10-K

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

FORM 10-K

/x/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2000, or

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

For the transition period from                to                .

COMMISSION FILE NUMBER: 0-23289

HYBRID NETWORKS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	77-0252931 (I.R.S. EMPLOYER IDENTIFICATION NO.)
6409 Guadalupe Mines Road San Jose, California (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	95120 (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 323-6500

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

    Securities registered pursuant to Section 12(g) of the Exchange Act: common stock, par value $0.001 per share

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

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

    As of January 31, 2001, there were outstanding 22,000,018 shares of the Registrant's common stock, $0.001 par value per share. As of that date, the aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant, based on the average bid and ask prices of such stock as of such date as reported by The Nasdaq National Market was approximately $100,352,000. This excludes shares of common stock held by directors, officers and stockholders whose ownership exceeded ten percent of the shares outstanding. Exclusion of shares held by any person should not be construed to indicate that such person possesses power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or is under common control with the Registrant.

TABLE OF CONTENTS

			Page
PART I
	ITEM 1	Business	3
	ITEM 2	Properties	10
	ITEM 3	Legal Proceedings	10
	ITEM 4	Submission of Matters to a Vote of Security Holders	12
PART II
	ITEM 5	Market for the Registrant's Common Equity and Related Stockholder Matters	13
	ITEM 6	Selected Financial Data	14
	ITEM 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	29
	ITEM 8	Financial Statements	30
	ITEM 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	54
PART III
	ITEM 10	Directors and Executive Officers of the Company	55
	ITEM 11	Executive Compensation	55
	ITEM 12	Security Ownership of Certain Beneficial Owners and Management	55
	ITEM 13	Certain Relationships and Related Transactions	55
PART IV
	ITEM 14	Exhibits, Financial Statement Schedules and Reports on Form 8-K	56
Signatures			59

    As used in this report on Form 10-K, unless the context otherwise requires, the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid Networks, Inc., a Delaware corporation.

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PART I

This report on Form 10-K contains forward-looking statements relating to future events or financial results, including such statements indicating that "we believe," "we expect," "we anticipate", or "we intend" that certain events may occur or certain trends may continue. Other forward-looking statements include statements about the future development of products or technologies, matters relating to our proprietary rights, facilities needs, our liquidity and capital needs, and other statements about future matters. All these forward-looking statements involve risks and uncertainties. You should not rely too heavily on these statements; although they reflect the good faith judgment of our management, they involve future events that might not occur. We can only base such statements on facts and factors that we currently know. Our actual results could differ materially from those in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this Form 10-K. We disclaim any obligation to update these forward-looking statements as a result of subsequent events.

ITEM 1. BUSINESS

Overview

    We design, develop, manufacture and market broadband access products, primarily for wireless systems, that provide high-speed access to the Internet for business and consumers. Our customers are principally wireless system operators and national and regional telephone companies. Our systems are designed for operators of wireless frequencies within the Multichannel Multipoint Distribution Service (MMDS), Multipoint Distribution Service (MDS), Wireless Communication Service (WCS), Instructional Television Fixed Service (ITFS), 3.5 GHz, and other similar bands. We do not compete in markets with unlicensed or Local Multipoint Distribution Service (LMDS), frequencies. Our high-speed access systems remove the bottleneck in the connection to the end-user, thereby greatly accelerating the response time for accessing bandwidth-intensive information on the Internet. We provide a proven alternative to Digital Subscriber Line (DSL) and cable for high-speed Internet access for small businesses and residential subscribers.

    In 2000, major Hybrid systems were deployed in 18 markets worldwide including 11 markets for Sprint Corp. Hybrid systems are now deployed in more than 70 markets across six continents. We believe the demand for high-speed Internet access will continue to grow internationally as well as domestically. The advantages that Hybrid has in this marketplace include:

•

Field Experience: Hybrid maintains strong leadership in the MMDS/MDS fixed broadband wireless (FBBW) market with more than 70 commercially deployed markets and more than 125,000 Customer Premise Equipment (CPE) units installed on six continents.

•

Patented Technology: Hybrid holds 14 patents and maintains a leading patent for its use of three 2 MHz sub-channels utilized over the standard 6MHz downstream frequency block. This sub-channel patent allows for enhanced performance in the presence of multi-path, or interference, in the wireless environment.

