# **UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM10-Q**

 

**(Mark One)**

** **

ý           **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2001**

 

## **OR**

 

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 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)

 

| **Delaware**                                                    |   | **58-2418576**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  Employer   Identification No.) |
|                                                            |   |                                    |
| **6120  Windward Parkway, Suite 100, Alpharetta, Georgia**      |   | **30005**                               |
| (Address  of principal executive offices)                       |   | (Zip  Code)                             |
|                                                            |   |                                    |
| **(678) 297-3100**                                              |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý   No  o

 

Elastic Networks Inc. had31,524,351 shares of its $.01 par value common stock outstanding as of November1, 2001.

 

 
| PART I     | FINANCIAL INFORMATION |
|------------|-----------------------|
|       |                  |   |
|       | Item 1.               | Condensed  Financial Statements |
|       |                  |   |
|       |                  | Condensed  Balance Sheets as of |
|       |                  | September  30, 2001 and December 31, 2000 |
|       |                  |   |
|       |                  | Condensed  Statements of Operations for the Three and Nine |
|       |                  | Months Ended  September 30, 2001 and 2000 |
|       |                  |   |
|       |                  | Condensed  Statement of Stockholders’ Equity |
|       |                  | For the  Nine Months Ended September 30, 2001 |
|       |                  |   |
|       |                  | Condensed  Statements of Cash Flows for the |
|       |                  | Nine Months Ended  September 30, 2001 and 2000 |
|       |                  |   |
|       |                  | Notes to  Condensed Financial Statements |
|       |                  |   |
|       | Item  2.              | Management’s  Discussion and Analysis of Financial |
|       |                  | Condition  and Results of Operations |
|       |                  |   |
|       |                  | Risk Factors |
|       |                  |   |
|       | Item  3.              | Quantitative  and Qualitative Disclosures About Market Risk |
|       |                  |   |
| PART II    | OTHER INFORMATION     |
|       |                  |   |
|       | Item  2.              | Changes  in Securities and Use of Proceeds |
|       |                  |   |
|       | Item 5.               | Other Information |
|       |                  |   |
|       | Item 6.               | Exhibits  and Reports on Form 8-K |
|       |                  |   |
| SIGNATURES |

 

**PART I -- FINANCIAL INFORMATION**

**ITEM 1.  CONDENSEDFINANCIAL STATEMENTS.**

 

**ELASTICNETWORKS INC.**

# **Condensed Balance Sheets**

**(in thousands, except share data)**

**(unaudited)**

 
|                                                                                                                                                                 |   | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|------------------|------------|
|                                                                                                                                                                 |   | **2001**          |       | **2000**         | ** ** |
| **Assets**                                                                                                                                                           |   |              |       |             |       |
| Current assets:                                                                                                                                                      |   |              |       |             |       |
| Cash and cash equivalents                                                                                                                                            |   | $                 | 17,112     |             | $          | 48,195 |   |
| Short-term investments                                                                                                                                               |   | 10,176            |       | 20,396           |       |
| Restricted cash                                                                                                                                                      |   | 5,000             |       | -                |       |
| Accounts receivable, net of allowance for doubtful  accounts of $396 and $90                                                                                         |   | 1,967             |       | 8,068            |       |
| Inventories                                                                                                                                                          |   | 5,988             |       | 6,467            |       |
| Note receivable                                                                                                                                                      |   | -                 |       | 2,951            |       |
| Other current assets                                                                                                                                                 |   | 941               |       | 1,799            |       |
| Total current assets                                                                                                                                                 |   | 41,184            |       | 87,876           |       |
| Property and equipment, net                                                                                                                                          |   | 3,405             |       | 3,375            |       |
| Other assets                                                                                                                                                         |   | 102               |       | 102              |       |
| Total assets                                                                                                                                                         |   | $                 | 44,691     |             | $          | 91,353 |   |
|                                                                                                                                                                 |   |              |       |             |       |   |   |
| **Liabilities  and Stockholders' Equity**                                                                                                                            |   |              | ** ** |             | ** ** |
| Current liabilities:                                                                                                                                                 |   |              |       |             |       |
| Accounts payable                                                                                                                                                     |   | $                 | 6,336      |             | $          | 10,891 |   |
| Accrued liabilities                                                                                                                                                  |   | 8,891             |       | 2,341            |       |
| Deferred revenues                                                                                                                                                    |   | 796               |       | 926              |       |
| Capital lease obligations                                                                                                                                            |   | 231               |       | 216              |       |
| Total current liabilities                                                                                                                                            |   | 16,254            |       | 14,374           |       |
| Deferred revenues, long-term                                                                                                                                         |   | 153               |       | 712              |       |
| Capital lease obligations, long-term                                                                                                                                 |   | 134               |       | 305              |       |
| 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, 31,524,351 and  31,329,470 shares issued and outstanding at September 30, 2001 and December  31, 2000 |   | 315               |       | 313              |       |
| Additional  paid-in capital                                                                                                                                          |   | 131,689           |       | 129,802          |       |
| Deferred stock  compensation                                                                                                                                         |   | (905              | )          | (2,978           | )          |
| Accumulated deficit                                                                                                                                                  |   | (102,949          | )          | (51,175          | )          |
| Total  stockholders’ equity                                                                                                                                     |   | 28,150            |       | 75,962           |       |
| Total liabilities and stockholders’ equity                                                                                                                      |   | $                 | 44,691     |             | $          | 91,353 |   |
|                                                                                                                                                                      |        |                   |            |                  |            |  |  |  |

 

*The accompanying notes are an integral part of thesecondensed financial statements.*

* *

**ELASTIC NETWORKS INC.**

**Condensed Statements of Operations**

**(in thousands, except per share data)**

**(unaudited)**

* *
|                                                                                         |   | **Three  Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                                                         |   | **2001**                              |    | **2000**                            |   | **2001** |   | **2000** |   |
| Net revenues                                                                                 |   | $                                     | 5,825   |                                | $      | 11,204 |   | $ | 19,468 |   | $ | 25,897 |   |
| Cost of revenues                                                                             |   | 4,627                                 |    | 10,062                              |   | 16,964 |   | 24,193 |   |
| Charges related  to excess inventory on hand  and on order and restructuring charges    |   | 12,145                                |    | -                                   |   | 23,998 |   | - |   |
| Gross profit  (loss)                                                                         |   | (10,947                               | )       | 1,142                               |   | (21,494 | ) | 1,704 |   |
| Operating  expenses (1)                                                                      |   |                                  |    |                                |   |   |   |   |   |
| Sales and  marketing                                                                         |   | 2,864                                 |    | 3,882                               |   | 9,895 |   | 10,123 |   |
| Research and  development                                                                    |   | 3,017                                 |    | 2,956                               |   | 9,545 |   | 8,385 |   |
| General and  administrative                                                                  |   | 3,575                                 |    | 2,492                               |   | 12,478 |   | 4,696 |   |
| Total operating  expenses                                                                    |   | 9,456                                 |    | 9,330                               |   | 31,918 |   | 23,204 |   |
| Operating loss                                                                               |   | (20,403                               | )       | (8,188                              | )      | (53,412 | ) | (21,500 | ) |
| Other income  (expense), net                                                                 |   | 198                                   |    | (904                                | )      | 1,638 |   | (851 | ) |
| Net loss                                                                                     |   | (20,205                               | )       | (9,092                              | )      | (51,774 | ) | (22,351 | ) |
| Accretion of  Series A preferred stock                                                       |   | -                                     |    | (133                                | )      | - |   | (399 | ) |
| Net loss  attributed to common stockholders                                                  |   | $                                     | (20,205 | )                                   | $      | (9,225 | ) | $ | (51,774 | ) | $ | (22,750 | ) |
| Basic and  diluted net loss per common share                                                 |   | $                                     | (0.64   | )                                   | $      | (0.55 | ) | $ | (1.65 | ) | $ | (1.36 | ) |
| Weighted average  shares used in computing basic and diluted net loss per common  share |   | 31,523                                |    | 16,691                              |   | 31,460 |   | 16,680 |   |
|                                                                                              |        |                                       |         |                                     |        |  |  |  |  |  |  |  |  |  |

 

----

(1)   Includes $1.8 million of restructuringcharges for the three months ended September 30, 2001 and $3.9 million ofrestructuring charges and additional accruals for uncollectible accounts forthe nine months ended September 30, 2001. Includes $1.3 million, $1.2 million, $3.6 million, and $2.0 million ofnon-cash stock based compensation expenses for the three months ended September30, 2001 and 2000 and the nine months ended September 30, 2001 and 2000,respectively.

