additional 500 shares of Series C preferred stock to the assignee
and three year warrants exercisable at $10.66 to acquire 70,000 shares of common
stock. The modified Series C stock is convertible at the lesser of (i) 86% of
the average closing bid price for the common stock for the five days prior to
conversion, and (ii) $8.528. After registration of the underlying common stock
the Series C preferred stock is convertible at multiple intervals over 150 days.
The remaining 355 shares of Series C preferred stock held by the redeemed
shareholder were modified to provide for a fixed conversion price of $5.81 and
received a three year warrant exercisable at $10.66 to acquire 20,000 shares of
common stock. The Series C shares were converted during August 1999 and the
warrant was exercised during January, 2000 for which we received net proceeds of
$213.

         All of these revised Series C preferred shares were converted prior to
January 31, 2000; an aggregate of 1,906,206 shares of our common stock have been
issued in conversions of these Series C preferred shares of which 1,048,440
shares were issued during the year ended January 31, 2000.

         During January 2001, we issued 86,464 shares of our common stock in
conversion of 1,500 shares of our Series D preferred stock. The remaining 1,353
shares of our non-voting, non-dividend bearing Series D preferred stock are
being held in escrow pending resolution of acquisition contingencies including
liabilities related to




                                      F-23






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

funding deficits related to a terminated defined benefit pension plan of
Entrada. Payments by the seller towards these liabilities will have no effect on
our financial results and payments, if any, by us will reduce the face value of
the preferred stock. Each share of Series D preferred stock is convertible into
common stock at the then market value and we have the right to redeem the shares
prior to conversion for 100% of their conversion value.

J. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS

         Stock Split - In July, 1998, approval was granted for a one for three
reverse stock split effective July 24, 1998. The effect of this stock split was
reflected in the financial statements retroactively as if the stock split
occurred at the beginning of the earliest period reported.

         Private Placements - Immediately prior to its merger with Sync Research
our Entrada subsidiary completed a private placement of 2,431,818 of its common
shares receiving net proceeds of $7,851. We purchased 1,001,818 of these shares
for $3,306. (See Note A).

         In March 2001, we completed a private placement of 1,525,995
unregistered shares of our common stock receiving net proceeds of $9,645. In
addition the purchasers received three year warrants to acquire an additional
381,499 shares of our common stock at $8.19 per share. If we issue shares of our
common stock or equity securities convertible into our common stock at a price
less than $6.5531 per share for an aggregate purchase price of $10,000, the
purchasers are entitled to receive additional shares of common stock. If we
issue common stock or equivalents at a price less than the warrant exercise
price the warrant exercise price is subject to adjustment. During October 2001
the warrant exercise price was reduced to $1.93 per share.

         On March 3, 2000, our Sorrento subsidiary completed a sale of 8,596,333
shares of its Series A Convertible Preferred Stock receiving net proceeds of
$46,638 from a group of investors. 1,467,891 shares were purchased by entities
in which our immediate past Chairman and CEO, who was an outside director at
that time, was a partner or member pursuant to a previously contracted right of
participation. In addition, Sorrento paid a finders fee of $1,950 through the
issuance by Sorrento of an additional 357,799 shares of its Series A Convertible
Preferred Stock to an entity in which our immediate past Chairman and CEO, who
was an outside director at that time, was a partner. Subsequent to the purchase
of 2,697,248 of these shares an officer and director of the purchaser joined the
Board of Directors of Sorrento. One of our then outside directors purchased
45,872 shares and a then director of Sorrento purchased 91,744 in this
placement. One of our present outside directors, who was not a director at that
time, purchased 183,486 shares in this placement. In addition, he is a director
of Liberty Media Corporation which owns an 11% economic interest representing a
37% voting interest in UGC. The purchaser of 3,027,523 shares in this placement
is an indirect subsidiary of UGC. Liberty Media also holds convertible debt in
this Series A holder which debt it has agreed to exchange for shares in UGC.

         Each share of Sorrento's Series A Preferred Stock is convertible into
one share of Sorrento's common stock at the option of the holder, may vote on an
"as converted" basis except for election of directors, and has a liquidation
preference of $5.45 per share. The shares are automatically converted into
Sorrento's common stock upon an underwritten public offering by Sorrento with an
aggregate offering price of at least $50,000. Sorrento did not complete a
$50,000 public offering by March 1, 2001, the holders of more than 50% of the
then outstanding Series A shares may request to be redeemed at the shares then
adjusted liquidation preference. If such a request is made in writing, our
Sorrento subsidiary has the obligation to redeem the shares in cash, if funds
are lawfully available to such a redemption, or for such pro rata portion as to
which a lesser amount of lawfully available funds would exist. The net proceeds
from the issuance of these shares has been classified as a minority interest in
the accompanying financial statements as of January 31, 2001. The difference
between the net proceeds received on the sale of these shares and




                                      F-24






<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

their liquidation preference of $48,800 will be recorded as a deemed dividend
during the period from issuance to March 31, 2001. During the years ended
January 31, 2002 and 2001, we recorded a deemed dividend of $180 and $1,982 with
respect to the Sorrento Series A shares. As of January 31, 2002 the Series A
Preferred Stock has been reclassified as a current liability since the holders
have exercised their right to redeem the shares.