•

Coverage and Scalability: Hybrid systems provide an operator with a wide coverage area over a 35-mile radius (U.S. license limit) around a transmitter. Although today's wireless transmission requires a clear line-of-sight to subscribers, it can be deployed where there are significant service gaps in DSL and cable markets.

•

Rapid Deployment and Low Set-Up Cost: Wireless systems may be deployed and installed more rapidly than DSL and cable systems, in part, because wireless systems do not require infrastructure build-out of wiring for customer hookup. Hybrid systems are attractive to many international operators where telephone systems are undeveloped relative to the U.S. The system cost is low compared with that of building new wired systems such as DSL or cable.

    We believe that the FBBW market is poised for significant growth. The ARC Group expects global revenues of the FBBW industry to reach $41 billion by 2005. Allied Business Intelligence predicts that

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MMDS will account for more than six million subscribers worldwide by year-end 2005, with the U.S. accounting for more than 20% of the market.

Technology, Products, and Services

    Our products are an integral part of a system operator's full wireless high-speed Internet access system. Our Series 2000 product-line includes head end routers, network and subscriber management tools, and a line of wireless end-user routers, or modems.

    Our head end routers and management tools are used by broadband wireless and cable operators at their base stations, or head ends, to connect Internet subscribers to the operator's networks in order to give the subscribers high-speed Internet access. Our head end products provide management systems that allow the operators to configure and manage their networks, to set systems alarms and to configure parameters for different priorities, and establish different levels of services and charges among end-users. These parameters enable the operators to give higher service to premium-paying, high-volume subscribers and allocate unused capacity to lower-volume groups.

    The subscribers to the wireless operators' networks are typically single-computer customers, or local area networks (LANs), used by small businesses and high-end residential customers. The operators use our end-user products to connect subscribers to the wireless systems networks at the subscribers' sites.

Technology

    We have a scalable and deployable system with field-tested technology that continues to evolve. We have developed solutions to multi-path interference and frequency drift and have incorporated these solutions into our current products. We continue to evolve and improve our technology through extensive deployments and are now able to service up to thousands of subscribers in one cell. We are also continuing to work in conjunction with system operators to continue to refine our technology in accordance with their needs. Hybrid's products support two-way transmission on either wireless or cable systems as well as asymmetric telephone return or router return.

    Hybrid's Series 2000 system is expandable from an entry-level system to large systems that are designed to serve up to 20,000 routers/modems. It has been successfully deployed by wireless operators in systems that utilize multiple antennas at the head end to increase capacity. Each of the multiple return antennas is pointed in a slightly different direction, to increase the capacity of the available return frequency spectrum. Because most operators have only 10MHz of return channel capacity available, return sectorization is necessary to re-use spectrum until other options such as MMDS return are allowed

    Downstream Optimization

    Our patented proprietary sub-channelization technology splits a standard 6 MHz channel into three 2 MHz sub-channels for downstream transmission, providing greater service flexibility and minimizing the effects of multi-path interference in wireless systems. Sub-channels mitigate the effects of interference between transmitters and allow flexible sectorization in large installations. They can also be loaded differently to provide different grades of service. Our patented 2 MHz sub-channelization allows our products to serve the newer wireless communication services (WCS) bands, which are 5 and 10MHz wide.

    Upstream Optimization

    Our technology allows an operator's group of subscribers to share many 160 to 600 kHz bandwidth return channels. This provides redundancy and provides the resistance to the interference common in large wireless installations, especially those with multiple return sectors. Narrow channels allow smaller

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antennas and lower power transceivers than are needed for conventional 1.6 to 2 MHz TDMA channels.

    Our proprietary software not only allows subscribers to share many return channels, but also allows some to burst into a continuous transmission state to transfer or send large amounts of data upstream. The operator can control the parameters to optimize performance for business users yet still provide other users access to capacity. It is usual for some operators to set up two or three groups of return channels, often with different bandwidths so as to provide different service levels or groups for business and residential customers.