 

*The accompanying notes are an integral part of thesecondensed financial statements.*

* *

**ELASTIC NETWORKS INC.**

**CondensedStatement of Stockholders' Equity**

**(inthousands, except share data)**

**(unaudited)**

 
|                                                              |   |             |       |        |       | **Additional** |       | **Deferred**     |       |              |       | **Total**  |       |
|-------------------------------------------------------------------|--------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------|------------|
|                                                              |   | **Common Stock** | ** ** | **Paid-In** | ** ** | **Stock**      | ** ** | **Accumulated**  | ** ** | **Stockholders'** | ** ** |
|                                                              |   | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**       | ** ** | **Equity** | ** ** |
| **Balance  at December 31, 2000**                                 |   | 31,329,470       |       | $           | 313        |           | $          | 129,802          |       | $                 | (2,978     | )          | $          | (51,175 | ) | $ | 75,962 |   |
| Net loss                                                          |   | -                |       | -           |       | -              |       | -                |       | (51,774           | )          | (51,774    | )          |
| Employee stock  options exercised                                 |   | 156,540          |       | 1           |       | 323            |       | -                |       | -                 |       | 324        |       |
| Deferred stock  compensation                                      |   | -                |       | -           |       | (1,605         | )          | 1,605            |       | -                 |       | -          |       |
| Amortization of  deferred stock compensation                      |   | -                |       | -           |       | -              |       | 393              |       | -                 |       | 393        |       |
| Employee  purchases of stock through Employee Stock Purchase Plan |   | 38,341           |       | 1           |       | 59             |       | -                |       | -                 |       | 60         |       |
| Nortel Networks  options payout                                   |   | -                |       | -           |       | 3,322          |       | -                |       | -                 |       | 3,322      |       |
| Other                                                             |   | -                |       | -           |       | (212           | )          | 75               |       | -                 |       | (137       | )          |
| **Balance  at September 30, 2001**                                |   | 31,524,351       |       | $           | 315        |           | $          | 131,689          |       | $                 | (905       | )          | $          | (102,949 | ) | $ | 28,150 |   |
|                                                                   |        |                  |            |             |            |                |            |                  |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*The accompanying notes are an integral part of thesecondensed financial statements.*

* *

**ELASTIC NETWORKS INC.**

# **Condensed Statements of Cash Flows**

**(in thousands)**

**(unaudited)**

 
|                                                                                                            |   | **Nine  Months Ended September 30,** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                                            |   | **2001**                             |    | **2000** | ** ** |
| Cash flows from  operating activities:                                                                          |   |                                 |    |   |   |
| Net loss                                                                                                        |   | $                                    | (51,774 | ) | $ | (22,351 | ) |
| 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 |   | 27,662                               |    | - |   |
| Depreciation and  amortization                                                                                  |   | 1,409                                |    | 562 |   |
| Amortization of  deferred stock compensation                                                                    |   | 145                                  |    | 451 |   |
| Nortel Networks  options payout                                                                                 |   | 3,322                                |    | - |   |
| Issuance of  common stock options and warrants                                                                  |   | 140                                  |    | 2,210 |   |
| Changes in  assets and liabilities:                                                                             |   |                                 |    |   |   |
| Restricted cash                                                                                                 |   | (5,000                               | )       | - |   |
| Accounts  receivable                                                                                            |   | 6,101                                |    | (2,111 | ) |
| Note receivable                                                                                                 |   | 870                                  |    | - |   |
| Inventories                                                                                                     |   | (16,560                              | )       | (5,111 | ) |
| Accounts payable                                                                                                |   | (4,555                               | )       | 4,208 |   |
| Accrued  liabilities                                                                                            |   | (1,508                               | )       | 761 |   |
| Other                                                                                                           |   | 179                                  |    | (1,282 | ) |
| Net cash used in  operating activities                                                                          |   | (39,569                              | )       | (22,663 | ) |
| Cash flows from  investing activities:                                                                          |   |                                 |    |   |   |
| Purchases of  property and equipment                                                                            |   | (1,924                               | )       | (2,065 | ) |
| Proceeds from  sale of short-term investments                                                                   |   | 20,396                               |    | 67,077 |   |
| Purchases of  short-term investments                                                                            |   | (10,176                              | )       | (65,327 | ) |
| Net cash  provided by (used in) investing activities                                                            |   | 8,296                                |    | (315 | ) |
| Cash flows from  financing activities:                                                                          |   |                                 |    |   |   |
| Cash proceeds from issuance of common and preferred stock                                                       |   | 60                                   |    | 20,903 |   |
| Borrowings under stockholder lines of credit                                                                    |   | -                                    |    | 6,000 |   |
| Payment of note  receivable attributable to Series A preferred shares issuance                                  |   | -                                    |    | 1,994 |   |
| Other                                                                                                           |   | 130                                  |    | (62 | ) |
| Net cash  provided by financing activities                                                                      |   | 190                                  |    | 28,835 |   |
| Net increase  (decrease) in cash and cash equivalents                                                           |   | (31,083                              | )       | 5,857 |   |
| Cash and cash  equivalents, beginning of period                                                                 |   | 48,195                               |    | 3,863 |   |
| Cash and cash  equivalents, end of period                                                                       |   | $                                    | 17,112  |   | $ | 9,720 |   |
| Supplemental  schedule of investing and financing activities:                                                   |   |                                 |    |   |   |
| Cash paid during  the period for interest                                                                       |   | $                                    | 53      |   | $ | 73 |   |
| Issuance of  stock options and warrants for consulting services                                                 |   | $                                    | -       |   | $ | 2,211 |   |
| Capital lease  additions                                                                                        |   | $                                    | -       |   | $ | 466 |   |
|                                                                                                                 |        |                                      |         |  |  |  |  |  |

 

*Theaccompanying notes are an integral part of these condensed financialstatements.*

* *

**ELASTIC NETWORKS INC.**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(inthousands, except share and per share data)**

**(unaudited)**

 

## **NOTE 1.  BASIS OF PREPARATION**

 

The accompanying condensedfinancial statements included herein have been prepared by Elastic NetworksInc. (the “Company”) without audit, in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”).  Footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americafor complete financial statements have been condensed or omitted pursuant tosuch rules and regulations.

 

This quarterly report and the accompanying condensed financial statements should be read in conjunction withthe Company's audited financial statements and notes thereto presented in itsAnnual 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 theCompany’s audited financial statements for the year ended December 31, 2000contained in the 2000 Annual Report, have been omitted.

 

In the opinion ofmanagement, the condensed financial statements included herein contain all adjustments(consisting of normal recurring adjustments) necessary to present fairly thefinancial position of the Company as of September 30, 2001 and the results ofoperations for the three and nine months ended September 30, 2001 and 2000 andcash flows for the nine months ended September 30, 2001 and 2000.  Operating results for the three and ninemonths ended September 30, 2001 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2001.

 

## **NOTE2.  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

## ** **

## **REVENUERECOGNITION**

 

The Company generallyrecognizes revenues upon shipment depending on contract terms and conditions ifcollectibility is reasonably assured, pricing is fixed and determinable, andreturns are reasonably estimated.  Norevenues are recognized on products shipped on a trial basis until products arefully accepted by the customer. Estimated sales returns, based on historical experience by product, arerecorded at the time the product revenues are recognized.  Certain technology license revenues arerecognized ratably over the term of the related agreement (see note 12 in theCompany’s 2000 Annual Report).

 

Consulting services,principally, installation and training revenues are recognized as the servicesare completed.  These services aretypically performed under separate service agreements and are usually performedon a time and material basis.  Suchservices primarily consist of implementation services related to theinstallation and deployment of the Company’s products.

