<PAGE>

                                   UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                      FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2001

                                       OR

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

For the transition period from .....................to.........................

                        Commission File Number: 001-16147

                              ELASTIC NETWORKS INC.
             (Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
                 Delaware                                           58-2418576
<S>                                                                <C>
(State or other jurisdiction of incorporation                      (I.R.S. Employer
              or organization)                                    Identification No.)
</TABLE>

              6120 Windward Parkway, Suite 100, Alpharetta, Georgia
                    (Address of principal executive offices)

                                      30005
                                   (Zip Code)

                                 (678) 297-3100
              (Registrant's telephone number, including area code)


         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

Elastic Networks Inc. had 31,448,100 shares of its $.01 par value common stock
outstanding as of April 30, 2001.

<PAGE>


PART I   FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                                             PAGE NO.
<S>                                                                                          <C>
                  Item 1. Condensed Financial Statements.

                           Condensed Balance Sheets as of
                           March 31, 2001 and December 31, 2000..........................      3

                           Condensed Statements of Operations for the Three
                           Months Ended March 31, 2001 and 2000..........................      4

                           Condensed Statement of Stockholders' Equity
                           For the Three Months Ended March 31, 2001.....................      5

                           Condensed Statements of Cash Flows for the
                           Three Months Ended March 31, 2001 and 2000....................      6

                           Notes to Condensed Financial Statements.......................      7

                  Item 2. Management's Discussion and Analysis of Financial
                           Condition and Results of Operations...........................     11

                           Risk Factors..................................................     17

                  Item 3. Quantitative and Qualitative Disclosures About
                           Market Risk...................................................     28


PART II  OTHER INFORMATION

                  Item 2. Changes in Securities and Use of Proceeds......................     29

                  Item 4. Submission of Matters to a Vote of Security Holders............     30

                  Item 6. Exhibits and Reports on Form 8-K...............................     30

SIGNATURES...............................................................................     31
</TABLE>


                                                                               2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1.  CONDENSED FINANCIAL STATEMENTS.

                              ELASTIC NETWORKS INC.
                            CONDENSED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       MARCH 31,             DECEMBER 31,
                                                                          2001                   2000
                                                                  --------------------- -----------------------
<S>                                                               <C>                    <C>
ASSETS
Current assets:
  Cash and cash equivalents                                        $          50,807     $            48,195
  Short-term investments                                                       4,507                  20,396
  Accounts receivable, net of allowance for doubtful
      accounts of $252 and $90                                                 7,108                   8,068
  Inventories                                                                  9,062                   6,467
  Note receivable                                                                  -                   2,951
  Other                                                                        2,592                   1,799
                                                                  --------------------- -----------------------
       Total current assets                                                   74,076                  87,876
Property and equipment, net                                                    4,273                   3,375
Other assets                                                                     102                     102
                                                                  --------------------- -----------------------
        Total assets                                               $          78,451     $            91,353
                                                                  ===================== =======================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                 $          15,460     $            10,891
  Accrued liabilities                                                          7,347                   2,341
  Deferred revenues                                                            1,007                     926
  Capital lease obligations                                                      221                     216
                                                                  --------------------- -----------------------
       Total current liabilities                                              24,035                  14,374
Capital lease obligations, long-term                                             252                     305
Deferred revenues, long-term                                                     529                     712
Commitments and contingencies                                                      -                       -

Stockholders' equity:
   Preferred stock, par value $0.01; 25,000,000 shares
     authorized, 0 shares issued and outstanding                                   -                       -
   Common Stock, par value $0.01; 100,000,000 shares authorized,
     31,448,100 shares and 31,329,470 shares issued and
     outstanding at March 31, 2001 and December 31, 2000                         314                     313
   Additional paid-in capital                                                130,201                 129,802
   Deferred stock compensation                                                (1,985)                 (2,978)
   Accumulated deficit                                                       (74,895)                (51,175)
                                                                  --------------------- -----------------------
         Total stockholders' equity                                           53,635                  75,962
                                                                  --------------------- -----------------------
       Total liabilities and stockholders' equity                  $          78,451     $            91,353
                                                                  ===================== =======================

               THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>

                                                                               3
<PAGE>

                              ELASTIC NETWORKS INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED MARCH 31,
                                                                           2001                  2000
                                                                  ---------------------- --------------------
<S>                                                               <C>                              <C>
Net revenues                                                      $        5,643                   $   6,189

Cost of revenues                                                           5,530                       6,056

Charges related to excess inventory on hand
     and on order and restructuring charges                               11,853                           -
                                                                  ---------------------- --------------------
Gross profit (loss)                                                      (11,740)                        133

Operating expenses: (1)
     Sales and marketing                                                   4,161                       2,518
     Research and development                                              3,550                       2,105
     General and administrative                                            5,168                       1,260
                                                                  ---------------------- --------------------
          Total operating expenses                                        12,879                       5,883
                                                                  ---------------------- --------------------
               Operating loss                                            (24,619)                     (5,750)
Other income (expense), net                                                  899                          78
                                                                  ---------------------- --------------------
          Net loss                                                       (23,720)                     (5,672)
Accretion of series A preferred stock                                          -                        (133)
                                                                  ---------------------- --------------------
Net loss attributed to common stockholders                             $ (23,720)                  $  (5,805)
                                                                  ====================== ====================

Basic and diluted net loss per share                                   $   (0.76)                  $   (0.35)
                                                                  ====================== ====================
Weighted average shares used in computing
   basic and diluted net loss per share                                   31,389                      16,673
                                                                  ====================== ====================


(1) Includes $2.1 million of restructuring charges and additional
    accruals for uncollectible accounts for the three months ended March
    31, 2001. Includes $1.2 million and $0.1 million of non-cash stock
    based compensation expenses for the three months ended March 31, 2001
    and 2000, respectively.

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>

                                                                               4
<PAGE>

                              ELASTIC NETWORKS INC.
                   CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>                                                                                                       TOTAL
                                       COMMON STOCK        ADDITIONAL     DEFERRED STOCK   ACCUMULATED      STOCKHOLDERS'
                                    SHARES      AMOUNT   PAID-IN CAPITAL   COMPENSATION      DEFICIT       EQUITY (DEFICIT)
                                   ----------------------------------------------------------------------------------------
<S>                                 <C>        <C>        <C>              <C>              <C>            <C>
BALANCE AT  DECEMBER 31, 2000       31,329,470  $ 313       $  129,802      $ (2,978)       $ (51,175)     $  75,962

Net loss                                                                                      (23,720)       (23,720)

Employee stock options exercised       118,630      1              245                                           246

Deferred stock compensation                                       (825)          825                               -

Amortization of deferred stock
compensation                                                                     168                             168

Nortel Networks options payout                                   1,107                                         1,107

Other                                                             (128)                                         (128)
                                   ------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001           31,448,100  $ 314       $  130,201      $ (1,985)       $ (74,895)     $  53,635
                                   ====================================================================================

               THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>


                                                                               5
<PAGE>

                              ELASTIC NETWORKS INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED MARCH 31,
                                                                             2001                  2000
                                                                    ---------------------- -----------------
<S>                                                                     <C>                    <C>
Cash flows from operating activities:
     Net loss                                                               $  (23,720)          $  (5,672)
     Adjustments to reconcile net loss to net cash used in
            operating activities:
     Charges related to excess inventory on hand and on order,
       note receivable write-off, and restructuring charges                     13,994                   -
     Depreciation and amortization                                                 392                 120
     Amortization of deferred stock compensation                                    38                  70
     Nortel Networks options payout                                              1,107                   -
     Issuance of common stock options and warrants                                  27                   -
     Change in assets and liabilities:
          Accounts receivable                                                      960              (3,443)
          Note receivable                                                          870                   -
          Inventories                                                          (10,089)             (3,262)
          Accounts payable                                                       4,569               2,396
          Accrued liabilities                                                      587                 227
          Other                                                                   (886)               (219)
                                                                    ---------------------- -----------------
              Net cash used in operating activities                            (12,151)             (9,783)
                                                                    ---------------------- -----------------
Cash flows from investing activities:
     Purchases of property and equipment                                        (1,290)                (464)
     Proceeds from sale of short-term investments                               20,500                1,750
     Purchases of short-term investments                                        (4,611)                (519)
                                                                    ---------------------- -----------------
              Net cash provided by investing activities                         14,599                  767
                                                                    ---------------------- -----------------

Cash flows from financing activities:
     Proceeds from issuance of common and preferred stock                            -               20,903
     Payments of capital lease obligations                                         (57)                  (4)
     Other                                                                         221                    -
                                                                    ---------------------- -----------------
              Net cash provided by financing activities                            164               20,899
                                                                    ---------------------- -----------------

              Net increase in cash and cash equivalents                          2,612               11,883
 Cash and cash equivalents, beginning of period                                 48,195                3,863
                                                                    ---------------------- -----------------
 Cash and cash equivalents, end of period                                   $   50,807           $   15,746
                                                                    ====================== =================

 Supplemental schedule of investing and financing activities:
     Cash paid during the period for interest                               $       20           $        4
                                                                    ====================== =================
     Capital lease additions                                                $        8           $      180
                                                                    ====================== =================

             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>


                                                                               6
<PAGE>

ELASTIC NETWORKS INC. NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

NOTE 1.  BASIS OF PREPARATION

The accompanying condensed financial statements included herein have been
prepared by Elastic Networks Inc. (the "Company") without audit, in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
for complete financial statements have been condensed or omitted pursuant to
such rules and regulations.

This quarterly report and the accompanying condensed financial statements
should be read in conjunction with the Company's audited financial statements
and notes thereto presented in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 (the "2000 Annual Report"). Footnotes, which
would substantially duplicate the disclosures in the Company's audited
financial statements for the year ended December 31, 2000 contained in the
2000 Annual Report, have been omitted.

In the opinion of management, the condensed financial statements included
herein contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of the Company as of March
31, 2001 and the results of operations for the three months ended March 31,
2001 and 2000 and cash flows for the three months ended March 31, 2001 and
2000. Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2001.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company generally recognizes revenues upon shipment depending on contract
terms and conditions if collectibility is reasonably assured, pricing is
fixed and determinable, and returns are reasonably estimated. No revenues are
recognized on products shipped on a trial basis until products are fully
accepted by the customer. Estimated sales returns, based on historical
experience by product, are recorded at the time the product revenues are
recognized. Certain technology license revenues are recognized ratably over
the term of the related agreement (see note 12 in the Company's 2000 Annual
Report).

Consulting services, principally, installation and training revenues are
recognized as the services are completed. These services are typically
performed under separate service agreements and are usually performed on a
time and material basis. Such services primarily consist of implementation
services related to the installation and deployment of the Company's products.

                                                                              7
<PAGE>


Revenues are generally recognized upon shipment of the equipment. In other
transactions where the Company holds the inventory but invoices the customer,
the Company recognizes revenues when the following conditions are met: the
equipment is complete, ready for shipment and segregated from other
inventory; the Company has no further significant performance obligations in
connection with the completion of the transaction; the commitment and
delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the
customer. There were no revenues recognized from these transactions for the
quarters ended March 31, 2001 and 2000. No net accounts receivable relating
to these transactions existed at March 31, 2001 and $1.2 million were
included in total accounts receivable at December 31, 2000.

NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, Earnings Per Share, for all periods presented. Basic and
diluted net loss per common share were computed on the basis of
weighted-average shares outstanding.

For all periods presented, dilutive securities included options, warrants and
contingent stock related to Series A redeemable convertible participating
preferred stock. Potentially dilutive securities totaling 2,086,423 and
1,668,098 for the quarters ended March 31, 2001 and 2000, respectively were
excluded from historical diluted net loss per common share because of their
anti-dilutive effect.

RECENT PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
established accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on the entity's rights or obligations under the applicable
derivative contract. In June 1999, the FASB issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities Deferral of the effective
date of FASB Statement No. 133, which deferred the effective date of SFAS No.
133 until fiscal quarters of all fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. The Company, to date, has not engaged in
derivative or hedging activities, and accordingly the adoption of SFAS No.
133 on January 1, 2001 did not have a material impact on the financial
reporting and related disclosures of the Company.


                                                                              8
<PAGE>

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

NOTE 3.  INVENTORIES

Inventories, net of allowances, consist of the following:

<TABLE>
<CAPTION>
                                                MARCH 31,            DECEMBER 31,
                                                  2001                  2000
                                            -----------------     ------------------
<S>                                              <C>                    <C>
           Raw materials                         $     2,269            $      512
           Finished goods                              6,793                 5,955
                                            -----------------     ------------------
                   Total                         $     9,062            $    6,467
                                            =================     ==================
</TABLE>

The allowances for inventories were $9.0 million and $1.7 million at March
31, 2001 and December 31, 2000, respectively.

NOTE 4.  SEGMENT INFORMATION

The Company operates in one reportable business segment, to develop
technology and products to provide high-speed access over copper wire
infrastructure.