    Alliances

    Our products are integrated with other telecommunications equipment to create a complete wireless system. In 2000, Hybrid entered agreements with two global systems integrators, Andrew Corporation and Thomcast Communications, as well as with system integrators in targeted markets. Each of these system integrators offer wireless operators a complete turnkey system that integrates our products with the associated radio and Internet equipment needed to deploy a wireless system.

Products

    Head end Equipment

    CYBERMANAGER 2000. The CyberManager 2000 (CMG-2000) is our proprietary subscriber and network management workstation and allows the operator to set the service levels or groups, for both business and residential end-users. The CMG-2000 uses our software to provide the system administrator interface to the upstream and downstream routers and end-customer equipment. The CMG-2000 has a 10/100BaseT (Ethernet) interface to connect to a fast Ethernet switch in the head end.

    CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router (CMD-2000B) is a rack-mounted industrial microcomputer. It supports our proprietary Serial Interface (SIF) and Quadrature Amplitude Modulation (QAM) cards, which are used for downstream routing and for 64-QAM downstream modulation. The CMD-2000 has a 10/100BaseT interface to connect to a fast Ethernet switch within the headend.

    CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router is a rack-mounted industrial microcomputer. The product houses dual Quaternary Phase Shift Keying (QPSK) receiver cards that demodulate upstream QPSK signals. The CMU-2000-14CB has a 10/100BaseT interface to connect to a fast Ethernet switch at the head end.

    Wireless Broadband Router

    The Multi-User Wireless Broadband Router supports 10 Mbps, 64-QAM downstream data transmission on both wireless and cable systems and upstream transmission using a wireless or cable return, telephone modem or router. The current production router family includes the WBR-5, WBR-20, and WBR-60 with capacities of 5, 20, and 60 networked devices respectively, with their own distinct IP addresses. These units have a number of security features including system authentication and user ID.

Services

    Our product support services include consulting, systems engineering, systems integration, installation, training, and technical support. Our network operations group also works with the customer during site preparation to aid in systems engineering, system integration, installation, and acceptance testing for system start-up.

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Customers

    Our customers are principally wireless system operators and national and regional telephone companies. A small number of customers have traditionally accounted for a large portion of our net sales. In 2000, Sprint Corporation accounted for 54% of our gross sales, while Look Communications (Canadian-based service provider) accounted for 23% of our gross sales. We had two customers that individually accounted for 31% and 28% of gross sales during 1999 and for 25% and 13% of gross sales in 1998.

    In 2000, Sprint purchased our products to support what we believe constituted the largest number of MMDS deployments in the world during that year. Look Communications made substantial purchases in connection with their Canadian deployments. Overall international sales accounted for 24% of total sales during the year (virtually all of which were to Look Communication) and included deployments in Canada, Ireland, Nigeria, Korea, Peru, and Argentina.

    Sprint Corporation holds 4,066,466 shares of our common stock and warrants to purchase $8.4 million principal amount of convertible debentures which is convertible into 2,946,622 shares of our common stock. Two of our directors are Sprint designees, and we cannot issue any securities (with limited exceptions) or, in most cases, take any material corporate action without Sprint's approval. Sprint has other rights and privileges as well, including pre-emptive rights and a right of first refusal in the case of any proposed change of control transaction, which right of first refusal is assignable by Sprint to any third-party.

    Prior to 2000, most of our sales were to cable customers. However, these sales represented only 6% of our total sales in 2000 and they will continue to represent a small portion of net sales in the future.

Sales and Marketing

    Sales in 2000 were made primarily to companies in the United States and Canada. Sales are made through our field sales force as well as global and regional system integrators.

    Customer internal procedures related to the completion of the evaluation and approval of the large capital expenditures that are typically required to purchase our products can result in purchasing delays. Customers usually engage in a significant technical evaluation before making a purchase commitment and any delay or loss of an order that is expected in a quarter can have a major effect on our sales and operating results for that quarter. As of December 31, 2000, the total amount of shipments not recognized as revenue due to acceptance or testing criteria or because they were sales to a distributor were $5.6 million.

    Our product sales backlog on February 28, 2001 was $2.7 million and consisted of customer purchase orders which had been received and accepted and for which we have a reasonable expectation of shipment within the current fiscal period. The comparable backlog figure as of February 28, 2000 was $274,000.