 

Revenues are generally recognized uponshipment of the equipment.  In othertransactions where the Company holds the inventory but invoices the customer,the Company recognizes revenues when the following conditions are met: theequipment is complete, ready for shipment and segregated from other inventory;the Company has no further significant performance obligations in connectionwith the completion of the transaction; the commitment and delivery schedule isfixed; the customer requested the transaction be completed on this basis; andthe risks of ownership have passed to the customer.  There were no revenues recognized from these transactions for thethree months or nine months ended September 30, 2001 and 2000.  Accounts receivable relating to thesetransactions of $0.0 and $1.2 million was included in total accounts receivableat September 30, 2001 and December 31, 2000, respectively.

** **

## **NET LOSS PER COMMON SHARE**

 

Basic and diluted net loss per common share are presented inconformity with Statement of Financial Accounting Standards (“SFAS”) No. 128, *Earnings Per Share*, for all periodspresented.  Basic and diluted net lossper common share were computed on the basis of weighted-average sharesoutstanding.

 

For all periods presented, dilutive securities included options,warrants and contingent stock related to Series A and B redeemable convertibleparticipating preferred stock. Potentially dilutive securities totaling 125,618and 3,626,327 for the quarters ended September 30, 2001 and 2000 and 547,569and 2,853,696 for the nine months ended September 30, 2001 and 2000,respectively were excluded from historical diluted net loss per common sharebecause of their anti-dilutive effect.

 

## **RECENT PRONOUNCEMENTS**

 

In October 2001, the Financial AccountingStandards Board ("FASB") issued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*which supersedes SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of* and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, *Reportingthe Results of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions*for the disposal of a segment of a business. SFAS 144 retains many of the fundamental provisions of SFAS 121, butresolves certain implementation issues associated with that Statement.  SFAS 144 will be effective for the Companybeginning January 1, 2002.  The Companyis in the process of evaluating the effects of this new statement.

 

In July 2001,the FASB issued SFAS No. 141, *BusinessCombinations*.  This statementsupersedes APB Opinion No. 16, *BusinessCombinations*and FASB Statement No. 38, *Accounting for Preacquisition Contingencies of Purchased Enterprises*.  It revises the standards for accountingtreatment for business combinations by requiring the use of purchase accountingand prohibiting the use of the pooling-of-interests method for all businesscombinations initiated after June 30, 2001. To date, the Company has not entered into any business combinations thatwould be subject to this statement. Accordingly, the adoption of SFAS No. 141 did not have any impact on thefinancial reporting and related disclosures of the Company.

 

In July 2001,the FASB issued SFAS No. 142, *Goodwill andOther Intangible Assets*. This statement supersedes APB Opinion No. 17, *Accounting for Intangible Assets*.  It revises the standards for accounting for goodwill and otherintangible assets by not allowing amortization of goodwill and establishingaccounting for impairment of goodwill and other intangible assets.  In addition, the standard includesprovisions for reclassification of certain existing recognized intangibles asgoodwill, reassessment of the useful lives of existing recognized intangibles,reclassification of certain intangibles out of previously reported goodwill andthe identification of reporting units for purposes of assessing potentialfuture impairments of goodwill.  SFAS142 is required to be applied starting with fiscal years beginning afterDecember 15, 2001.  To date, the Companyhas not entered into any business combinations and has no goodwill orintangible assets that would be subject to this statement.  Accordingly, the adoption of SFAS No. 142should not have any impact on the financial reporting and related disclosuresof the Company.

 

In June 1998, the FASB issued SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, which established accounting and reporting standards forderivative instruments and hedging activities. It requires an entity to measureall derivatives at fair value and to recognize them in the balance sheet as anasset or liability, depending on the entity's rights or obligations under theapplicable derivative contract. In June 1999, the FASB issued SFAS No. 137, *Accounting for Derivative Instruments and HedgingActivities Deferral of the effective date of FASB Statement No. 133*,which deferred the effective date of SFAS No. 133 until fiscal quarters of allfiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities*, which amends the accounting and reporting standards ofSFAS No. 133 for certain derivative instruments and certain hedgingactivities.  The Company, to date, hasnot engaged in derivative or hedging activities, and accordingly the adoptionof SFAS No. 133 on January 1, 2001 did not have any impact on the balance sheetof the Company.

 

## **RECLASSIFICATIONS**

 

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

 

## **RESTRICTED CASH**

 

During the quarter ended September 30, 2001,the Company entered into an agreement with one of its contract manufacturersrelating to the manufacturing of finished products and procurement of componentparts required in the manufacturing process. As part of these agreements, the Company established $5.0 million ofcash in restricted, interest-bearing accounts until June 1, 2002.

 

**NOTE3.  INVENTORIES**

 

Inventories, net of allowances, consist of the following:

 

|           |   | **September  30,** |   | **December  31,** |       |
|----------------|--------|--------------------|--------|-------------------|------------|
|           |   | **2001**           |   | **2000**          | ** ** |
| Raw materials  |   | $                  | 899    |              | $          | 512 |   |
| Finished goods |   | 5,089              |   | 5,955             |       |
| Total          |   | $                  | 5,988  |              | $          | 6,467 |   |

 

The allowances for inventories,primarily for excess and obsolescence, were $20.4 million at September 30,2001.  The allowances for inventorieswere $1.7 million at December 31, 2000.

 

**NOTE 4.  SEGMENTINFORMATION**

 

TheCompany operates in one reportable business segment, to develop technology andproducts to provide high-speed access over copper wire infrastructure.

 

*GEOGRAPHIC INFORMATION*

 

TheCompany's headquarters and its operations are located in the U.S.  The Company’s research and developmentactivities are conducted in the U.S. The Company conducts its sales, marketing and customer serviceactivities throughout the world including the Company’s international officelocated in Hong Kong, China.  Geographiclong-lived assets information is based on the physical location of the assetsat the end of each period. Geographic revenue information is based on thelocation of the end customer. Identifiable long-lived assets (principally property and equipment) bygeographic areas:

 
|                     |   | **September 30,** |   | **December 31,** |   |
|--------------------------|--------|-------------------|--------|------------------|--------|
|                     |   | **2001**          |   | **2000**         |   |
| Long-lived assets - U.S. |   | $                 | 3,405  |             | $      | 3,375 |   |
|                          |        |                   |        |                  |        |  |  |

 

Revenues by geographic region are as follows:

 
|           |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|----------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|           |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Revenues:      |   |                                  |   |                                 |   |   |   |   |   |
| U.S.           |   | $                                     | 5,340  |                                 | $      | 9,010 |   | $ | 17,304 |   | $ | 21,477 |   |
| Asia           |   | 89                                    |   | 1,846                                |   | 1,651 |   | 3,313 |   |
| Other          |   | 396                                   |   | 348                                  |   | 513 |   | 1,107 |   |
| Total Revenues |   | $                                     | 5,825  |                                 | $      | 11,204 |   | $ | 19,468 |   | $ | 25,897 |   |
|                |        |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***NOTE 5.  RELATED PARTY TRANSACTIONS***

* *

*The following tables summarize related partytransactions:*

*** ***
|                             |   | **September 30,** |   | **December 31,** |       |
|----------------------------------|--------|-------------------|--------|------------------|------------|
|                             |   | **2001**          |   | **2000**         | ** ** |
| Receivables from Nortel Networks |   | $                 | 879    |             | $          | 1,082 |   |
| Payables to Nortel Networks      |   | 386               |   | 360              |       |
|                                  |        |                   |        |                  |            |  |  |

*** ***
|                      |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                      |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** | ** ** |
| Sales to Nortel  Networks |   | $                                     | 3,787  |                                 | $      | 497 |   | $ | 13,214 |   | $ | 3,558 |   |
|                           |        |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |

* *

***NOTE 6.  EMPLOYEE STOCK PURCHASE PLAN***

* *

*In May 2001, the stockholders of the Companyapproved and adopted an Amended and Restated Employee Stock Purchase Plan underSection 423 of the Internal Revenue Code. Under this plan, employees are entitled to purchase shares at 85% of thelower market value on January 1 or June 30 for the first half of the plan yearand 85% of the lower market value on July 1 or December 31 for the second halfof the plan year.  During the quarterended September 30, 2001, the Company issued 38,341 shares of Common Stock at apurchase price of $1.57 per share pursuant to the Amended and Restated EmployeeStock Purchase Plan.*