         We made sales of products to affiliates of two of the purchasers of
Sorrento's Series A Preferred Stock. During the years ended January 31, 2002 and
2001, we made sales of $2,076 and $3,281 to the subsidiaries of the purchaser of
33.8% of the shares of which $1,601 and $3,281 was outstanding at January 31,
2002 and 2001 under 180 days terms. During the fiscal years ended January 31,
2002 and 2001, we made sales of $2,553 and $4,781 to the subsidiaries of the
purchaser of 6.2% of the shares of which $2 and $2496 was outstanding at January
31, 2002 and 2001 respectively.

         In December, 1999 we issued 679,483 unregistered shares of common stock
receiving net proceeds of $6,862. In connection with this placement one of our
then outside directors received a finder's fee of $300. In addition, we paid a
$300 finders fee to an entity in which our immediate past Chairman and CEO, who
was not a director at the time, was an officer. The holder had the right to
request us to register their shares upon the earlier of December 1, 2000 or the
disposition of substantially all of our NSI shares. The holder had the right to
nominate one member of the Board of Directors to serve until the next annual
shareholders' meeting and had the right to participate in any stock offering by
Sorrento to the extent of $7,500 subject to certain limitations. Our immediate
past Chairman and CEO was the purchaser's appointee to our Board of Directors.

         Debentures payable - We issued 143,115 shares of our common stock in
conversions of these securities and accrued interest thereon during the year
ended January 31, 1999. We had the right to call the debentures prior to
conversion at 90% of face value and had the right to assign this call option.
The debentures bore interest at 8% beginning specified periods after date of
issue payable in our common shares. The debentures were convertible at the
average closing price as reported by Nasdaq for the five preceding business days
not to exceed $18.00 per share.

         Warrants - During the year ended January 31, 2001, we issued 13,009
shares of our common stock upon the cashless exercise by our lender of 16,668
warrants with exercise prices ranging from $10.02 to $15.94. (See Note D).

         During the year ended January 31, 2000, 125,000 of the 265,340 warrants
held by a former strategic partner were exercised by an assignee. The remaining
warrants expired unexercised.

         We have outstanding warrants to purchase 33,334 shares at $12.00 which
expire December 31, 2002 may be redeemed by us for $1,000.

K. STOCK OPTION PLANS

         We have four stock options plans in effect: The 2000 Stock Incentive
Plan, the 1988 Stock Option Plan, the 1997 Incentive and Non-Qualified Stock
Option Plan and the 1997 Director Stock Option Plan. The stock options have been
made available to certain employees and consultants. All options are granted at
not less than fair value at the date of grant and have terms varying from 3 to
10 years. The purpose of these plans is to attract, retain, motivate and reward
our officers, directors, employees and consultants to maximize their
contribution towards our success. The following table summarizes the activity in
the plans:





                                      F-25






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                             Weighted Average
                                                                   Number of Shares           Exercise Price
                                                                   ----------------           --------------
         <S>                                                      <C>                          <C>
         Shares under option at January 31, 1999                       2,424,175                 $11.83
           Granted                                                       998,213                 $13.36
           Exercised                                                    (717,373)                $12.47
           Canceled                                                     (516,960)                $16.71
                                                                      ----------
         Shares under option at January 31, 2000                       2,188,055                 $11.83
           Granted                                                     3,878,068                 $37.42
           Exercised                                                    (890,898)                $10.01
           Canceled                                                     (107,990)                $12.31
                                                                      ----------
         Shares under option at January 31, 2001                       5,067,235                 $30.93
           Granted                                                       873,688                  $7.52
           Exercised                                                     (98,267)                 $8.17
           Canceled                                                   (1,232,116)                $25.98
                                                                      ----------
         Shares under option at January 31, 2002                       4,610,540                 $28.30
                                                                      ==========
</TABLE>


         Additional information relating to stock options outstanding and
exercisable at January 31, 2002 summarized by exercise price are as follows:

<TABLE>
<CAPTION>
                                                    Outstanding                         Exercisable
                                           ------------------------------        ---------------------------
                                                 Weighted Average
              Exercise Price                  -------------------                           Weighted Average
                Per Share        Shares    Life (Years)    Exercise Price        Shares      Exercise Price
                ---------        ------    ------------    --------------        ------      --------------
              <S>              <C>           <C>             <C>                <C>            <C>
              $3.00 - $9.99    1,334,924        7.28           $ 6.32            932,930         $7.12
             $10.00 - $19.99     641,728        6.62           $14.92            508,668        $14.12
             $20.00 - $29.99     573,038        7.65           $22.42            408,038        $22.59
             $30.00 - $39.99     645,450        7.91           $35.89            645,375        $35.89
             $40.00 - $69.13   1,415,400        8.22           $54.02          1,293,533        $54.46
                               ---------                                       ---------
             $3.00 - $69.13    4,610,540        7.61           $28.30          3,788,544        $30.79
                               =========                                       =========
</TABLE>


         All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of grant,
and in accordance with the accounting for such options utilizing the intrinsic
value method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Statement of Accounting Standards No. 123, the Company's
net loss and loss per share for the years ended January 31, 2002, 2001 and 2000,
would have been increased to the pro forma amounts presented below:

<TABLE>
<CAPTION>
                                                                    2002                2001              2000
                                                                   ------              ------            ------
                 <S>                                             <C>               <C>                <C>
                 Net loss:
                      As reported                                  $(43,136)       $ (41,905)         $(21,653)
                      Pro forma                                     (46,978)        (103,130)          (25,146)
                 Loss per share:
                      Basic EPS as reported                        $  (3.10)         $ (3.71)          $ (2.33)
                      Pro forma basic EPS                             (3.38)           (8.87)            (2.70)
                      Diluted EPS as reported                         (4.36)           (3.71)            (2.12)
                      Pro forma diluted EPS                           (4.59)           (8.87)            (2.45)
</TABLE>



                                      F-26






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

         The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for grants during the year ended January 31, 2002: expected
life of option 3 years, expected volatility of 140%, risk free interest rate of
2.91% to 4.50% based upon the date of grant and a 0% dividend yield. The fair
value, at date of grant, using these assumptions range from $2.30 to $5.63 and
the weighted average was $4.18. The assumptions for the year ended January 31,
2001 were expected life of option 3 to 5 years, expected volatility of 85%, risk
free interest rate of 4.89% to 6.75% and a 0% dividend yield. The fair value, at
date of grant, using these assumptions range from $8.97 to $40.09 and the
weighted average was $22.17. The assumptions for the year ended January 31, 2000
were expected life of option 3 to 4 years, expected volatility of 85%, risk free
interest rate of 5.56% and a 0% dividend yield. The fair value, at date of
grant, using these assumptions range from $2.73 to $22.15 and the weighted
average was $7.68.

         In addition our Sorrento subsidiary adopted its 2000 Stock Option/Stock
Issuance Plan in February 2000 under which it has granted options to certain of
its employees, directors and consultants. All options are generally granted at
prices not less than fair value at the date of grant and generally vest over
four years. Eligible individuals may be issued shares of common stock directly,
either through immediate purchase of the shares at fair value or as a bonus tied
to performance of services or the attainment of prescribed milestones. No
milestones were attained and, no stock has been issued under the stock
issuance program and option activity for the plan for the year ended January 31,
2002 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                             Weighted Average
                                                                   Number of Shares           Exercise Price
        <S>                                                         <C>                         <C>
         Shares under option at January 31, 2000                             -                      -
           Granted                                                    22,071,074                  $ 5.37
           Exercised                                                         -                       -
           Canceled                                                   (3,335,170)                 $ 5.52
         Shares under option at January 31, 2001                      18,735,904                  $ 5.34
           Granted                                                     1,193,064                  $ 5.45
           Exercised                                                     (22,300)                 $ 2.60
           Canceled                                                   (4,592,236)                 $ 5.52
         Shares under option at January 31, 2002                      15,314,432                  $ 5.30
</TABLE>


         Additional information relating to the stock options of our Sorrento
subsidiary outstanding and exercisable at January 31, 2002 summarized by
exercise price are as follows:

<TABLE>
<CAPTION>
                                                    Outstanding                         Exercisable
                                           ------------------------------        ---------------------------
                                                 Weighted Average
              Exercise Price                  -------------------                           Weighted Average
                Per Share        Shares    Life (Years)    Exercise Price        Shares      Exercise Price
                ---------        ------    ------------    --------------        ------      --------------
              <S>            <C>             <C>             <C>             <C>              <C>
                  $2.00          715,975        8.05            $2.00            464,978         $2.00
                  $5.45       14,527,612        8.26            $5.45         10,230,528         $5.45
                  $6.85           70,845        8.52            $6.85             36,195         $6.85
                              ----------                                      ---------
              $2.00 - $6.85   15,314,432        8.25            $5.30         10,731,701         $5.31
                              ==========                                      ==========
</TABLE>

         The holders of the options of our Sorrento subsidiary may elect to
convert all or a portion of their options into options to acquire our stock at a
ratio of 3.9 for one. During the year ended January 31, 2002 and 2001, no
options were converted.




                                      F-27






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

L. INCOME TAXES

         The Company's provision for taxes on income for the years ended January
31, 2002, 2001 and 2000 consists of:

<TABLE>
<CAPTION>
                                                                      Non-U.S.
                                                                    -----------
                                                                    Discontinued
                                                                     Operations
                                                                     ----------
                 <S>                                                 <C>
                  Year ended January 31, 2002:
                      Current                                          $  -
                      Deferred                                            -
                                                                       -----
                      Total                                            $  -
                                                                       =====

                  Year ended January 31, 2001:
                      Current                                          $  -
                      Deferred                                            -
                                                                       -----
                      Total                                            $  -
                                                                       =====

                  Year ended January 31, 2000:
                      Current                                          $ -
                      Deferred                                          (246)
                                                                       -----
                      Total                                            $(246)
                                                                       =====
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                        2002             2001
                                                                                      --------         --------
                  <S>                                                                <C>              <C>
                  Deferred tax assets:
                    Valuation allowances                                             $  3,283         $  1,798
                    Research and development credits                                       63              100
                    Tax loss carryforwards                                             55,004           40,189
                    Purchase accounting                                                 2,057            2,057
                    Depreciable assets                                                    583              583
                    Other liabilities and reserves                                      2,334            1,735
                                                                                     ---------        --------
                         Gross deferred tax assets                                     63,324           46,462
                    Less: valuation allowance                                         (63,324)         (46,462)
                                                                                     --------         --------
                         Deferred tax asset                                          $      -         $      -
                                                                                     ========         ========
</TABLE>