    Our marketing efforts are targeted to broadband wireless system operators in the U.S and abroad. Many of our international opportunities are marketed in tandem with one or more of our system integrators who often provide in-country support. Concentrated efforts in 2000 and 2001 have been, and will be, in the areas of South America, Australia, Korea, Malaysia, and China.

Manufacturing

    We configure, test, and perform quality assurance procedures on the final product at the Hybrid facility. We outsource manufacturing of the product modules to third parties, while maintaining a limited in-house manufacturing capability for pre-production assembly and testing.

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    Our Series 2000 client routers are manufactured by Sharp Corporation through an agreement we have had since early 1997 with Sharp and its distributor, Itochu Corporation. We have not developed an alternative manufacturing source given the quality of the Sharp product and our limited volumes. We continue cost reduction efforts in response to market pressures to reduce our prices. Given that Sharp remains our only manufacturing source of our routers and production rates remain level, our ability to reduce the manufacturing costs may be limited.

    Our CyberManager 2000 is built on the Ultra 10/Solaris platform by installing our proprietary network subscriber and network management software. Our CyberMaster Downstream Router and CyberMaster Upstream Router are built on Intel's Pentium-based PCI/ISA-based computer cards installed in a standard rack-mounted chassis from Industrial Computer Source. Our proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU.

    We are dependent upon these and other key suppliers for a number of components within our Series 2000 products. The WBR series routers use a Texas Instrument chip set for the 64-QAM demodulator. Hitachi is the sole supplier of the processors used in our routers. Intel is currently the sole supplier for certain components used in our products. There can be no assurance that these and other single-source components will continue to be available to us, or that deliveries to us will not be interrupted or delayed (due to shortages or other factors). Having single-source components also makes it more difficult for us to reduce our costs for these components and makes us vulnerable to price increases by the component manufacturer. Any significant interruption or delay in the supply of components for our products or any increase in our costs for components, or our inability to reduce component costs, could adversely affect our business.

    We typically provide a 12 to 18 month warranty on our hardware products that includes factory repair service. We also provide customer support as a purchase option that includes telephone and e-mail support, software maintenance releases, and technical bulletins.

Research and Development

    As of December 31, 2000, our research and development staff consisted of 20 full-time employees, and eight local consultants. To supplement our research and development efforts, we have hired a consulting firm in India to work on various projects. Our total research and development expenses for 2000, 1999, and 1998 were $6,715,000, $4,191,000, and $7,771,000, respectively. Our research and development during 2000 was directed primarily towards improving the performance of our 2-way wireless products and reducing the cost of our routers. We enhanced our return product software and increased the capacity of the CMG 2000 and the WBR multi user modem.

    In 2001, we are continuing our efforts to reduce the cost of manufacturing and improve the performance of client routers significantly through design and engineering changes. Our efforts to improve performance are focused on increasing coverage, capacity, and ease of installation.

    Coverage: We are working to enhance our patented downstream sub-channels to enable the use of three modulation schemes. These include QPSK and 16-QAM, which are more robust and will allow successful operation in customer locations that may not currently be serviceable. Other features such as diversity are under development.

    Capacity: Our new capability with multiple modulation schemes (ThruWAVE) will have multiple downstream interleaving options. This has the potential to increase the number of users that may share a return channel on the upstream by 20-40%, improving total number of active users on the system. Additionally, the use of QPSK and 16-QAM allows our customers the ability to put multiple cells into a geographic region and reuse frequencies in these cells, thus improving overall system capacity. We are also working on enhancements to our MAC layer to further increase the capacity.

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    Ease of Installation: Hybrid works continuously to simplify and reduce the installation of the CPE. Having the ability to use a variety of modulation schemes will allow the installation to proceed more rapidly. Hybrid is investigating, with numerous vendors (RF, wireless LAN, etc.), how to make the overall CPE installation simpler.

Competition

    We are primarily engaged in the business of manufacturing FBBW high-speed Internet access equipment. Our market is intensely competitive and we expect even more competition in the future. Most of our competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support, and other resources, as well as greater name recognition and access to customers than we have.