* *

***NOTE 7.  ACCRUED LIABILITIES***

* *

*Accrued liabilities include accruals for excessinventory on order arising from arrangements with contract manufacturers for$5.2 million and $0.0 million at September 30, 2001 and December 31, 2000,respectively.  Other restructuringrelated accruals (see Note 8 – Restructuring Charges) for $1.0 million and $0.0million at September 30, 2001 and December 31, 2000, respectively, are alsoincluded in the total accrued liabilities for the periods presented.*

* *

***NOTE 8.  RESTRUCTURING CHARGES***

* *

*The Company recorded charges of $1.8 million and$0.0 million for the three month periods ended September 30, 2001 and 2000,respectively, and $1.9 million and $0.0 million for the nine month periodsended September 30, 2001 and 2000, respectively, related to facility consolidations,fixed asset write-offs, equipment lease write-offs, and workforce reductions asa result of changes in business conditions.*

* *

***ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.***

* *

**Forward-LookingStatements**

 

Certainof the statements contained in this Report are forward-looking statements(rather than historical facts) that are subject to risks and uncertainties thatcould 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 PrivateSecurities Litigation Reform Act of 1995. Additional information concerningthese risks and uncertainties is set forth in the section titled “Risk Factors”on page 17 of this Report.  Therisk factor discussion contained therein is intended to identify certain of theprincipal factors that could cause actual results to differ materially from thosedescribed in the forward-looking statements included herein.  It is not intended to represent a completelist of all risks and uncertainties inherent in the Company’s business.

 

Readersare also urged to carefully readand consider this Management’sDiscussion 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 inthe Company's Annual Report on Form-10K for the year ended December 31, 2000and other reports and filings made with the Securities and Exchange Commission (“SEC”).

 

**Overview**

 

TheCompany designs, develops and markets high-speed, broadband communicationsproducts which enable service providers to deliver easy to deploy andcost-effective broadband access solutions to their customers over the existingcopper telephone wire infrastructure. The Company designs products based on itspatented EtherLoop technology to deliver a next generation accesssolution.  EtherLoop’s advantages overcomemany of the deployment, performance, cost and quality of service limitations ofconventional Digital Subscriber Line (“DSL”) technologies.

 

TheCompany was formed in January 1997 as a division of Nortel Networks, andthrough mid 1999, its operating activities related primarily to developing itsEtherLoop technology and complementary software, building and testing prototypeproducts, building its technical support infrastructure, staffing its sales andmarketing organization and establishing relationships with its customers.  In mid 1999, the Company commenced shipmentof its commercial products and has continued making investments to grow itsbusiness.

 

TheCompany’s 2001 revenues have been generated principally from sales of its firstand second generation DSL access multiplexers (“DSLAMs”),which are known as BitStorm DSLAMs and which connect broadband modem signalswith the Internet, its StormPort broadband modem, and to a lesser extent, itscomplementary software.  Sales of theCompany’s Storm System family of products in the third quarter of 2001generated the majority of the Company’s revenues for the quarter.  Sales of the Company's IP DSLAMs, serversand broadband modems accounted, in the aggregate, for approximately 95% and 73%of total revenues for the quarters ended September 30, 2001 and 2000,respectively, and 90% and 81% of total revenues for the nine months endedSeptember 30, 2001 and 2000, respectively.

 

TheCompany follows a revenue diversification strategy consisting of focusing onthe carrier, Multi Tenant Unit(“MTU”) and international markets.  The Company targets its sales efforts tovarious categories of service providers operating in the market for high-speedaccess, both in the U.S. and internationally. To date, customer installationshave ranged from in-building applications, including hotels, apartmentbuildings and university campuses, to service providers’ central officelocations used to reach both business and residential users.

 

Aspart of its ongoing goal to achieve and increase profitability, the Companyclosed its Toronto, Canada office in July 2001.  The Hong Kong, China office remains a viable part of theCompany’s international operations and the Canadian customers are serviced fromthe U.S. location.  To date, theCompany’s international sales have been denominated in U.S. dollars and,accordingly, it has not been materiallyexposed to fluctuations in non-U.S. currency exchange rates.  In the future, a portion of itsinternational sales may be denominated in currencies other than U.S. dollars,which would expose the Company to gains and losses upon exchange ratefluctuations.

 

TheCompany’s negative gross margin for the quarter ended September 30, 2001 wasprimarily the result of the charges related to excess inventory on hand and onorder due to market demands requiring an accelerated migration to the 10Mbpsplatform and due to customer order cancellations and deferrals after theSeptember 11 terrorist attacks in the U.S. The Company’s gross margins are expected to improve in the future as theCompany lowers the cost of its existing products, continues to sell its StormSystem family of products and increases its licensing and chipset salerevenues.

 

Asof November 5, 2001, the Company employed 108 employees, which reflects adecrease of 81 employees from December 31, 2000 as a result of therestructuring of the Company’s employee base in March 2001 and July 2001.

 

Stock-basedcompensation reflected in the Company’s operating expenses includes theamortization of stock compensation charges resulting from the grant of stockoptions to employees with exercise or sales prices which may be deemed foraccounting purposes to be below the fair market value of the Company’s commonstock on the date of grant and compensation expense associated with the grantof stock options to non-employees. Deferred compensation amounts are amortized over the vesting periods ofthe applicable options, which are generally four years.  Thecompensation expense associated with options granted to non-employees isrecorded at the time services are provided.

 

Infulfillment of compensation arrangements between Nortel Networks and some ofthe Company’s employees relating to their prior employment with NortelNetworks, Nortel Networks has agreed to pay these employees, if they are stillworking for the Company at the time of payment, an aggregate of approximately$13.3 million in cash.  On October 21,2000, the employees received a payment from Nortel Networks of $8.9 million. Nortel Networksmade an additional payment of approximately $4.4 million on November 2,2001.  In connection with thesearrangements, the Company recorded compensation expense for the nine monthsended September 30, 2001 of $3.3 million. The Company recorded capital contributions from Nortel Networks inequivalent amounts.

 

## **RESULTS OFOPERATIONS**

 

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

 
|                                                                                |   | **Three Months**        |   | **Nine Months**         |   |
|-------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                                |   | **Ended September 30,** |   | **Ended September 30,** |   |
|                                                                                |   | **2001**                |   | **2000**                |   | **2001** |   | **2000** | ** ** |
| Total revenues                                                                      |   | 100                     | %      | 100                     | %      | 100 | % | 100 | % |
| Cost of revenues                                                                    |   | 79                      |   | 90                      |   | 87 |   | 93 |   |
| Charges related  to excess inventory on hand and on order and restructuring charges |   | 209                     |   | -                       |   | 123 |   | - |   |
| Gross profit (loss)                                                                 |   | (188                    | )      | 10                      |   | (110 | ) | 7 |   |
| Operating  expenses: (1)                                                            |   |                    |   |                    |   |   |   |   |   |
| Sales and  marketing                                                                |   | 49                      |   | 35                      |   | 51 |   | 39 |   |
| Research and  development                                                           |   | 52                      |   | 26                      |   | 49 |   | 33 |   |
| General and  administrative                                                         |   | 61                      |   | 22                      |   | 64 |   | 18 |   |
| Total operating  expenses                                                           |   | 162                     |   | 83                      |   | 164 |   | 90 |   |
| Operating loss                                                                      |   | (350                    | )      | (73                     | )      | (274 | ) | (83 | ) |
| Other income  (expense), net                                                        |   | 3                       |   | (8                      | )      | 8 |   | (3 | ) |
| Net loss                                                                            |   | (347                    | %)     | (81                     | %)     | (266 | %) | (86 | %) |

*** ***

----

***(1)  Includes non-cash stock based compensation expenses in 2001 and2000; includes restructuring charges in 2001; andincludes additional accruals for uncollectible accounts in 2001.***

*** ***

**THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001VS. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000**

 

**Total Revenues.**  Revenues decreased from $11.2 million in thequarter ended September 30, 2000 to $5.8 million in the same period for2001.  During the first ninemonths of 2001, the Company generated revenues of $19.5 million, a decrease of25% from the prior year’s same period amount of $25.9 million.  Thesedecreases were primarily due to continued weakening economic conditions thathave affected overall capital spending in the telecommunications industry.  The hospitality market was negativelyimpacted by the terrorist attacks which occurred on September 11, 2001,resulting in lower revenues due to orders and product shipments beingrescheduled or cancelled during the last weeks of the third quarter.  During the three months ended September 30,2001 and 2000, the Company generated revenues from international sales of  $0.5 and $2.2 million, respectively.  During the nine months ended September 30,2001 and 2000, the Company generated revenues from international sales of $2.2million and $4.4 million, respectively.