GEOGRAPHIC INFORMATION

The Company's headquarters and its operations are located in the U.S. The
Company's research and development activities are conducted in the U.S. The
Company conducts its sales, marketing and customer service activities
throughout the world including Company locations in Toronto, Canada and Hong
Kong, China. Geographic long-lived assets information is based on the
physical location of the assets at the end of each period. Geographic revenue
information is based on the location of the end customer. Identifiable
long-lived assets (principally property and equipment) by geographic areas:

<TABLE>
<CAPTION>
                                                  MARCH 31,                  DECEMBER 31,
                                                    2001                        2000
                                            ---------------------       ----------------------
<S>                                          <C>                         <C>
       Long-lived assets - U.S.                      $ 4,273                     $ 3,375
</TABLE>


                                                                              9
<PAGE>

Revenues by geographic region are as follows:

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED MARCH 31,
                                                      2001            2000
                                                   ----------------------------
<S>                                                 <C>              <C>
        Revenues:
                U.S.                                 $ 4,031         $  5,197
                Asia                                   1,455              691
                Other                                    157              301
                                                   ---------------------------
        Total Revenues                               $ 5,643         $  6,189
                                                   ===========================
</TABLE>

NOTE 5.  RELATED PARTY TRANSACTIONS

The following tables summarize related party transactions:

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED MARCH 31,
                                                       2001              2000
                                                   -----------------------------
<S>                                                 <C>                 <C>
 Sales to Nortel Networks                           $  2,844            $   953
</TABLE>

<TABLE>
<CAPTION>
                                                      MARCH 31,       DECEMBER 31,
                                                        2001              2000
                                                   --------------------------------
<S>                                                <C>                <C>
 Receivables from Nortel Networks                    $  2,165            $ 1,082
 Royalties payable to Nortel Networks                     358                360

</TABLE>


                                                                              10
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.


FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this Report are forward-looking
statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those
described herein. With respect to such forward-looking statements, Elastic
Networks Inc. (the "Company"), seeks the protections afforded by the Private
Securities Litigation Reform Act of 1995. Additional information concerning
these risks and uncertainties is set forth in the section titled "Risk
Factors" on page 17 of this Report. The risk factor discussion contained
therein is intended to identify certain of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included herein. It is not intended to represent a
complete list of all risks and uncertainties inherent in the Company's
business.

Readers are also urged to carefully read and consider this Management's
Discussion and Analysis of Financial Condition and Results of Operations in
conjunction with the Company's financial statements and the related notes and
Risk Factors included herein and in the Company's Annual Report on Form-10K
for the year ended December 31, 2000 and other reports and filings made with
the Securities and Exchange Commission ("SEC").

OVERVIEW

The Company designs, develops and markets high-speed, broadband
communications products which enable service providers to deliver easy to
deploy and cost-effective broadband access solutions to their customers over
the existing copper telephone wire infrastructure. The Company designs
products based on its patented EtherLoop technology to deliver a next
generation access solution. EtherLoop's advantages overcome many of the
deployment, performance, cost and quality of service limitations of
conventional Digital Subscriber Line ("DSL") technologies.

The Company was formed in January 1997 as a division of Nortel Networks, and
through mid 1999, its operating activities related primarily to developing
its EtherLoop technology and complementary software, building and testing
prototype products, building its technical support infrastructure, staffing
its sales and marketing organization and establishing relationships with its
customers. In mid 1999, the Company commenced shipment of its commercial
products and have continued making investments to grow its business.

The Company's 2001 revenues have been generated principally from sales of its
second generation DSL access multiplexers ("DSLAMs"), which are known as
BitStorm DSLAMs and which connect broadband modem signals with the Internet,
its StormPort broadband modem, and to a lesser extent, its complementary
software. Sales of the Company's IP DSLAMs, servers and broadband modems
accounted, in the aggregate, for approximately 73% and 85% of total revenues
for the quarters ended March 31, 2001 and 2000, respectively.

                                                                             11
<PAGE>

The Company began limited shipment of its first release DSLAM, the ELMo 8, in
the second quarter of 1999. The Company began shipping the ELMo 120 in the
third quarter of 1999. In the fourth quarter of 2000, the Company introduced
the Storm System family of broadband access equipment to serve its carrier
and in-building/multi-tenant unit ("MTU") markets both domestically and
internationally. The Company's revenues during the quarter ended March 31,
2001 from the Storm System family of products were primarily from the sales
of its BitStorm 1900 IP DSLAM and related StormPort customer premises
equipment and chipsets. Additionally, the Company plans to pursue both an OEM
licensing strategy for its broadband modems and a technology licensing
strategy for its software and patented EtherLoop technology. These licensing
strategies are primarily intended to accelerate its market penetration and to
increase its gross margin.

The Company has followed a revenue diversification strategy consisting of
focusing on the MTU market, the carrier and international markets. As the
Company continues to expand its customer relationships in 2001, it
anticipates existing customers will represent a smaller percentage of its
revenues in the remaining quarters of 2001.

The Company targets its sales efforts to various categories of service
providers operating in the market for high-speed access, both in the United
States and internationally. To date, customer installations have ranged from
in-building applications, including hotels, apartment buildings and
university campuses, to service providers' central office locations used to
reach both business and residential users.

In order to continue growing its revenues and attain profitability, the
Company must continue to invest in its international operations. As part of
this investment, the Company opened offices in Toronto, Canada and Hong Kong,
China in the fourth quarter of 2000. To date, the Company's international
sales have been denominated in U.S. dollars and, accordingly, it has not been
materially exposed to fluctuations in non-U.S. currency exchange rates. In
the future, a portion of its international sales may be denominated in
currencies other than U.S. dollars, which would expose the Company to gains
and losses upon exchange rate fluctuations.

The Company's negative gross margin for the quarter ended March 31, 2001 was
primarily the result of the write-off of excess and obsolete inventory due to
customer order deferrals late in the quarter, leaving the Company with a
significant investment in 4 megabytes per second ("Mbps") products as the
Company transitioned to the enhanced features offered by the 6Mbps product
line. This transition to the 6Mbps product line and cancellation of 4Mbps
volume purchase commitments resulted in additional non-recurring charges
which also contributed to the negative gross margin for the Company during
the quarter ended March 31, 2001. If these adjustments had not been required,
the gross margin for the quarter ended March 31, 2001 would have been
positive. The Company expects that its gross margins will increase in the
future as the Company lowers the cost of its existing products, further
offers the sale of its Storm System family of products and increases its
licensing revenues.


                                                                             12
<PAGE>

As of April 30, 2001, the Company employed approximately 152 full time
employees. This includes a decrease of 29 employees from December 31, 2000 as
part of a restructuring of the Company's employee base. This restructuring
resulted in total non-recurring charges of $0.1 million for the quarter ended
March 31, 2001. The Company does not anticipate additional restructuring
charges of this nature in the remaining quarters of 2001.

Stock-based compensation reflected in the Company's operating expenses
includes the amortization of stock compensation charges resulting from the
grant of stock options to employees with exercise or sales prices which may
be deemed for accounting purposes to be below the fair market value of the
Company's common stock on the date of grant and compensation expense
associated with the grant of stock options to non-employees. Deferred
compensation amounts are amortized over the vesting periods of the applicable
options, which are generally four years. The compensation expense associated
with options granted to non-employees is recorded at the time services are
provided.

In fulfillment of compensation arrangements between Nortel Networks and some
of the Company's employees relating to their prior employment with Nortel
Networks, Nortel Networks has agreed to pay these employees, if they are
still working for the Company at the time of payment, an aggregate of
approximately $13.4 million in cash. On October 21, 2000, the employees
received a payment from Nortel Networks of $8.9 million. Nortel Networks will
make an additional payment of approximately $4.5 million on the first
anniversary of that date. In connection with these arrangements, the Company
recorded compensation expense in the quarter ended March 31, 2001 of $1.1
million and will record additional compensation expense of approximately $2.3
million in 2001. The Company will record capital contributions from Nortel
Networks in equivalent amounts.