    The principal competitive factors in this market include:

•

Product performance and features, including downstream and upstream capacity, reliability, and operational stability

•

Cost of installation

•

Solutions to line-of-sight limitations

•

Integration with major operator's management and customer care systems

•

Price

•

Sales and distribution capability

•

Technical support

•

Relationships with broadband wireless system operators, affiliates and Internet Service Providers (ISPs)

    Our principal competitors in the wireless market include Vyyo, Inc. (which is marketing a technology based on the Data Over Cable Systems Interface Specification (DOCSIS) standard) and Cisco Systems, Inc. (which is promoting Vector Orthogonal Frequency Division Multiplex or VOFDM). Other wireless competitors include ADC, Com21, IOSpan, Aperto, and Adaptive Broadband.

    Participants in the wireless broadband access market have not settled on a technology standard for equipment to serve this market. Our major competitors have created or joined in consortia to promote the technology they are employing as the industry standard, which are different from our underlying technology. While Hybrid also actively promotes its technology, if the marketplace settles on a standard that we do not employ, our competitive position would be seriously impaired. We are not making material sales into the broadband cable access market because cable operators adopted the DOCSIS standard, to which our products do not conform.

    Our Customer's Competition

    Our customers compete with providers of other forms of high-speed Internet access, including DSL and cable. Telephone companies are deploying DSL, providing high-speed Internet access over existing phone wires. They are working with computer vendors to install DSL cards in PCs manufactured by those companies, thereby reducing the telephone companies' distribution costs. Although DSL poses a significant competitive threat to the services offered by our customers, in some instances, the availability of DSL service may be viewed as complementary to the use of fixed broadband wireless products. In other words, some operators may offer DSL service to customers in those locations where line-of-sight access may not be optimal, while also offering wireless service in areas where line-of-sight transmission is uninterrupted.

    As our focus has shifted to wireless operators, cable operators may now be considered as competing with our customers for the end-user.

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Intellectual Property

    Patents

    We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in our products. We have received 14 patents from the U.S. Patent and Trademark Office. These patents are directed to various aspects of wireless and cable modems and head end systems. In addition, the U.S. Patent and Trademark Office has issued formal notices of allowances for pending patent applications which are also directed to wireless and cable modems and head end systems, as well as various modulation and transmission schemes used in wireless cable modem systems. We have other patent applications pending before the U.S. Patent and Trademark Office. We have patent applications pending in a number of foreign jurisdictions as well. It is unknown whether any pending or foreign patent applications will result in the issuance of patents.

    We cannot be certain that our patents will not be challenged or invalidated, or that the claims allowed in our patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. We have initiated one patent infringement litigation to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing certain terms that are in some respects favorable to them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that, in the future, we propose to sell our patents (separately or in conjunction with our other assets) to any third party. We do not know whether we will bring litigation in the future in an effort to assert our patent rights, or whether other companies will bring litigation challenging our patents. Any such litigation could be time consuming, costly, and could result in our patents being held invalid or unenforceable. Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents.

    Software Protection

    We have entered into confidentiality and invention assignment agreements with our employees, and we enter into non-disclosure agreements with certain of our suppliers, distributors and customers, in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we take to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent, as do the laws of the United States.

    Infringement

    We have in the past, received, and may in the future receive, notices from third parties claiming that our products, software or asserted proprietary rights infringe the proprietary rights of third parties. We expect that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in our market grows. While we are not currently subject to any such claim, any future claim, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all.

    In the future, we may also file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or not, could result in substantial costs and diversion of resources. Nonetheless, we may find it necessary to institute further infringement litigation in the future.

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Employees

    As of December 31, 2000, we had 62 full-time employees. None of our employees is represented by a collective bargaining unit with respect to his or her employment, and we have never experienced an organized work stoppage. We use consultants, contractors, and temporary workers to supplement our workforce and, as of December 31, 2000, we had 18 of these in various areas.

ITEM 2. PROPERTIES

    We currently sublease approximately 55,000 square feet of office, research and development and manufacturing space in San Jose, California. The sublease expires in April 2004, and we have an option to extend the term of the lease through October 2009.

ITEM 3. LEGAL PROCEEDINGS

Class Action Litigation

    In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against us, two of our directors, four former directors and two former officers. The lawsuits were brought on behalf of purchasers of our common stock during the class period commencing November 12, 1997 (the date of our initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits (the State Actions) also named as defendants the underwriters in our initial public offering, but the underwriters were dismissed from the cases.