 

**GrossProfit (Loss).  **Gross profit decreasedfrom $1.1 million in the quarter ended September 30, 2000 to $(10.9) million inthe same period for 2001.  The Company’sgross profit decreased from a profit of $1.7 million for the nine months endedSeptember 30, 2000 to a loss of $21.5 million for the same period of 2001.  The decline in third quarter gross profitand year-to-date gross profit, in absolute dollars and as a percentage ofrevenues, was primarily the result of the charges related to excess inventoryon hand and on order in the amounts of $12.1 million taken during the thirdquarter of 2001 and $11.9 million taken during the first quarter of 2001.

 

**Sales And Marketing.  **Sales and marketing expenses decreased from $3.9 million in thequarter ended September 30, 2000 to $2.9 million in the same period for2001.  This decrease was primarily aresult of decreases in staffing for marketing, account management, customerproduct trials, and direct sales as a result of the Company’s overall costrestructuring efforts.  For thenine-month periods ended September 30, sales and marketing expenses decreasedfrom $10.1 million in 2000 to $9.9 million in 2001.  This decrease in sales and marketing expenses was the result ofthe Company's cost restructuring efforts offset by investments in internationaloperations.  Non-cash stock compensationexpense was $0.04 million and $0.06 million for the quarters ended September30, 2000 and 2001, respectively and $0.02 million and $0.1 million for thenine-month periods of 2000 and 2001, respectively.

 

**Research And Development. **Research and development expenses remained consistent at $3.0million in the quarters ended September 30, 2000 and 2001.  The increase from $8.4 million for the ninemonth period ended September 30, 2000 to $9.5 million for the same period in2001 was primarily a result of an increase in prototype costs and depreciationexpense related to lab equipment associated with ongoing technologicaldevelopment incurred during 2001. Non-cash stock compensation expense was $0.03 million and $0.08 millionfor the quarters ended September 30, 2000 and 2001, respectively and $0.7million and $0.1 million for the nine-month periods of 2000 and 2001,respectively.

** **

**GeneralAnd Administrative.**General and administrative expenses increased from $2.5 millionfor the quarter ended September 30, 2000 to $3.6 million in the same period for2001. This increase was primarily the result of increases in expendituresrelated to depreciation expense, office rent, and other facility-relatedexpenditures.  For the nine-monthperiods ended September 30, 2000 and 2001, general and administrative expensesincreased from $4.7 million to $12.5 million, respectively.  This increase was primarily the result of awrite-off of an uncollectible note receivable for $2.1 million in the firstquarter of 2001 and non-cash stock compensation expense of $3.3 million arisingfrom payouts from Nortel Networks related to compensation arrangements withcertain of our key executives.  Theremaining increases resulted fromincreased personnel related costs and increased expenditures on facilities,legal, accounting, information systems and consultingfees.

 

**Other Income (Expense), Net.**   Other income (expense), net increased from($0.9) million in the quarter ended September 30, 2000 to $0.2 million in thesame period for 2001, and increased from $0.9 million for the nine month periodended September 30, 2000 to $1.6 million in the same period for 2001,resulting, in each case, primarily from an increase in interest income.

## ** **

## **LIQUIDITY AND CAPITALRESOURCES**

 

On October 4, 2000, the Company completed its Initial PublicOffering (“IPO”) for the sale of 6.8 million shares of Common Stock at a priceto the public of $13.00 per share, which resulted in proceeds of $80.3 millionto the Company, net of aggregate expenses. Upon the closing of the IPO, allshares of the Company’s Series A and B redeemable convertible participatingpreferred stock were converted into an aggregate of 9.1 million shares ofCommon Stock.  At September 30, 2001,the Company had cash and cash equivalents, short-term investments andrestricted cash of $32.3 million.

 

Cash used in operating activities was $39.6 million for the ninemonths ended September 30, 2001 and $22.7 million for the same period of2000.  The increase in cash used foroperating activities was primarily due to increases in inventories and accounts payable and to fund net losses.  This increase waspartially offset by $27.7 million of non-cash charges related to excessinventory on hand and on order, the write-off of a note receivable, andrestructuring charges, and a decrease of $6.1 million in accounts receivable.

 

Cash provided by investing activities was $8.3 million for thenine months ended September 30, 2001 and cash used in investing activities was$0.3 million for the same period of 2000. The increase in cash provided byinvesting activities was primarily due to the sale of $20.4 million ofshort-term investments due to interest earnings potential in cash investmentsexceeding the short-term earnings rate during the nine months ended September30, 2001.  The increase was partially offsetby the utilization of $1.9 million for capital expenditures and $10.2 millionfor the purchase of short-term investments during the nine months endedSeptember 30, 2001.

 

Cash provided byfinancing activities was $0.2 million for the nine months ended September 30,2001 and $28.8 million for the same period of 2000. The decrease in cashprovided by financing activities was primarily due to $20.9 million in cashreceived during the quarter ended March 31, 2000 in connection with theissuance of Series B redeemable convertible participating preferred stock,which was not issued in 2001.

 

The Company’s future capital requirements will depend upon manyfactors, including sales of its products, the management of volume purchasecommitments with contract manufacturers, and the timing of research and productdevelopment efforts.  The Companyexpects to continue to expend amounts on property and equipment related to thefacility infrastructure, computer equipment, and for its research anddevelopment laboratory and testequipment to support on-going research and development operations. At September30, 2001, the Company had no material commitments other than obligations underits operating and capital leases and product manufacturing and purchaseagreements.  There are potentialadditional exposures from existing contract manufacturer commitments andinventory obsolescence, which may arise due to market fluctuations in thefuture.  The Company believes its cashand cash equivalents, restricted cash and short-term investments will besufficient to satisfy its cash requirements for at least the next twelvemonths. The Company intends to invest its cash in excess of current operatingrequirements in short-term, interest-bearing, investment-grade securities.

 

## **RISKFACTORS**

 

**WE HAVE A SHORT OPERATING HISTORY, WHICH MAY MAKEIT DIFFICULT TO ACCURATELY FORECAST OUR FUTURE REVENUES AND OTHER OPERATINGRESULTS.**

 

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

 

**WE HAVE INCURRED NET LOSSES SINCE WE WERE FORMEDAND EXPECT TO INCUR FUTURE LOSSES.**

 

From inceptionthrough September 30, 2001, we incurred net losses totaling approximately$131 million. We expect to continue to make substantial expenditures forsales and marketing, product development and other purposes, which may be fixedin the short term. As a result, we expect to continue to incur losses in 2001,as well as in future years.  Our abilityto increase revenues, and achieve and maintain profitability in the future,will primarily depend on our ability to increase sales of our products, reduceproduction and other costs and successfully introduce new and enhanced versionsof our existing products into the marketplace. We cannot assure you that we will be able to increase our revenues at arate 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 quarterlyand annual operating results are likely to fluctuate significantly in thefuture due to a variety of factors, many of which are outside of ourcontrol.  Therefore, you should not relyon our historical operating results as an indicator of future performance. Ourresults of operations could fluctuate due to the following material factors:

 

•         variations in marketacceptance of our products and in the timing and size of customer orders andshipments;

 

•         changesin the mix of our product offerings and sales channels;

 

•         competitive market conditions, such aspricing policies, timing and acceptance of new and enhanced product introductionsby us, our customers or our competitors, including introductions of alternativetechnologies;

 

•         changesin our operating expenses, including the costs of our products’ components;

 

•         ourability to meet and maintain production volumes and ship products in a timelymanner; and

 

•         othergeneral economic factors, as well as those specific to the telecommunicationsindustry.

**WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND THELOSS OF, OR REDUCTION IN PURCHASES FROM ANY ONE OF THEM COULD SIGNIFICANTLYHARM OUR BUSINESS.**

 

We derive asubstantial portion of our revenues, and expect to continue to derive asubstantial portion of our revenues in the near future, from sales to a limitednumber of customers. Unless and until we further diversify and expand our customerbase, our success will depend significantly upon the timing and size of futurepurchase orders, if any, from our largest customers, as well as their productrequirements, financial and operational success, and, in particular, thesuccessful deployment of services using our products. The loss of any one ormore of these customers, significant changes in their product requirements,delays of significant orders or the occurrence of any sales fluctuations of ouror our customers’ products could reduce our revenues.