                                                                              13
<PAGE>

RESULTS OF OPERATIONS

         The unaudited table below shows operating data, as a percentage of
revenues, for the periods indicated:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED MARCH 31,
                                                      -----------------------------
                                                           2001            2000
                                                      --------------  -------------
<S>                                                    <C>             <C>
Total revenues                                              100%           100%
Cost of revenues                                             98             98
Charges related to excess inventory on
     hand and on order and restructuring
     charges                                                210              -
                                                      --------------  -------------
Gross profit (loss)                                        (208)             2

Operating expenses: (1,2,3)
     Sales and marketing                                     74             41
     Research and development                                63             34
     General and administrative                              91             20
                                                      --------------  -------------
          Total operating expenses                          228             95
                                                      --------------  -------------
               Operating loss                              (436)           (93)
Other income (expense), net                                  16              1
                                                      --------------  -------------
Net loss                                                   (420)%          (92)%
                                                      ==============  =============
</TABLE>

[1]  Includes non-cash stock compensation expenses in 2001 and 2000.
[2]  Includes restructuring charges in 2001.
[3]  Includes additional accruals for uncollectible accounts in 2001.


THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2000

TOTAL REVENUES. Revenues decreased from $6.2 million in the quarter ended
March 31, 2000 to $5.6 million in the same period for 2001. This decrease was
primarily due to customer order deferrals late in the quarter ended March 31,
2001 and continued weakening economic conditions that have affected overall
telecommunications spending. For the quarters ended March 31, 2001 and 2000,
the Company generated revenues from international sales of $1.6 million and
$1.0 million, respectively.

GROSS PROFIT (LOSS). Gross profit (loss) declined from a profit of $0.1 million
in the quarter ended March 31, 2000 to a loss of $11.7 million in the same
period for 2001. The decline in gross profit (loss), in absolute dollars and
as a percentage of revenues, was primarily the result of the charges related
to excess inventory on hand and on order in the amount of $11.9 million
during the quarter ended March 31, 2001. The Company introduced its


                                                                              14
<PAGE>

second generation chipset in the fourth quarter of 2000. The sale of these
new products should continue to help improve the Company's gross margins in
2001.

SALES AND MARKETING. Sales and marketing expenses increased from $2.5 million
in the quarter ended March 31, 2000 to $4.2 million in the same period for
2001. This increase was primarily a result of increases in staffing for
marketing, account management, customer product trials, customer support and
direct sales. The increase in sales and marketing expenses was also the
result of the Company's increased investment in international operations and
restructuring charges of $0.03 million during the quarter ended March 31,
2001. Non-cash stock compensation expense was $0.03 million for both of the
quarters ended March 31, 2000 and 2001. Sales and marketing expenses as a
percentage of revenues increased significantly as a result of the decrease in
revenues and increased costs described herein.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$2.1 million in the quarter ended March 31, 2000 to $3.6 million in the same
period for 2001. This increase was primarily a result of an increase in
personnel related costs, including restructuring charges of $0.03 million.
Non-cash stock compensation expense was $0.03 million for both of the
quarters ended March 31, 2000 and 2001. Research and development expenses as
a percentage of revenues increased significantly as a result of the decrease
in revenues and increased costs described herein.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.3 million for the quarter ended March 31, 2000 to $5.2 million in the
same period for 2001. This increase was primarily the result of a write-off
of an uncollectible note receivable for $2.1 million and non-cash stock
compensation expense of $1.1 million of payouts from Nortel Networks related
to compensation arrangements with key executives. The remaining increase
resulted from personnel related costs and increased expenditures on
facilities, legal, accounting, information systems and consulting fees.
Non-cash stock compensation expense, excluding the Nortel Networks
compensation arrangement, was $6,000 and $13,000 for the quarters ended March
31, 2000 and 2001, respectively. Excluding the uncollectible note receivable
write-off and the Nortel Networks non-stock compensation expense, general and
administrative expenses as a percentage of revenues increased to 35% for the
quarter ended March 31, 2001 from 20% in the same period for 2000 as a result
of the decrease in its revenues and increased costs described herein.

OTHER INCOME (EXPENSE), NET. Other income (expense), net increased from $0.1
million in the quarter ended March 31, 2000 to $0.9 million in the same
period for 2001, resulting primarily from an increase in interest income.


                                                                             15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

On October 4, 2000, the Company completed its initial public offering ("IPO")
for the sale of 6.8 million shares of Common Stock at a price to the public
of $13.00 per share, which resulted in proceeds of $80.3 million to the
Company, net of aggregate expenses. Upon the closing of the IPO, all shares
of the Company's Series A and B redeemable convertible participating
preferred stock were converted into an aggregate of 9.1 million shares of
Common Stock. At March 31, 2001, the Company had cash and cash equivalents
and short-term investments of $55.3 million.

Cash used in operating activities was $9.8 million for the quarter ended
March 31, 2000 and $12.2 million for the same period of 2001. The increase in
cash used for operating activities was primarily due to increases in net
losses and inventories. This increase was partially offset by increases in
accounts payable.

Cash provided by investing activities was $0.8 million for the quarter ended
March 31, 2000 and $14.6 million for the same period of 2001. The increase in
cash provided by investing activities was primarily due to the sale of $20.5
million in short-term investments due to interest earnings potential in cash
investments exceeding the short-term earnings rate during the quarter ended
March 31, 2001. The increase was partially offset by the utilization of $1.3
million for capital expenditures and $4.6 million for the purchase of
short-term investments during the quarter ended March 31, 2001.

Cash provided by financing activities was $20.9 million for the quarter ended
March 31, 2000 and $0.2 million for the same period of 2001. The decrease in
cash provided by financing activities was primarily due to cash generation of
$20.9 for the quarter ended March 31, 2000 for the issuance of Series B
redeemable convertible participating preferred stock but not issued in the
same period of 2001.

The Company's future capital requirements will depend upon many factors,
including sales of its products, the timing of research and product
development efforts and the expansion of its marketing efforts. The Company
expects to continue to expend amounts on property and equipment related to
the expansion of facility infrastructure, computer equipment, and for its
research and development laboratory and test equipment to support on-going
research and development operations. At March 31, 2001, the Company had no
material commitments other than obligations under its operating and capital
leases and product manufacturing and purchase agreements. There are potential
additional exposures from existing contract manufacturer commitments and
inventory obsolescence. The Company believes its cash and cash equivalent
balances and short-term investments will be sufficient to satisfy its cash
requirements for at least the next twelve months. The Company intends to
invest its cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.


                                                                             16
<PAGE>

RISK FACTORS

WE HAVE A SHORT OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT TO ACCURATELY
FORECAST OUR FUTURE REVENUES AND OTHER OPERATING RESULTS.