         At January 31, 2002, the Company has federal net operating losses which
may be available to reduce future taxable income. Among potential adjustments
which may reduce available loss carryforwards, the Internal Revenue Code of
1986, as amended, (IRC), reduces the extent to which net operating loss
carryforwards may be utilized in the event there has been an "ownership change"
of a company as defined by applicable IRC provisions. The Company believes that
the issuances of its equity securities and transfers of ownership of outstanding
equity securities may have resulted in one or more such ownership changes and
intends to analyze the impact of such transfers on the continued availability,
for tax purposes, of the Company's net operating losses incurred through January
31, 2002. Further



                                      F-28






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

ownership changes in the future, as defined by the IRC, may reduce the extent to
which any net operating losses may be utilized. These NOL carryforwards expire
as follows:

<TABLE>
                  <S>                                                  <C>
                  2007                                                 $  5,140
                  2008                                                    3,097
                  2009                                                    2,794
                  2010                                                    1,052
                  2011                                                      386
                  2012                                                    4,678
                  2018                                                   14,257
                  2019                                                   11,243
                  2020                                                   32,394
                  2021                                                   39,786
                  2022                                                   42,328
                                                                       --------
                                                                       $157,155
                                                                       ========
</TABLE>

         The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the years ended January 31,
2002, 2001 and 2000, is as follows:

<TABLE>
<CAPTION>
                                                                  2002             2001           2000
                                                                --------          -------       -------
                  <S>                                           <C>             <C>            <C>
                  Income (loss) before income taxes              $(43,136)       $(41,905)      $ 2,410

                  Theoretical tax (benefit) at 35%               $(15,098)       $(14,667)      $   844
                  Impact of purchase accounting                         -             101        (8,197)
                  Impact of non-qualified stock options              (434)         (3,978)       (4,905)
                  Change in valuation allowance                    16,862          18,499        12,258
                  Other individually immaterial items              (1,330)             45             -
                                                                 --------        --------       -------
                                                                 $      -        $      -       $     -
                                                                 ========        ========       =======
</TABLE>

M. EARNINGS PER SHARE CALCULATION

         The following data show the amounts used in computing basic earnings
per share. The number of shares used in the calculations for the years ended
January 31, 2002, 2001 and 2000 reflect a 1-for-3 stock split effective July 24,
1998.
<TABLE>
<CAPTION>
                                                                  2002             2001           2000
                                                                --------          -------       -------
        <S>                                                   <C>             <C>            <C>
         Net loss                                             $   (43,136)     $  (41,905)     $(21,653)
         Less: deemed dividend                                       (180)         (1,982)         (103)
         Less: preferred dividends paid                                 -               -          (564)
         Less: accrued, unpaid preferred dividends                      -            (118)         (150)
                                                              -----------      ----------     ---------
         Net loss available to common shareholders
         used in basic EPS                                    $   (43,316)     $  (44,005)    $ (22,470)
                                                              ===========      ==========     =========

         Average number of common shares used in basic EPS     13,966,067       11,854,848    9,630,713
                                                               ==========      ===========   ==========
</TABLE>


         For the year ended January 31, 2000 our convertible preferred stock was
antidilutive. Accordingly, the weighted average number of dilutive potential
common stock of 463,401 and the dividends paid on these preferred shares of $564
are excluded from the calculation of diluted EPS. We incurred a net loss from
continuing operations



                                      F-29






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

for the years ending January 31, 2002, 2001 and 2000. Accordingly, the effect of
dilutive securities including convertible debentures, convertible preferred
stock, vested and nonvested stock options and warrants to acquire common stock
are not included in the calculation of EPS because their effect would be
antidilutive. The following data shows the effect on income and the weighted
average number of shares of dilutive potential common stock.

<TABLE>
<CAPTION>
                                                                      2002            2001             2000
                                                                    --------         --------        --------
        <S>                                                      <C>              <C>               <C>
         Net loss available to common shareholders used
             in basic EPS                                       $   (43,316)      $   (44,005)     $   (22,470)
         Interest on convertible debt                               (27,135)                -                -
                                                                -----------       -----------      -----------
         Net loss available to common shareholders after
           Assumed conversions of dilutive securities           $   (70,451)      $   (44,005)     $   (22,470)
                                                                ===========       ===========      ===========

         Average number of common shares used in basic EPS       13,966,067        11,854,848        9,630,713
         Effect of dilutive securities:
           Convertible preferred stock                                  -              22,046                -
           Stock benefit plans                                      130,639         1,628,255          861,077
           Stock benefit plan of Sorrento                            23,910                 -                -
           Warrants                                                  72,983            93,384          112,741
           Convertible debentures                                 2,208,739                 -                -
                                                                -----------       -----------      -----------
         Average number of common shares and dilutive
           potential common stock used in diluted EPS            16,402,338        13,958,533       10,604,531
                                                                ===========       ===========      ===========
</TABLE>


         The shares issuable upon exercise of options and warrants represents
the quarterly average of the shares issuable at exercise net of the shares
assumed to have been purchased, at the average market price for the period, with
the assumed exercise proceeds. Accordingly, options and warrants with exercise
prices in excess of the average market price for the period are excluded because
their effect would be antidilutive.