 

**APORTION OF OUR BUSINESS IS GENERATED BY DEMAND FROM NEW AND EMERGING SERVICEPROVIDERS, AND THEIR INABILITY TO OBTAIN CAPITAL OR FINANCING COULD CAUSE THEMTO REDUCE OR DISCONTINUE THE PURCHASE OF OUR PRODUCTS AT ANY TIME.**

 

Many of thecompanies 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 capitalfor the development, construction and expansion of their businesses.  Financing may not be available to thesecompanies or our other customers on favorable terms, if at all.  To the extent that these companies areunable to obtain the financing they need, our ability to make future sales tothese customers directly or through our distributors could be harmed.  In addition, to the extent we choose toprovide financing to these customers, we will be subject to additionalfinancial risk, which could reduce our profitability.

 

**WEONLY OFFER A LIMITED NUMBER OF PRODUCTS AND THE FAILURE OF ANY ONE OF THEM TOACHIEVE WIDESPREAD MARKET ACCEPTANCE WOULD SIGNIFICANTLY HARM OUR RESULTS OFOPERATIONS.**

 

We derivesubstantially all of our revenues from sales of a limited number of high-speedaccess products.  The failure of any ofour product offerings to achieve and maintain a meaningful level of marketpenetration and customer satisfaction would harm our revenues.

 

In addition, we only began selling our products in mid 1999, andcannot yet predict whether they will gain widespread market acceptance.  Even if our customers do purchase ourproducts in meaningful quantities, due to the variety and complexity of theenvironments in which these customers operate, our products may not operate asexpected.  This could result incancelled orders, delays in installation and increased expenses.  In addition, the success of competingproducts and technologies, pricing pressures or manufacturing difficultiescould further reduce our profitability and the price of our CommonStock.

 

**THEFAILURE OF DSL TECHNOLOGY TO ACHIEVE WIDESPREAD MARKET PENETRATION WOULDNEGATIVELY IMPACT DEMAND FOR OUR PRODUCTS.**

 

Because ourproducts are based on the use of copper telephone wires, and because there arephysical limits to the speed and distance over which data can be transmittedover these types of wires, our products may not be a viable solution for somepotential customers.  Some of ourcompetitors currently offer products based on directly competing technologiesthat do not have these limitations. Additionally, in the future our competitors may develop transmissionmedia and technologies other than DSL that provide faster access, higherreliability or are more cost effective for some of our existing and potentialcustomers.

 

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

 

**WEDEPEND ON DISTRIBUTORS AND RESELLERS FOR SALES, AND IF ANY OF THEM DO NOTPERFORM AS EXPECTED, WE COULD EXPERIENCE LOWER THAN EXPECTED SALES.**

 

Our successdepends, in part, upon distribution and reseller arrangements, including ourcurrent arrangements with Nortel Networks. These arrangements are relatively new, and we cannot accurately predictwhether significant recurring revenues will be generated from thesearrangements. Our sales and distribution partners may not market, sell ordistribute our products, or perform any of their other obligations, as weexpect, in which case we may not desire to maintain these arrangements, or be ableto develop successful replacements.  Inthe event that any of these arrangements are terminated or are otherwiseunsuccessful, sales of our products could be harmed.

 

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

 

Although wegenerally use standard parts and components for our products, our productscontain several key components that are purchased from single source suppliers:line driver chips from Texas Instruments Incorporated, power supplies fromAstec America, Inc., and system processor chips fromMotorola, Inc.  We do not havewritten agreements with our single source suppliers.  Our reliance on the suppliers of these components exposes us topotential production difficulties and quality variations due to increasedthird-party demand or supplier related issues. If these suppliers are unable to meet component requirements, we will beforced to seek alternative production sources, which could negatively impactour costs and the timely delivery of our products. Alternate suppliers may notmeet our quantity requirements or quality standards.  Our inability to obtain sufficient quantities of thesecomponents, or components that meet our quality standards, may result in delaysor reductions in product shipments, which could harm our reputation and reduceour profitability.

 

**OUR DEPENDENCE ON TWO CONTRACT MANUFACTURERSCOULD RESULT IN PRODUCT DELIVERY DELAYS.**

 

We currently usetwo contract manufacturers, Sanmina Corporation and Solectron Corporation, tobuild some of our printed circuit boards, chassis and subassemblies and, inmost cases, to complete final assembly and testing of our products.  Our current reliance on two manufacturerscould result in the absence of adequate capacity to meet our customers’needs.  In addition, we could experienceunavailability 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 possiblethat Sanmina’s or Solectron’s manufacturing capabilities may not be availableto us when needed, or that they may not be in a position to satisfy ourproduction requirements at acceptable prices and on a timely basis, if at all.  If Sanmina or Solectron are unable orunwilling to continue manufacturing our components in required volumes, or toour quality specifications, or if we develop new technologies requiringcomponents which Sanmina or Solectron are incapable of manufacturing, we will haveto identify acceptable alternative manufacturers.  Alternative manufacturers, however, may not be available. Anysignificant interruption in the supply of products could result in ourinability to adequately meet our customers' demands, which in turn could harmour sales.

 

**WEORDER OUR PRODUCTS FROM OUR SUPPLIERS IN ADVANCE OFCUSTOMER ORDERS AND A DELAY, DEFERRAL OR CANCELLATION IN ANY OF SUCH CUSTOMER ORDERSCOULD NEGATIVELY IMPACT OUR INVENTORY AND HARM OUR PROFITABILITY.**

 

As part of our inventory planning, we frequently pay certainsuppliers well in advance of receipt of customer orders and enter into purchasecommitments with vendors to ensure products are available to meet forecastedcustomer demand. The market fortelecommunications products is characterized by rapid technological advances, a high degree of volatility andthe frequent introduction of new products.  Accordingly, if wefail to accurately forecast customer demand for our products, or if ourcustomers delay, defer or cancel their orders for our products, we could experience a decline in salesof products thatwe have committed to purchase.  If we cannot change or be released from thepurchase commitments, we could incur significant costs from the purchase of rawmaterial 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 manyproducts since the orders are based on the forecasts of customer orders ratherthan actual orders.  Accordingly, wecould be left with an excess of inventory on hand that has no available marketdue to enhanced features on successor product lines.  Our business and operating results could be adversely affected asa result of these increased costs.

 

**BECAUSE A SIGNIFICANT INCREASING PERCENTAGE OFOUR REVENUES COMES FROM SALES OUTSIDE THE U.S., WE ARE SUBJECT TO A NUMBER OFRISKS SPECIFIC TO THE INTERNATIONAL MARKETS IN WHICH WE OPERATE.**

 

Revenues from customers outside of the U. S. accounted for about20% and 17% of our total revenues for the three months and nine months endedSeptember 30, 2000, respectively and 8% and 11% of our total revenues for thethree and nine months ended September 30, 2001, respectively.  As a part of our strategy, we intend toexpand our sales in international markets. Sales to international markets have the following material risks:

 

•         longer receivables collection periods;

 

**•**         potential increase in political andeconomic instability;

 

•         difficulties and costs of staffing andmanaging foreign operations;

 

•         difficulties in enforcing our rightsand agreements through non-U.S. legal systems;

 

•         unexpected changes in regulatoryrequirements;

 

•         changes in import or export licensingrequirements;

 

•         foreign currency exchange rate fluctuations;

 

•         unexpected foreign tax fluctuations;

 

•         reduced protection for intellectualproperty rights in some countries; and

 

•         currency fluctuations, which couldcause our products, the prices of which are denominated in U.S. dollars, tobecome relatively more expensive for non-U.S. customers and reduce demand forour products.