We only began selling our products in mid 1999. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. Our limited operating history may make it difficult or impossible
for analysts or investors to accurately forecast our future revenues and
other operating results. Furthermore, if we do not meet or exceed the
forecasts and expectations of analysts and investors regarding our future
revenues and other operating results, the price of our Common Stock could
decline substantially.

WE HAVE INCURRED NET LOSSES SINCE WE WERE FORMED AND EXPECT TO INCUR FUTURE
LOSSES.

From inception through March 31, 2001, we incurred net losses totaling
approximately $103 million. We expect to continue to make substantial
expenditures for sales and marketing, product development and other purposes,
which may be fixed in the short term. As a result, we expect to continue to
incur losses in 2001, as well as in future years. Our ability to increase
revenues, and achieve and maintain profitability in the future, will
primarily depend on our ability to increase sales of our products, reduce
production and other costs and successfully introduce new and enhanced
versions of our existing products into the marketplace. We cannot assure you
that we will be able to increase our revenues at a rate that equals or
exceeds expenditures. Our failure to do so will result in our incurring
additional losses.

WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.

Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. Therefore, you should not rely on our historical
operating results as an indicator of future performance. Our results of
operations could fluctuate due to the following material factors:

    -  variations in market acceptance of our products and in the timing and
       size of customer orders and shipments;

    -  changes in the mix of our product offerings and sales channels;

    -  competitive market conditions, such as pricing policies, timing and
       acceptance of new and enhanced product introductions by us, our
       customers or our competitors, including introductions of alternative
       technologies;


                                                                             17
<PAGE>

    - changes in our operating expenses, including the costs of our products'
      components;

    - our ability to meet and maintain production volumes and ship products in a
      timely manner; and

    - other general economic factors, as well as those specific to the
      telecommunications industry.

WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND THE LOSS OF, OR REDUCTION IN
PURCHASES FROM ANY ONE OF THEM COULD SIGNIFICANTLY HARM OUR BUSINESS.

We derive a substantial portion of our revenues, and expect to continue to
derive a substantial portion of our revenues in the near future, from sales
to a limited number of customers. Unless and until we further diversify and
expand our customer base, our success will depend significantly upon the
timing and size of future purchase orders, if any, from our largest
customers, as well as their product requirements, financial and operational
success, and, in particular, the successful deployment of services using our
products. The loss of any one or more of these customers, significant changes
in their product requirements, delays of significant orders or the occurrence
of any sales fluctuations of our or our customers' products could reduce our
revenues.

A MAJORITY OF OUR BUSINESS IS GENERATED BY DEMAND FROM NEW AND EMERGING
SERVICE PROVIDERS, AND THEIR INABILITY TO OBTAIN CAPITAL OR FINANCING COULD
CAUSE THEM TO REDUCE OR DISCONTINUE THE PURCHASE OF OUR PRODUCTS AT ANY TIME.

Many of the companies that currently deploy our products, or that may do so
in the future, are new and emerging and have largely unproven business
models. These companies require substantial capital for the development,
construction and expansion of their businesses. Financing may not be
available to these companies or our other customers on favorable terms, if at
all. To the extent that these companies are unable to obtain the financing
they need, our ability to make future sales to these customers directly or
through our distributors could be harmed. In addition, to the extent we
choose to provide financing to these customers, we will be subject to
additional financial risk, which could reduce our profitability.

WE ONLY OFFER A LIMITED NUMBER OF PRODUCTS AND THE FAILURE OF ANY ONE OF THEM
TO ACHIEVE WIDESPREAD MARKET ACCEPTANCE WOULD SIGNIFICANTLY HARM OUR RESULTS
OF OPERATIONS.

We derive substantially all of our revenues from sales of a limited number of
high-speed access products. The failure of any of our product offerings to
achieve and maintain a


                                                                             18
<PAGE>

meaningful level of market penetration and customer satisfaction would harm
our revenues.

In addition, we only began selling our products in mid 1999, and cannot yet
predict whether they will gain widespread market acceptance. Even if our
customers do purchase our products in meaningful quantities, due to the
variety and complexity of the environments in which these customers operate,
our products may not operate as expected. This could result in cancelled
orders, delays in installation and increased expenses. In addition, the
success of competing products and technologies, pricing pressures or
manufacturing difficulties could further reduce our profitability and the
price of our Common Stock.

THE FAILURE OF DSL TECHNOLOGY TO ACHIEVE WIDESPREAD MARKET PENETRATION WOULD
NEGATIVELY IMPACT DEMAND FOR OUR PRODUCTS.

Because our products are based on the use of copper telephone wires, and
because there are physical limits to the speed and distance over which data
can be transmitted over these types of wires, our products may not be a
viable solution for some potential customers. Some of our competitors
currently offer products based on directly competing technologies that do not
have these limitations. Additionally, in the future our competitors may
develop transmission media and technologies other than DSL that provide
faster access, higher reliability or are more cost effective for some of our
existing and potential customers.

If any of these technologies are adopted or implemented in our market, sales
of our products could decline and our market share and profitability could be
reduced.

WE DEPEND ON DISTRIBUTORS AND RESELLERS FOR SALES, AND IF ANY OF THEM DO NOT
PERFORM AS EXPECTED, WE COULD EXPERIENCE LOWER THAN EXPECTED SALES.

Our success depends, in part, upon distribution and reseller arrangements,
including our current arrangements with Nortel Networks. These arrangements
are relatively new, and we cannot accurately predict whether significant
recurring revenues will be generated from these arrangements. Our sales and
distribution partners may not market, sell or distribute our products, or
perform any of their other obligations, as we expect, in which case we may
not desire to maintain these arrangements, or be able to develop successful
replacements. In the event that any of these arrangements are terminated or
are otherwise unsuccessful, sales of our products could be harmed.


                                                                              19
<PAGE>

OUR DEPENDENCE ON SINGLE SOURCE SUPPLIERS EXPOSES US TO SUPPLY INTERRUPTION
RISKS, WHICH COULD HARM OUR SALES OR INCREASE OUR COSTS.

Although we generally use standard parts and components for our products, our
products contain several key components that are purchased from single source
suppliers: line driver chips from Texas Instruments Incorporated, power
supplies from Astec America Inc. and system processor chips from Motorola,
Inc. We do not have written agreements with our single source suppliers. Our
reliance on the suppliers of these components exposes us to potential
production difficulties and quality variations due to increased third-party
demand or supplier related issues. If these suppliers are unable to meet
component requirements, we will be forced to seek alternative production
sources, which could negatively impact our costs and the timely delivery of
our products. Alternate suppliers may not meet our quantity requirements or
quality standards. Our inability to obtain sufficient quantities of these
components, or components that meet our quality standards, may result in
delays or reductions in product shipments, which could harm our reputation
and reduce our profitability.

OUR DEPENDENCE ON TWO CONTRACT MANUFACTURERS COULD RESULT IN PRODUCT DELIVERY
DELAYS.