Options to purchase common shares that were outstanding but were not included
in the computation of diluted earnings per share because their exercise price
was greater than the average market price of the common shares for the period.
Options outstanding were 4,734,458 for the fiscal year ended January 31, 2002.
All three years were also not dilutive because of losses.

N. OTHER RELATED PARTY TRANSACTIONS

         Summarized below are all material related party transactions entered
into by us and our subsidiaries during the periods presented not otherwise
disclosed in these notes.

     In November 2001, we acquired in a like kind exchange furniture having
an approximate current value of $8,000 from Digital Boardwalk, Inc. ("DBI")
which is an affiliate of Par Chadha, our former Chairman and CEO. Also, during
the fourth quarter of fiscal 2002, our Meret subsidiary retained DBI to consult
on various matters, for which DBI charged a consulting fee of approximately
$49,000, and our Sorrento subsidiary retained DBI to consult on a matter for
which DBI charged a consulting fee of approximately $7,000.

         During the year ended January 31, 2001 we made a 6.6% three year loan
in the amount of $300 to an officer in connection with his accepting employment
as our Senior Vice President, Legal. This is a full recourse loan and the
officer has pledged all his options to acquire our common stock and any options
he may receive from any of our subsidiaries as collateral. At January 31, 2002
the balances of this loan was $316, consisting of principal and accrued
interest. The loan was fully reserved as of January 31, 2002.

         During June 2000, we entered into various agreements with Par Chadha,
our former CEO and Chairman, which, among other matters, provides for payments
of $250,000 per year for three years of consulting services and loans by us for
the exercise of previously granted options to acquire 1,178,500 options at
prices varying from $7.03 to $49.25 per share. As the members of our Board of
Directors at the time of his resignation ceased to represent more than 50% of
the Board in October 2000, all payments for consulting services were accelerated
and no future consulting services are required. During October 2000, Mr. Chadha
exercised 71,112 options, applying the $500,000 accelerated payment to the
exercise. In addition, he exercised 507,388 options for which we are
contractually obligated to loan the $5,034,000 due on the exercise. During
September 2001, Mr. Chadha notified us that he does not have any obligations
under the agreements. We have notified him that we do not agree with his




                                      F-30






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

interpretation of his repayment obligations under the terms of the agreements.

During December 2001, we entered into an agreement whereby the 507,388 option
exercise was rescinded. Mr. Chadha returned the 507,388 shares to us for
cancellation and we cancelled the receivable due from him and restored the
original option agreements. This rescission agreement did not resolve any
underlying dispute as to the option loan repayment obligations. We anticipate
this dispute will be resolved through binding arbitration. Should Mr. Chadha
prevail in the arbitration, the Company may be required to issue him 1,178,500
shares of the Company's stock for no consideration.

         During December 2001, we entered into an agreement whereby the 507,388
option exercise was rescinded. Mr. Chadha returned the 507,388 shares to us for
cancellation and we cancelled the receivable due from him and restored the
original option agreements. The required non-cash expense as a result of the
rescission equal to the difference between the amount of the loan receivable and
the market value of the returned shares was recorded as a reserve of $2,700
against the receivable during the year ended January 31, 2002 and is included in
other operating expenses in the accompanying income statement. This rescission
agreement did not resolve any underlying dispute as to the option loan repayment
obligations. This dispute is being negotiated between Mr. Chadha and the
Company, see details in Note H.

         During fiscal 2000 FIBR Holdings, LLC purchased 679,483 unregistered
shares of our common stock for $7,500,000. In connection with this placement
Humbert B. Powell, III, then a director, received a finder's fee of $300,000.
Andersen Weinroth Capital Corp. ("AW") received a placement fee of $300,000 in
connection with this placement and Rohit Phansalkar, who subsequently became one
of our directors, and later became our Chairman and Chief Executive Officer, was
a partner of AW at that time. FIBR Holdings, LLC had the right to nominate one
member of the Board of Directors to serve until the annual shareholders' meeting
in 2001 and had the right to participate in any stock offering by our Sorrento
Subsidiary, to the extent of $7,500,000 subject to certain limitations. Mr.
Phansalkar was nominated by AW and joined our Board of Directors on January 6,
2000.

         On March 3, 2000, our Sorrento subsidiary completed a sale of 8,596,333
shares of its Series A Convertible Preferred Stock to a group of investors
receiving net proceeds of approximately $46.6 million. Of these shares,
1,467,891 shares were purchased for $8,000,000 pursuant to the previously
contracted right of participation by entities in which Mr. Phansalkar was
partner or member. In addition, AW received a placement fee of $1,950,000 paid
through the issuance by Sorrento of 357,799 shares of its Series A Convertible
Preferred Stock. Mr. Phansalkar disclaims beneficial ownership of these shares
except to the extent of his beneficial ownership of each entity. In addition,
Renn Zaphiropoulos, a former director, purchased 45,872 of these shares for
$250,000.