 

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

 

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

 

**THE ABILITY OF NORTEL NETWORKS TO EXERCISESIGNIFICANT INFLUENCE OVER OUR AFFAIRS COULD AFFECT OUR ABILITY TO IMPLEMENTSUCCESSFUL STRATEGIC AND OPERATIONAL INITIATIVES.**

 

We were formed by means of a contribution agreement among NortelNetworks Corporation, its subsidiary Nortel Networks Inc., and us.  Under this agreement, we issued NortelNetworks Inc. 15,384,614 shares of our Common Stock.  Prior to theclosing of our IPO on October 4, 2000, Nortel Networks Inc.transferred 8,948,770 shares of our Common Stock, and awarrant for 51,230 shares of our Common Stock, to its parent, Nortel NetworksLimited.  Nortel Networks Limited sold1,000,000 shares of our Common Stock in the IPO and on December 28, 2000, Nortel NetworksInc. reacquired 7,948,770 shares of our Common Stock, and the warrant for 51,230 sharesof our Common Stock, from Nortel Networks Limited.  Accordingly, Nortel Networks Inc. owns approximately 46%, or14,435,845 shares, of our Common Stock,including the 51,230 shares of our Common Stock that are issuable upon exercise ofthe warrant described above.  AlthoughNortel Networks announced in June 2001 its intent to divest its interests inElastic Networks, because of Nortel Networks’ current level of ownership of ourCommon Stock, Nortel Networks continues to have the ability to exercisesignificant control over our affairs. There also may be conflicts of interest between Nortel Networks and uswith respect to acquisitions, financings and other corporateopportunities.  Nortel Networks’ abilityto exercise significant control could have the effect of delaying or preventinga change in control of Elastic Networks and other strategic and operationalinitiatives, which could harm our business and the price of our Common Stock.  In addition, because of its current level ofownership of our Common Stock, Nortel Networks’ stated initiative of divestingits interests in Elastic Networks could have a negative effect on the price ofour Common Stock.

 

**AN INTERRUPTION OR DISSOLUTION OF ANY ONE OF OURRELATIONSHIPS WITH NORTEL NETWORKS COULD SIGNIFICANTLY HARM OUR BUSINESS ANDFINANCIAL CONDITION.**

 

We have entered into various agreements and relationships withNortel Networks, including a distribution arrangement under which they haveagreed to market and distribute our products. We cannot predict whether NortelNetworks will continue to market and distribute our products or perform itsother 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, OURCOMPETITIVE POSITION MAY SUFFER.**

 

Our ability to compete and be successful is based, in part, on ourintellectual property.  We rely on acombination of copyright, trademark, patent and trade secret laws andcontractual restrictions to establish and protect our technology and otherintellectual property. We require employees and consultants and, when possible,suppliers, manufacturers and distributors, to sign confidentiality agreements.  However, we cannot assure you that our stepswill be sufficient to prevent misappropriation of our technology and otherintellectual property, or that our competitors will not independently developtechnologies or other intellectual property that are substantially equivalentor superior to ours.  In addition, thelaws of many countries do not protect intellectual property to the same extentas the laws of the U.S. If our intellectual property rights are not protected,our business may suffer.  If we have tobring a lawsuit against another entity that infringes or misappropriates any ofour intellectual property, we would likely have to divert significantresources, both financial and human, in prosecuting the lawsuit. We own U.S.patent number 5,912,895, titled “Information Network Access Apparatus andMethods for Communicating Information Packets via Telephone Lines.”  This patent issued on June 15, 1999 andexpires on May 1, 2016.  We alsohave exclusive and non-exclusive licenses from Nortel Networks to othertechnologies that we use in our business. However, our rights to our patent and to all of these licensedtechnologies are subject to various licenses that Nortel Networks, as theoriginal owner, granted to other companies prior to May 12, 1999.  Therefore, we cannot assure you that ourrights to these technologies will allow us to prevent these companies and theirlicensees from using these technologies.

 

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

 

Also, from timeto time, we may desire or be required to obtain or renew licenses from otherparties in order to further develop and market commercially viable products andfor other business purposes.  There canbe no assurance that the necessary licenses will be available upon acceptableterms, if at all.  Our failure to obtainthese licenses, or to protect and prevent the misappropriation of ourintellectual property, could significantly harm our competitive position.

 

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

 

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

 

**WE BELIEVE THAT EXPANSION OF OUR BUSINESS WILL BEREQUIRED FOR OUR COMPANY TO SUCCEED, AND IF WE FAIL TO MANAGE THIS EXPANSIONEFFECTIVELY, OUR BUSINESS AND STOCK PRICE WILL SUFFER.**

 

We have rapidly and significantly expanded our operations since1998.  We believe that further expansionwill be required to address potential growth in our client base and marketopportunities in order for us to be successful.  From May 13, 1999 to November 5, 2001, we had a net increase in the number of employees from 58 to108.  To manage the expected growth ofour operations, we will be required to:

 

•         improve existing and implement newoperational, financial and management controls, reporting systems and            procedures;

 

•         install new management informationsystems;

 

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

 

•         train, motivate, manage and retain oursales and marketing, engineering, technical and customer support employees.

 

If we are notable to manage our growth and its related costs effectively, it will bedifficult to support our future operations.

 

**WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THEFUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCKHOLDERS; IF WE ARE UNABLE TOSECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US, WE MAY BE UNABLE TO EXECUTEOUR BUSINESS PLAN.**

 

If our existing cash balances and cash flows from operations arenot sufficient to meet our liquidity needs, we will need to raise additionalfunds.  If additional funds are raisedthrough the issuance of equity securities, the percentage ownership ofpre-existing stockholders will be reduced. If additional funds are raised through the issuance of debt or preferredequity securities, these securities would have rights, preferences andprivileges senior to those of the Common Stock.  Furthermore, theterms of any debt could impose restrictions on our operations.  If adequate funds are not available onacceptable terms, or are not available at all, we may not be able to takeadvantage of market opportunities, develop new products or otherwise respond tocompetitive pressures.

 

**DUE TO A HIGH LEVEL OF STOCK OWNERSHIP,MANAGEMENT AND SOME OF OUR STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVEROUR 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, in the aggregate, more than 50% of ouroutstanding Common Stock. These stockholders, if acting together, couldsignificantly influence all matters requiring approval by our stockholders,including the election of directors and the approval of mergers or otherbusiness combinations.  Thisconcentration of ownership may have the effect of delaying, deterring orpreventing a change in control of Elastic Networks, which could prevent ourstockholders from receiving a premium for their Common Stock as part of anymerger or other business combination.

 

**OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS ANDDELAWARE LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE INCONTROL.**

 

Our certificate of incorporation and bylaws provide for aclassified board of directors and restrict our stockholders from acting withouta meeting.  These provisions may makesome corporate actions more difficult and might delay or prevent a change incontrol. Further, our board of directors has the ability to issue up to25.0 million shares of preferred stock with certain rights, preferences,privileges and restrictions, including voting rights, that could be senior tothose of our Common Stock.  New preferred stock might also be used tomake acquiring control of us more difficult. We will also indemnify officersand directors against losses incurred in legal proceedings to the broadestextent permitted by Delaware law.

 

**OUR MARKET IS SUBJECT TO RAPID CHANGES ININDUSTRY STANDARDS AND TECHNOLOGY, AND IF WE FAIL TO CONTINUALLY MAKE NEWPRODUCT INTRODUCTIONS AND ENHANCEMENTS, OUR ABILITY TO EFFECTIVELY COMPETE WILLSUFFER.**

 

The market for high-speed access products is characterized byrapid technological developments, frequent enhancements to existing products,new product introductions, changes in end user requirements and evolvingindustry standards.  Any technologicaladvancements, whether in DSL or otherwise, or product introductions thatprovide faster access, greater reliability, increased cost-effectiveness orother advantages over our technology, could render our product lineobsolete.  We cannot assure you that wewill be able to respond quickly and effectively to any of these changes orchallenges.  Moreover, in order torespond quickly and effectively to all of these changes and challenges, we mustcontinually make investments in the development of new technologies and thefurther advancement of our current technologies.  However, the nature and quantity of these investments cannot bedefinitively predicted, and we may not have sufficient resources to make theseinvestments.

 

Even if we are able to make the necessary investments, thedevelopment of new or enhanced products or technologies is a complex anduncertain process requiring the accurate anticipation of technological andmarket trends.  We may experiencedesign, manufacturing, marketing and other difficulties that could delay orprevent our development, introduction or marketing of new or enhanced productsor technologies. The introduction of new or enhanced products or technologiesalso requires that we manage the transition from older products or technologiesin order to minimize disruption in customer ordering patterns and ensure thatadequate supplies of new products can be delivered to meet anticipated customerdemand. We may not be able to successfully develop or introduce, or manage thetransition to, these new products. Delays in releasing these products and technologies within the publicizedavailability dates due to design, manufacturing, and other difficulties coulddamage our reputation and negatively impact the valuation of our CommonStock.  Furthermore, despite testing byour contract manufacturers and us, any of these new or enhanced products ortechnologies may contain undetected or unresolved errors when they are firstintroduced or as new versions are released.