We currently use two contract manufacturers, Sanmina Corporation and
Solectron Corporation, to build some of our printed circuit boards, chassis
and subassemblies and, in most cases, to complete final assembly and testing
of our products. Our current reliance on two manufacturers could result in
the absence of adequate capacity to meet our customers' needs. In addition,
we could experience unavailability of, or interruptions in, access to certain
process technologies, as well as reduced control over delivery schedules,
manufacturing yields, quality and costs. It is also possible that Sanmina's
or Solectron's manufacturing capabilities may not be available to us when
needed, or that they may not be in a position to satisfy our production
requirements at acceptable prices and on a timely basis, if at all. If
Sanmina or Solectron are unable or unwilling to continue manufacturing our
components in required volumes, or to our quality specifications, or if we
develop new technologies requiring components which Sanmina or Solectron are
incapable of manufacturing, we will have to identify acceptable alternative
manufacturers. Alternative manufacturers, however, may not be available. Any
significant interruption in the supply of products could result in our
inability to adequately meet our customers' demands, which in turn could harm
our sales.

WE ORDER OUR PRODUCTS FROM OUR SUPPLIERS IN ADVANCE OF CUSTOMER ORDERS
AND A DELAY, DEFERRAL OR CANCELLATION IN ANY OF SUCH CUSTOMER ORDERS COULD
NEGATIVELY IMPACT OUR INVENTORY AND HARM OUR PROFITABILITY.

As part of our inventory planning, we frequently pay certain suppliers well
in advance of receipt of customer orders and enter into purchase commitments
with vendors to ensure products are available to meet forecasted customer
demand. The market for telecommunications products is characterized by rapid
technological advances, a high degree of volatility and the frequent
introduction of new products. Accordingly, if we fail to accurately forecast
customer demand for our products, or if our customers delay, defer or cancel
their orders for our products, we could experience a decline in sales of
products


                                                                             20
<PAGE>

that we have committed to purchase. If we cannot change or be released from
the purchase commitments, we could incur significant costs from the purchase
of raw material components acquired for the manufacturing of these products,
as well as other restructuring and inventory-related charges. We also face
the risk of ordering too many products since the orders are based on the
forecasts of customer orders rather than actual orders. Accordingly, we could
be left with an excess of inventory on hand that has no available market due
to enhanced features on successor product lines. Our business and operating
results could be adversely affected as a result of these increased costs.

BECAUSE A SIGNIFICANT AND INCREASING PERCENTAGE OF OUR REVENUES COMES FROM
SALES OUTSIDE THE U.S., WE ARE SUBJECT TO A NUMBER OF RISKS SPECIFIC TO THE
INTERNATIONAL MARKETS IN WHICH WE OPERATE.

Revenues from customers outside of the U. S. accounted for about 16% of our
total revenues for the quarter ended March 31, 2000, and 29% of our total
revenues for the quarter ended March 31, 2001. As a part of our strategy, we
intend to expand our sales in international markets. Sales to international
markets have the following material risks:

    -  longer receivables collection periods;

    -  potential increase in political and economic instability;

    -  difficulties and costs of staffing and managing foreign operations;

    -  difficulties in enforcing our rights and agreements through non-U.S.
       legal systems;

    -  unexpected changes in regulatory requirements;

    -  changes in import or export licensing requirements;

    -  foreign currency exchange rate fluctuations;

    -  reduced protection for intellectual property rights in some countries;
       and

    -  currency fluctuations, which could cause our products, the prices of
       which are denominated in U.S. dollars, to become relatively more
       expensive for non-U.S. customers and reduce demand for our products.

We also utilize product development and other resources in order to meet
regulatory and technical requirements of countries into which we sell our
products. We depend on sales of our products in these markets to offset the
costs associated with developing products for these markets. If we are unable
to generate sufficient sales to offset these expenses, our profitability will
suffer.


                                                                             21
<PAGE>

We can give no assurance that non-U.S. markets for our products will continue
to develop or develop at the rate we expect. Any failure of these markets to
develop, or our failure to increase sales to customers outside of the U.S.,
could harm our results of operations and the price of our Common Stock.

THE ABILITY OF NORTEL NETWORKS TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
AFFAIRS COULD AFFECT OUR ABILITY TO IMPLEMENT SUCCESSFUL STRATEGIC AND
OPERATIONAL INITIATIVES.

We were formed by means of a contribution agreement among Nortel Networks
Corporation, its subsidiary Nortel Networks Inc., and us. Under this
agreement, we issued Nortel Networks Inc. 15,384,614 shares of our Common
Stock. Prior to the closing of our IPO on October 4, 2000, Nortel Networks
Inc. transferred 8,948,770 shares of our Common Stock, and a warrant for
51,230 shares of our Common Stock, to its parent, Nortel Networks Limited.
Nortel Networks Limited sold 1,000,000 shares of our Common Stock in the IPO
and on December 28, 2000, Nortel Networks Inc. reacquired 7,948,770 shares of
our Common Stock, and the warrant for 51,230 shares of our Common Stock, from
Nortel Networks Limited. Accordingly, Nortel Networks Inc. owns approximately
46%, or 14,435,845 shares, of our Common Stock, including the 51,230 shares
of our Common Stock that are issuable upon exercise of the warrant described
above. Messrs. Manley and Reid, appointed by Nortel Networks to our board of
directors, are executives of Nortel Networks. Because of its level of
ownership, and because of its board representation, Nortel Networks continues
to have the ability to exercise significant control over our affairs. There
also may be conflicts of interest between Nortel Networks and us with respect
to acquisitions, financings and other corporate opportunities. Nortel
Networks' ability to exercise significant control could have the effect of
delaying or preventing a change in control of Elastic Networks and other
strategic and operational initiatives, which could harm our business and the
price of our Common Stock.

AN INTERRUPTION OR DISSOLUTION OF ANY ONE OF OUR RELATIONSHIPS WITH NORTEL
NETWORKS COULD SIGNIFICANTLY HARM OUR BUSINESS AND FINANCIAL CONDITION.

We have entered into various agreements and relationships with Nortel
Networks, including a distribution arrangement under which they have agreed
to market and distribute our products. We cannot predict whether Nortel
Networks will continue to market and distribute our products or perform its
other obligations under this or our other agreements.

IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY, OR IF OTHERS USE OUR
INTELLECTUAL PROPERTY WITHOUT OUR PERMISSION, OUR COMPETITIVE POSITION MAY
SUFFER.