         During the year ended January 31, 2000 we paid $40 to a then outside
director for management consulting services rendered to us and our subsidiaries.

         During the years ended January 31, 2000 we paid $190 in fees for
assistance in obtaining the amended loan and security agreements to an entity
controlled by a then outside director. During the year ended January 31, 1998 we
made 8% demand loans in the amount of $165 to an entity controlled by a then
outside director which was fully repaid, including interest thereon, during
April 1999. The loan was collateralized by 20,408 shares of the Company's common
stock.



                                      F-31






<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

O. SUPPLEMENTAL CASH FLOW DISCLOSURES

         Interest expense and taxes paid approximated the related expenses for
the years ended January 31, 2002, 2001 and 2000. During fiscal 2002, common
shares were issued as interest payments on debentures and neither provided nor
used cash.

         Common shares issued upon a cashless warrant exercise applied to an
outstanding short term note during the year ended January 31, 2000 neither
provided nor used cash. Accordingly, the $1,100 value assigned to such stock has
been excluded from the statement of cash flows.

P. CONCENTRATIONS OF CREDIT RISK

         Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. As regards the former, we place our temporary cash investments with
high credit financial institutions and limits. At times such amounts may exceed
the F.D.I.C. limits. We limit the amount of exposure with any one financial
institution and believe that no significant concentration of credit risk exists
with respect to cash investments. No accounts at a single bank accounted for
more than 10% of current assets.

         Although we are directly affected by the economic well being of
significant customers listed in the following tables, we do not believe that
significant credit risk exists at January 31, 2002. We perform ongoing
evaluations of our customers and require letters of credit or other collateral
arrangements as appropriate. Accordingly, trade receivable credit losses have
not been significant.

         The following data shows the customers accounting for more than 10% of
net receivables at January 31 2002 and 2001:

<TABLE>
<CAPTION>
                                                                       2002            2001
                                                                     --------        --------
                  <S>                                                <C>              <C>
                  Customer A                                           -               15.6%
                  Customer B                                           -                2.4
                  Customer C                                          19.8             20.5
                  Customer D                                          13.9             20.6
                  Customer E                                          24.7             14.1
                  Customer F                                           3.9             12.0
                  Customer G                                          20.4              -
</TABLE>

         The following data shows the customers accounting for more than 10% of
net sales during the years ended January 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                       2002            2001           2000
                                                                     --------        --------       -------
                  <S>                                                 <C>            <C>            <C>
                  Customer A                                           6.3%            10.7%           -
                  Customer B                                           6.9             12.9            8.0
                  Customer C                                           5.1              7.3            -
                  Customer D                                          21.1              9.3            -
                  Customer E                                          14.4              4.2            -
                  Customer F                                          13.2              4.9            -
                  Customer G                                           4.0              -              -
</TABLE>



                                      F-32






<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

Q. SUBSEQUENT EVENTS

    The Board of Directors of Osicom approved a two-year employment contract
with Mr. Mason ending May 2002, which provided for a base salary of $130,900 per
year and vesting of all his options to acquire our common stock granted prior to
February 1, 2000. This contract may be terminated for cause. However, should
Mr. Mason be terminated without cause or resign in certain circumstances prior
to the end of the contract term he will receive a continuation of his base
salary and benefits for two years, vesting of all his options to acquire our
common stock, and he is required to provide consulting services to us during the
two years following his termination. In March 2002 Mr, Mason notified the
Company that he was resigning with cause, relying on an agreement between Mr.
Mason and Dr. Cheng in April 2001 that allowed him to resign for cause at any
time prior to the expiration of his employment agreement as a result of having
been relocated more than 35 miles from his prior employment location. Mr.
Mason's resignation under these circumstances entitled him to receive two year
salary and benefit continuation and immediate stock vesting.

    The Board of Directors of Osicom approved a two-year employment contract
with Mr. Sue ending May 2002, which provides for a salary of $168,500 per year
and the vesting of all his options to acquire our common stock granted prior to
February 1, 2000. This contract may be terminated for cause. However, should Mr.
Sue be terminated without cause or resign in certain circumstances prior to the
end of the contract term he will receive a continuation of his salary and
benefits for two years, vesting of all his options to acquire our common stock
and he is required to provide consulting services to us during that period, On
May 8, 2002 Mr. Sue resigned from his position effective May 17, 2002 alleging
entitlement to the foregoing salary continuation and other benefits. The Company
does not believe Mr. Sue is entitled to any such benefits.

    The Board of Directors of Osicom entered into a two-year contact with Anne
Wallace, Director of Financial Reporting, ending May 22, 2002 which provided her
compensation of $200,000 per year, plus benefits and living expenses while on
location at the Company's Santa Monica facility. This contract may be terminated
for cause. However, should Ms. Wallace be contact be terminated without good
reason, or if she resigns for good reason, she will receive a continuation of
compensation and benefits for two years, and vesting of all her options to
acquire our common stock . On May 8, 2002 Ms. Wallace gave notice to the Company
that she has resigned for good reason, thus alleging entitlement to the
foregoing compensation annd benefits. The Company does not believe Ms. Wallace
is entitled to any such benefits.