 

To the extent that we are unable to effectively address thesetechnological 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 OURPRODUCTS, TECHNOLOGY AND BUSINESS MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITHOTHER 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 fromproviders of DSL based products, our products currently compete with productsusing other technologies.  Our mostdirect competitors include Alcatel USA, Inc., Cisco Systems, Inc.,Copper Mountain Networks, Inc., Lucent Technologies Inc., NokiaCorporation, Paradyne Networks, Inc., and Tut Systems, Inc.  In addition, due to the rapidly evolvingnature of the market in which we compete, additional competitors, includingother large telecommunications equipment manufacturers, as well as smallercompanies, may enter our markets and further intensify competition.  These and our other competitors may foreseethe course of market developments more accurately than we do.

 

In addition, many of our current and potential competitors havesignificantly greater sales and marketing, technical, manufacturing, andfinancial and other resources than we do, such as AT&T and AOL/Time Warnerin the cable broadband market.  Theproducts and technologies offered by these competitors may provide fasteraccess and higher reliability than ours, and prove more cost-effective for someend users.

 

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

 

**OUR COMPANY, OUR PRODUCTS AND OUR CUSTOMERS ARESUBJECT TO GOVERNMENT REGULATIONS, AND CHANGES IN CURRENT OR FUTURE LAWS ORREGULATIONS THAT COULD NEGATIVELY IMPACT OUR PRODUCTS, OUR CUSTOMERS OR USCOULD HARM OUR BUSINESS.**

 

The Federal Communications Commission (“FCC”) regulates thetelecommunications industry, including our company, our products and ourcustomers.  The adoption of new FCCregulations affecting the broadband access industry, our customers or ourproducts may harm our business. For example, FCC policies that affect theavailability 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 toadopt regulations and standards for the communications industry.  These regulations and standards may requireus to make engineering or functional changes to our products, or changes to ourmarketing and selling practices.  Delayscaused by changes in our products or practices undertaken to comply with state,national and international regulatory requirements may result in ordercancellations or postponements of product purchases by our customers, whichcould harm our sales and our reputation.

 

**OURPRODUCT CYCLES TEND TO BE SHORT AND WE MAY EXPERIENCE SUBSTANTIAL INVENTORYOBSOLESCENCE AND DEVOTE SIGNIFICANT RESOURCES TO THE GENERATION OF SALES THATDO NOT OCCUR WHEN ANTICIPATED.**

 

In the rapidlychanging technology environment in which we operate, product cycles tend to beshort.  Therefore, the resources wedevote to product sales and marketing may not generate revenues for us and fromtime to time we may need to write off excess and obsolete inventory.  In the past, we have experienced suchwrite-offs attributable to the obsolescence of certain finished goods inventorydue to transitions to advancing product lines and to an excess of raw materialsand finished goods on hand and on order.  If we incur substantial inventory expenses in the future that we are notable to recover, it could significantly harm our financial condition andprofitability.

 

**OURCUSTOMERS MAY HAVE SIGNIFICANTLY GREATER BARGAINING POWER THAN WE DO, WHICHCOULD NEGATIVELY IMPACT OUR ABILITY TO SECURE FAVORABLE CONTRACT TERMS ANDDELAY OUR GENERATION OF SALES.**

 

Some of ourcustomers are larger than we are and have significantly greater bargainingpower than we do.  This couldsignificantly impair out ability to secure favorable contract terms andconditions and prices and materially increase our risks of doing business.  In addition, the contract approval processfor these customers can last several months or more and be negatively impactedby customer priorities, customer budgets, test results, and regulatoryissues.  Delays in the contract approvalprocess could significantly harm our ability to generate revenues and achieveprofitability.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Under theCompany’s current policies, it does not use interest rate derivatives, foreigncurrency exchange rate derivatives, commodity prices derivatives, equityderivatives, or any other derivatives, for trading or any other purposes.  As of September 30, 2001, no debtinstruments of the Company were outstanding, and its investments in financialinstruments were limited to investing its excess cash in variousinvestment-grade commercial paper, money market accounts, and debt instrumentsof the U.S. Treasury, government agencies, and corporations with strong creditratings, generally with original maturity dates from dates of purchase of threemonths or less.  The Company’sinvestments in such financial instruments are exposed to financial market riskdue to fluctuations in interest rates and foreign currency exchange rates.

 

At September 30,2001, the fair market value of the Company’s investments in those of suchfinancial instruments that were exposed to financial market risk due tofluctuations in foreign currency exchange rates was not material.  At September 30, 2001, the fair market valueof the Company’s investments in those of such financial instruments that wereexposed to financial market risk due to fluctuations in interest rates totaled,in the aggregate, $32.3 million. However, due to the short-term nature of its investment portfolio, theCompany does not expect that a sudden change in market interest rates wouldmaterially affect the future earnings, fair values, or cash flows of theseinterest-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-termchange in such rates, would result in an annual reduction in interest incomeand cash flow of approximately $323,000, which the company considers to beimmaterial.

 

A significantportion of the Company’s revenues is derived from sales shippedinternationally.  Currently, all of theCompany’s sales shipped internationally are denominated in U.S. dollars.  If the value of the U.S. dollar increasesrelative to a particular foreign currency, the Company’s products could becomerelatively more expensive, which could result in a reduction in the Company’ssales in a particular country.

 

**PARTII – OTHER INFORMATION**

** **

**ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.**

 

(d)  Use of Proceeds.

 

During the period commencing on September 28, 2000 (theeffective date of the Company's Registration Statement on Form S-1, asamended (Registration No. 333-40500)) and ended September 30, 2001, the Companyused approximately $2.0 million of the IPO proceeds (net of expenses and commissions)to fund the expansion of its business, $5.0 million to fulfill a restrictedcash agreement, approximately $45.4 million to fund its operating deficitsand approximately $8.3 million for other working capital needs and generalcorporate purposes.

 

**ITEM 5.  OTHER INFORMATION**

 

Effective inAugust 2001, Darrell E. Borne was promoted from Vice President of Finance toChief Financial Officer, replacing Kevin D. Elop.  In September 2001, Mr. Borne was appointed Secretary andTreasurer of the Company, replacing Kevin D. Elop.

 

Effective inAugust 2001, Kevin D. Elop, former Chief Financial Officer of the Company, wasappointed to the Company’s Board of Directors. Mr. Elop fills the vacancy created by the retirement of Richard Reid.

 

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

 

(a)Exhibits.

 

(3)(i)        Second Amendedand Restated Certificate of Incorporation of the Company is incorporated hereinby reference to Exhibit 3(i) of the Company’s AnnualReport on Form 10-K for the yearended December 31, 2000 filed with the SEC on March 29, 2001.

 

**(ii)                **Amended and Restated Bylaws of the Company are incorporated herein by referenceto Exhibit 3(ii) of the Company’s Annual Report on Form10-K for the year ended December 31, 2000 filed with theSEC on March 29, 2001.

** **

**(4)           SpecimenStock Certificate of the Company is incorporated herein by reference toExhibit 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) Reportson Form 8-K.

 

**Noreports on Form 8-K were filed or were required to be filed during thequarter ended September 30, 2001.**

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                           | ELASTIC NETWORKS INC.                             |
|--------------------------------|---------------------------------------------------|
|                           | (Registrant)                                      |
|                           |                                              |
| Date:   November 14, 2001 | /s/ Guy D. Gill                                   |   |
|                           | Guy D. Gill                                       |
|                           | Chairman of the Board  of Directors,              |
|                           | Chief Executive Officer  and President            |
|                           | (principal executive  officer)                    |
|                           |                                              |
| Date:   November 14, 2001 | /s/ Darrell E. Borne                              |   |
|                           | Darrell E. Borne                                  |
|                           | Chief Financial  Officer, Secretary and Treasurer |
|                           | (principal financial  and accounting officer)     |