Our ability to compete and be successful is based, in part, on our
intellectual property. We rely on a combination of copyright, trademark,
patent and trade secret laws and


                                                                             22
<PAGE>

contractual restrictions to establish and protect our technology and other
intellectual property. We require employees and consultants and, when
possible, suppliers, manufacturers and distributors, to sign confidentiality
agreements. However, we cannot assure you that our steps will be sufficient
to prevent misappropriation of our technology and other intellectual
property, or that our competitors will not independently develop technologies
or other intellectual property that are substantially equivalent or superior
to ours. In addition, the laws of many countries do not protect intellectual
property to the same extent as the laws of the U.S. If our intellectual
property rights are not protected, our business may suffer. For instance, an
opposition to our registration of the trademark "YesWare" was filed on June
12, 2000. We are currently assessing this opposition to determine the effect,
if any, that this opposition may have if it is successful. If the opposition
succeeds, we will not be able to register this trademark and may be required
to rename our YesWare product or license the trademark from the opposing
party. If we have to bring a lawsuit against another entity that infringes or
misappropriates any of our intellectual property, we would likely have to
divert significant resources, both financial and human, in prosecuting the
lawsuit. We own U.S. patent number 5,912,895, titled "Information Network
Access Apparatus and Methods for Communicating Information Packets via
Telephone Lines." This patent issued on June 15, 1999 and expires on May 1,
2016. We also have exclusive and non-exclusive licenses from Nortel Networks
to other technologies that we use in our business. However, our rights to our
patent and to all of these licensed technologies are subject to various
licenses that Nortel Networks, as the original owner, granted to other
companies prior to May 12, 1999. Therefore, we cannot assure you that our
rights to these technologies will allow us to prevent these companies and
their licensees from using these technologies.

In addition, we have granted back to Nortel Networks licenses to these
technologies and to all improvements that we may acquire or make to these
technologies. We have also granted Nortel Networks a license to any patents
that we own, acquire, or result from our filing applications or from
obtaining a license, during any period that Nortel Networks owns more than
50% of our voting securities. Although these licenses are subject to Nortel
Networks' obligation not to compete with us with respect to EtherLoop based
products through May 12, 2002, there will be no contractual restrictions on
Nortel Networks' ability to engage in competitive activities with respect to
EtherLoop based products after that date.

Also, from time to time, we may desire or be required to obtain or renew
licenses from other parties in order to further develop and market
commercially viable products and for other business purposes. There can be no
assurance that the necessary licenses will be available upon acceptable
terms, if at all. Our failure to obtain these licenses, or to protect and
prevent the misappropriation of our intellectual property, could
significantly harm our competitive position.


                                                                             23
<PAGE>

DUE TO THE INTEGRATION OF OUR INTELLECTUAL PROPERTY WITH THIRD-PARTY
TECHNOLOGIES IN OUR PRODUCT OFFERINGS, WE MAY BE SUBJECT TO INTELLECTUAL
PROPERTY INFRINGEMENT CLAIMS THAT WOULD BE COSTLY TO DEFEND AND COULD HARM
OUR BUSINESS AND ABILITY TO COMPETE.

Because our products integrate our intellectual property and third party
technologies, we may be subject to the risk of adverse claims and litigation
alleging that our products, technologies and other intellectual property, as
well as those of our licensors, infringe the intellectual property rights of
others. Any of these claims could require us to pay damages or settlement
amounts and could require us to develop non-infringing intellectual property
or acquire licenses to the intellectual property that is the subject of
asserted infringement claims. This could result in product delays or
increased costs, either of which could harm our ability to compete and our
profitability. In addition, the cost of defending any litigation and
resulting distraction of our management resources could harm our ability to
generate and implement successful business strategies.

WE BELIEVE THAT SIGNIFICANT EXPANSION OF OUR BUSINESS WILL BE REQUIRED FOR
OUR COMPANY TO SUCCEED, AND IF WE FAIL TO MANAGE THIS EXPANSION EFFECTIVELY,
OUR BUSINESS AND STOCK PRICE WILL SUFFER.

We have rapidly and significantly expanded our operations since 1998. We
believe that further significant expansion will be required to address
potential growth in our client base and market opportunities in order for us
to be successful. From May 13, 1999 to April 30, 2001, we increased the
number of employees from 58 to 152. To manage the expected growth of our
operations and personnel, we will be required to:

    - improve existing and implement new operational, financial and management
      controls, reporting systems and procedures;

    - install new management information systems;

    - successfully integrate any companies, technologies or products that we may
      acquire; and

    - train, motivate and manage our sales and marketing, engineering, technical
      and customer support employees.

If we are not able to manage our growth and its related costs effectively, it
will be difficult to support our future operations.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH COULD ADVERSELY
AFFECT OUR STOCKHOLDERS; IF WE ARE UNABLE TO SECURE ADEQUATE FUNDS ON TERMS
ACCEPTABLE TO US, WE MAY BE UNABLE TO EXECUTE OUR BUSINESS PLAN.

If our existing cash balances and cash flows from operations are not
sufficient to meet our liquidity needs, we will need to raise additional
funds. If additional funds are raised


                                                                             24
<PAGE>

through the issuance of equity securities, the percentage ownership of
pre-existing stockholders will be reduced. If additional funds are raised
through the issuance of debt or preferred equity securities, these securities
would have rights, preferences and privileges senior to those of the Common
Stock. Furthermore, the terms of any debt could impose restrictions on our
operations. If adequate funds are not available on acceptable terms, or are
not available at all, we may not be able to take advantage of market
opportunities, develop new products or otherwise respond to competitive
pressures.

DUE TO A HIGH LEVEL OF STOCK OWNERSHIP, MANAGEMENT AND SOME OF OUR
STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS AFFAIRS,
WHICH COULD NEGATIVELY IMPACT OUR OTHER STOCKHOLDERS' POTENTIAL RETURN ON
INVESTMENT.

Our executive officers, directors and 5% or greater stockholders, and their
affiliates, currently own an aggregate of approximately 66% of our
outstanding common stock. These stockholders, if acting together, could
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration of ownership may have the effect of
delaying, deterring or preventing a change in control of Elastic Networks,
which could prevent our stockholders from receiving a premium for their
common stock as part of any merger or other business combination.

OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.

Our certificate of incorporation and bylaws provide for a classified board of
directors and restrict our stockholders from acting without a meeting. These
provisions may make some corporate actions more difficult and might delay or
prevent a change in control. Further, our board of directors has the ability
to issue up to 25.0 million shares of preferred stock with certain rights,
preferences, privileges and restrictions, including voting rights, that could
be senior to those of our Common Stock. New preferred stock might also be
used to make acquiring control of us more difficult. We will also indemnify
officers and directors against losses incurred in legal proceedings to the
broadest extent permitted by Delaware law.

OUR MARKET IS SUBJECT TO RAPID CHANGES IN INDUSTRY STANDARDS AND TECHNOLOGY,
AND IF WE FAIL TO CONTINUALLY MAKE NEW PRODUCT INTRODUCTIONS AND
ENHANCEMENTS, OUR ABILITY TO EFFECTIVELY COMPETE WILL SUFFER.

The market for high-speed access products is characterized by rapid
technological developments, frequent enhancements to existing products, new
product introductions, changes in end user requirements and evolving industry
standards. Any technological advancements, whether in DSL or otherwise, or
product introductions that provide faster


                                                                             25
<PAGE>

access, greater reliability, increased cost-effectiveness or other advantages
over our technology, could render our product line obsolete. We cannot assure
you that we will be able to respond quickly and effectively to any of these
changes or challenges. Moreover, in order to respond quickly and effectively
to all of these changes and challenges, we must continually make investments
in the development of new technologies and the further advancement of our
current technologies. However, the nature and quantity of these investments
cannot be definitively predicted, and we may not have sufficient resources to
make these investments.