    The Board of Directors of Osicom entered into a two-year employment contract
with Mr. Nimrod Johnson, Corporate Controller, ending May 22, 2002, which
provides for a salary of $97,307 per year and the vesting of all his options to
acquire our common stock. This contract maybe terminated for cause. However,
should Mr. Johnson be terminated without cause or resign in certain
circumstances prior to the end of the contract term he will receive a
continuation of his salary and benefits for two years, vesting of all his
options to acquire our common stock and he is required to provide consulting
services to us during that period. On May 9, 2002 Mr. Johnson resigned from his
position effective May 17, 2002 alleging entitlement to the foregoing salary
continuation and other benefits. The Company does not believe Mr. Johnson is
entitled to any such benefits.

R. SEGMENT INFORMATION

         Information for the years ended January 31, 2002, 2001 and 2000 in the
table below is presented on the same basis utilized by the Company to manage its
business. The segments according to product lines are as follows; Sorrento
Networks, Optical Networking, Entrada Networks and NETsilicon. Export sales and
certain income and expense items are reported in the geographic area where the
final sale to customers is made, rather than where the transaction originates.
We have no material long term assets outside the United States. The accounting
policies of the segments are the same as the policies described in the "Summary
of Significant Accounting Policies". Each segment operates independent of one
another. The company evaluates the performance of each segment and distributes
resources to them based on earnings before income taxes, excluding corporate
charges ("Segment Operating Profit")

<TABLE>
<CAPTION>
                                                        2002            2001            2000
                                                      --------        --------       ---------
         <S>                                          <C>             <C>            <C>
         Net sales:
               United States                           $28,341         $36,923        $53,158
               Asia                                      1,340             247         12,982
               Europe                                   10,130           7,285          1,656
               Other                                     1,016             186            576
                                                       -------         -------        -------
                      Total  net sales                 $40,827         $44,641        $68,372
                                                       =======         =======        =======
</TABLE>


<TABLE>
<CAPTION>
                                          Sorrento     Meret
                                          Networks     Optical           Other    Consolidated
                                          --------     -------           -----    ------------
<S>                                       <C>          <C>              <C>         <C>
As of January 31, 2002 except

Revenues from external customers          $ 36,034     $ 4,793          $    -      $  40,827
Cost of goods sold                          28,384       3,123               -         31,507
     Gross profit                            7,650       1,670               -          9,320
Operating income/(loss) from
     operations                            (28,993)        246          (8,407)       (37,154)
Depreciation and amortization
     expense                                 2,039         543             212          2,794
Valuation allowance additions:
     Receivables and inventory               5,328         269             987          5,597
     Other                                     812           -           1,788          2,600
Capital asset additions, net                 3,116          67              52          3,235
Total assets                                36,089       7,282          46,968         90,339
</TABLE>




                                      F-33






<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                          Sorrento     Meret          Entrada
                                          Networks     Optical        Networks       Other       Consolidated
                                          --------     -------        --------     ----------    ------------
<S>                                       <C>          <C>            <C>            <C>         <C>
As of January 31, 2001 except
  for Entrada which is
  as of August 31, 2000:

Revenues from external customers          $ 26,477      $6,272         $11,892       $      -      $ 44,641
Cost of goods sold                          17,344       3,661          10,465              -        31,470
     Gross profit                            9,133       2,611           1,427              -        13,171
Operating income/(loss) from
     continuing operations                 (36,147)      1,031          (7,859)        (7,440)      (50,415)
Depreciation and amortization
     expense                                 2,593         515           1,024            254         4,386
Valuation allowance additions:
     Receivables and inventory                 642         678           4,327            700         6,347
     Other                                   1,979           -             434              -         2,413
Capital asset additions, net                 8,320         157             444          5,492        14,413
Total assets                                36,524       9,088             n/a         67,511       113,123
</TABLE>

<TABLE>
<CAPTION>
                                          Sorrento      Meret         Entrada
                                          Networks     Optical        Networks     NETsilicon        Other    Consolidated
                                          --------     -------        --------     ----------      --------   ------------
<S>                                       <C>          <C>            <C>          <C>             <C>        <C>
As of January 31, 2000 except
  for NETsilicon which
  is as of September 14, 1999:

Revenues from external customers          $ 12,511      $6,953         $28,771        $20,137      $      -    $ 68,372
Cost of goods sold                           5,415       4,100          17,498          9,577             -      36,590
     Gross profit                            7,096       2,853          11,273         10,560             -      31,782
Operating income/(loss) from
     continuing operations                  (5,754)        415          (3,124)         2,540        (4,028)     (9,951)
Depreciation and amortization
     expense                                   825       1,021           2,118            660             -       4,624
Valuation allowance additions:
     Receivables and inventory                 373         657             911            733             -       2,674
     Other                                       -           -           1,742              -             -       1,742
Capital asset additions, net                 1,839        (576)            140            721             9       2,133
Total assets                                 7,973       7,925          16,135            n/a       191,232     223,265
</TABLE>