Even if we are able to make the necessary investments, the development of new
or enhanced products or technologies is a complex and uncertain process
requiring the accurate anticipation of technological and market trends. We
may experience design, manufacturing, marketing and other difficulties that
could delay or prevent our development, introduction or marketing of new or
enhanced products or technologies. The introduction of new or enhanced
products or technologies also requires that we manage the transition from
older products or technologies in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. We may not be able to
successfully develop or introduce, or manage the transition to, these new
products. Furthermore, despite testing by our contract manufacturers and us,
any of these new or enhanced products or technologies may contain undetected
or unresolved errors when they are first introduced or as new versions are
released.

To the extent that we are unable to effectively address these technological
changes and challenges, our business, financial condition, results of
operations and the price of our Common Stock could be harmed.

OUR MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS, TECHNOLOGY AND BUSINESS
MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.

The market for high-speed access products is highly competitive, and we
expect that it will become increasingly competitive in the future. In
addition to facing competition from providers of DSL based products, our
products currently compete with products using other technologies. Our most
direct competitors include Alcatel USA, Inc., Cisco Systems, Inc., Copper
Mountain Networks, Inc., Lucent Technologies Inc., Nokia Corporation, Nortel
Networks and Tut Systems, Inc. In addition, due to the rapidly evolving
nature of the market in which we compete, additional competitors, including
other large telecommunications equipment manufacturers, as well as smaller
companies, may enter our markets and further intensify competition. These and
our other competitors may foresee the course of market developments more
accurately than we do.

In addition, many of our current and potential competitors have significantly
greater sales and marketing, technical, manufacturing, and financial and
other resources than we do, such as AT&T and AOL/Time Warner in the cable
broadband market. The products and


                                                                             26
<PAGE>

technologies offered by these competitors may provide faster access and
higher reliability than ours, and prove more cost-effective for some end
users.

Commercial acceptance of any one of these competing solutions could decrease
the demand for our products, result in our loss of market share and reduce
average selling prices and the profit margins associated with our products.

OUR COMPANY, OUR PRODUCTS AND OUR CUSTOMERS ARE SUBJECT TO GOVERNMENT
REGULATIONS, AND CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS THAT COULD
NEGATIVELY IMPACT OUR PRODUCTS, OUR CUSTOMERS OR US COULD HARM OUR BUSINESS.

The Federal Communications Commission ("FCC") regulates the
telecommunications industry, including our company, our products and our
customers. The adoption of new FCC regulations affecting the broadband access
industry, our customers or our products may harm our business. For example,
FCC policies that affect the availability of data and Internet services may
impede our customers' penetration into certain markets or affect the prices
they charge. In turn, this may reduce their orders for our products.

In addition, international regulatory bodies are beginning to adopt
regulations and standards for the communications industry. These regulations
and standards may require us to make engineering or functional changes to our
products, or changes to our marketing and selling practices. Delays caused by
changes in our products or practices undertaken to comply with state,
national and international regulatory requirements may result in order
cancellations or postponements of product purchases by our customers, which
could harm our sales and our reputation.


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<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Under the Company's current policies, it does not use interest rate
derivatives, foreign currency exchange rate derivatives, commodity prices
derivatives, equity derivatives, or any other derivatives, for trading or any
other purposes. As of March 31, 2001, no debt instruments of the company were
outstanding, and its investments in financial instruments were limited to
investing its excess cash in various investment-grade commercial paper, money
market accounts, and debt instruments of the U.S. Treasury, government
agencies, and corporations with strong credit ratings, generally with
original maturity dates from dates of purchase of three months or less. The
Company's investments in such financial instruments are exposed to financial
market risk due to fluctuations in interest rates and foreign currency
exchange rates.

At March 31, 2001, the fair market value of the Company's investments in
those of such financial instruments that were exposed to financial market
risk due to fluctuations in foreign currency exchange rates was not material.
At March 31, 2001, the fair market value of the Company's investments in
those of such financial instruments that were exposed to financial market
risk due to fluctuations in interest rates totaled, in the aggregate, $55.3
million. However, due to the short-term nature of its investment portfolio,
the Company does not expect that a sudden change in market interest rates
would materially affect the future earnings, fair values, or cash flows of
interest-sensitive financial instruments. For example, a hypothetical 100
basis point adverse move in interest rates, which represents the company's
expectation for a reasonably possible near-term change in such rates, would
result in an annual reduction in interest income and cash flow of
approximately $553,000, which the company considers to be immaterial.

A significant portion of the Company's revenues is derived from sales shipped
internationally. Currently, all of the Company's sales shipped
internationally are denominated in U.S. dollars. If the value of the U.S.
dollar increases relative to a particular foreign currency, the Company's
products could become relatively more expensive, which could result in a
reduction in the Company's sales in a particular country.


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<PAGE>

PART II - OTHER INFORMATION

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.

(d)         USE OF PROCEEDS.

During the period commencing on September 28, 2000 (the effective date of the
Company's Registration Statement on Form S-1, as amended (Registration No.
333-40500)) and ended March 31, 2001, the Company used approximately $1.4
million of the IPO proceeds (net of expenses and commissions) to fund the
expansion of its business, approximately $28.5 million to fund its
anticipated operating deficits and approximately $2.8 million for other
working capital needs and general corporate purposes.

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<PAGE>


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

         No matters were submitted to a vote of security holders during the
quarter ended March 31, 2001.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a) Exhibits.

         (3)(i)   Second Amended and Restated Certificate of Incorporation of
                  the Company is incorporated herein by reference to Exhibit
                  3(i) of the Company's Annual Report on Form 10-K for the year
                  ended December 31, 2000 filed with the SEC on March 29, 2001.

             (ii) Amended and Restated Bylaws of the Company are incorporated
                  herein by reference to Exhibit 3(ii) of the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000 filed
                  with the SEC on March 29, 2001.

         (4)      Specimen Stock Certificate of the Company is incorporated
                  herein by reference to Exhibit 4.1 of the Company's
                  Registration Statement on Form S-1 (Registration No.
                  333-40500) initially filed with the SEC on June 29, 2000, as
                  amended and declared effective as of September 28, 2000.

         (b) Reports on Form 8-K.

         No reports on Form 8-K were filed or were required to be filed during
         the quarter ended March 31, 2001.


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<PAGE>

                                   SIGNATURES

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

                                    ELASTIC NETWORKS INC.
                                        (Registrant)



Date:  May 15, 2001                 /s/ Guy D. Gill
                                    -----------------------------
                                    Guy D. Gill
                                    Chairman of the Board of Directors,
                                    Chief Executive Officer and President
                                    (principal executive officer)

Date:  May 15, 2001                 /s/ Kevin D. Elop
                                    -----------------------------
                                    Kevin D. Elop
                                    Chief Financial Officer, Secretary and
                                    Treasurer
                                    (principal financial and accounting officer)



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