                                      F-34







<PAGE>



SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

S. VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
         <S>      <C>                                                                <C>
         Changes in the inventory valuation reserve were as follows:

                  Balance at February 1, 1999                                         $ 3,489
                      Additions charged to costs and expenses                           1,600
                      Amounts used during year                                           (589)
                      Balance of NSI at September 15, 1999                               (430)
                                                                                      -------
                  Balance at January 31, 2000                                           4,070
                      Additions charged to costs and expenses                           3,689
                      Amounts used during year                                            (55)
                      Balance of Entrada at August 31, 2000                            (4,912)
                                                                                      -------
                  Balance at January 31, 2001                                           2,792
                      Additions charged to costs and expenses                           4,038
                      Amounts used during year                                           (362)
                                                                                      -------
                  Balance at January 31, 2002                                         $ 6,468
                                                                                      =======

         Changes in the accounts receivable valuation reserve were as follows:

                  Balance at February 1, 1999                                         $ 1,136
                      Additions charged to costs and expenses                           1,074
                      Amounts used during year                                           (279)
                      Balance of NSI at September 15, 1999                               (728)
                                                                                      -------
                  Balance at January 31, 2000                                           1,203
                      Additions charged to costs and expenses                           1,958
                      Amounts used during year                                           (570)
                      Balance of Entrada at August 31, 2000                            (1,589)
                                                                                      -------
                  Balance at January 31, 2001                                           1,002
                      Additions charged to costs and expenses                           1,558
                      Amounts used during year                                           (821)
                                                                                      -------
                  Balance at January 31, 2002                                         $ 1,739
                                                                                      =======
</TABLE>



                                      F-35







<PAGE>


SORRENTO NETWORKS CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------

T. UNAUDITED QUARTERLY FINANCIAL DATA (Unaudited)

Amounts in thousands, except per share amounts.
<TABLE>
<CAPTION>

                                             First      Second          Third         Fourth
                                            Quarter     Quarter        Quarter        Quarter         Year
                                            -------     -------        -------        -------         ----
<S>                                       <C>         <C>             <C>           <C>            <C>
Year ended January 31, 2002:
       Net sales                          $ 14,497    $  7,998        $ 10,066       $  8,266      $ 40,827
       Gross profit                          4,929       1,296           1,321          1,774         9,320
       Loss from operations                 (5,768)    (10,961)        (15,924)       (10,483)      (43,136)

       Net loss                             (5,768)    (10,961)        (15,924)       (10,483)      (43,136)
       Net loss per share:
         Basic                               (0.45)      (0.77)          (1.11)         (0.74)        (3.10)
         Diluted                             (0.45)      (2.06)          (1.11)         (0.74)        (4.36)

Year ended January 31, 2001:
       Net sales                          $ 10,048    $ 11,376        $ 10,849       $ 12,368      $ 44,641
       Gross profit                          1,855       3,842           3,509          3,965        13,171
       Loss from continuing operations     (12,837)    (13,524)         (6,903)        (8,641)      (41,905)

       Net loss                            (12,837)    (13,524)         (6,903)        (8,641)      (41,905)
       Net loss per share:
         Basic                               (1.15)      (1.21)          (0.63)         (0.74)        (3.71)
         Diluted                             (1.15)      (1.21)          (0.63)         (0.74)        (3.71)

Year ended January 31, 2000:
       Net sales                          $ 19,129    $ 17,206       $  18,948       $ 13,089      $ 68,372
       Gross profit                          8,878       8,120           9,328          5,456        31,782
       Income (loss) from
         continuing operations              (1,043)     (2,493)         14,246         (8,300)        2,410
       Provision for income taxes                -           -          (3,406)         3,406             -
       Loss from discontinued operations    (1,229)       (120)         (9,307)       (13,407)      (24,063)
       Net income (loss)                    (2,272)     (2,613)          1,533        (18,301)      (21,653)
       Net income (loss) per share:
         Basic                               (0.29)      (0.30)           0.13          (1.66)        (2.33)
         Diluted                             (0.29)      (0.30)           0.14          (1.66)        (2.12)
</TABLE>




                                      F-36




<PAGE>



                                   SIGNATURES


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


SORRENTO NETWORKS CORPORATION


By:               /s/ Joe R. Armstrong                  Date:      May 16, 2002
      ----------------------------------------
       Joe R. Armstrong
       Chief Financial Officer
       Principal Accounting Officer


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


By:               /s/ Phil Arneson                      Date:      May 16, 2002
      ----------------------------------------
       Phil Arneson
       Chairman and Director
       Chief Executive Officer

By:               /s/ Donne Fisher                      Date:      May 16, 2002
      ----------------------------------------
       Donne Fisher
       Director

By:               /s/ Gary M. Parsons                   Date:      May 16, 2002
      ----------------------------------------
       Gary M. Parsons
       Director

By:               /s/ Robert Hibbard                    Date:      May 16, 2002
      ----------------------------------------
       Robert Hibbard
       Director


By:                                                     Date:      May 16, 2002
      ----------------------------------------
       Xin Cheng
       Director



                            STATEMENT OF DIFFERENCES
                           -------------------------

The trademark symbol shall be expressed as........................    'TM'
The registered trademark symbol shall be expressed as.............     'r'