    The complaints in the State Actions claimed that we and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements used in connection with our initial public offering and the financial statements issued subsequently during the class period, as well as related statements made on our behalf during the initial public offering and subsequently regarding our past and prospective financial condition and results of operations, were false and misleading. The complaints also alleged that the other defendants and we made these misrepresentations in order to inflate the price of the Company's common stock for the initial public offering and during the class period. The other defendants and we denied the charges of wrongdoing.

    In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California (the Federal Actions). Both of the Federal Actions were brought against the same defendants as the State Actions, except that the second Federal Action also named as a defendant Price Waterhouse Coopers, LLP (PWC), our former independent accountants. (The underwriters in our initial public offering were named as defendants in the first Federal Action but were subsequently dismissed.) The class period for the first Federal Action is from November 12, 1997 to June 1, 1998, and the class period in the second Federal Action extends to June 17, 1998. The complaints in both Federal Actions claimed that we and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. The other defendants and we denied these charges of wrongdoing.

    We and the other parties (other than PWC) to the State Actions and the Federal Actions reached an agreement to settle the lawsuits in March 1999. The agreement was approved by the U.S. District Court for the Northern District of California in June 1999. In November 1999, the settlement of the State Actions and the Federal Actions became final. The time to appeal from the Court's approval of the settlement has expired. Under the settlement, (i) our insurers paid $8.8 million on our behalf and on behalf of the other officer and director defendants, and (ii) we issued 3,045,000 shares of common stock to the plaintiffs and their counsel (750,000 shares were issued in November 1999 and the balance in February 2000). As a result of the settlement and a related agreement between us and our insurers,

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we have paid, and will not be reimbursed by our insurers for, $1.2 million in attorneys fees and other litigation expenses that would otherwise be covered by our insurance, and we will not have insurance coverage for the attorneys fees and expenses relating to the settlement that we incur in the future.

SEC Investigation

    In October 1998, the Securities and Exchange Commission began a formal investigation of us and certain individuals with respect to our 1997 financial statements and public disclosures. During 1999, we produced documents in response to the Securities and Exchange Commission's subpoena and cooperated with the investigation. A number of current and former officers and employees and outside directors testified before the Securities and Exchange Commission's staff.

    In November 1999, the SEC staff attorneys informed us in writing that the staff intended to file a civil injunctive action and seek civil monetary penalties against us for alleged violations of the federal securities laws.

    On June 29, 2000, the SEC filed, in the United States District Court for the Northern District of California, a complaint against the Company and three former employees. On the same day, the court approved the Company's settlement with the SEC and entered judgment against the Company. The court's order enjoins the Company from violating the books and records and related provisions of the federal securities laws but does not include any monetary penalties or an injunction against the violation of the antifraud provisions of the securities laws. At December 31, 2000, the Company has accrued $775,000 in legal fees in connection with this settlement and related continuing matters.

    The Company does not believe, based on current information, that the order will have a material adverse impact on the Company's business or financial condition.

Pacific Monolithics Lawsuit

    In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against us, two of our directors, four former directors (one of whom was subsequently dismissed), a former officer and PWC. The lawsuit concerns an agreement that we entered into in March 1998 to acquire Pacific Monolithics through a merger, which was never consummated. The complaint alleged that we induced Pacific Monolithics to enter into the agreement by providing it with our financial statements, and by making other representations concerning our financial condition and results of operations, which were false and misleading, and further alleged that we wrongfully failed to consummate the acquisition. The complaint claimed the defendants committed breach of contract and breach of implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint sought compensatory and punitive damages according to proof, plus attorneys' fees and costs. In July 1999, the court granted our motion to compel arbitration and to stay the lawsuit pending the outcome of the arbitration.

    In October 1999, the plaintiff filed a demand for arbitration against us and the individual defendants with the San Francisco office of the American Arbitration Association. In the demand, the plaintiff alleged claims for breach of contract, breach of implied covenant of good faith and fair dealing, fraud and negligent misrepresentation arising out of the proposed merger between the two companies. The demand sought unspecified compensatory and punitive damages, pre-judgement interest and attorneys' fees and costs. In November 1999, the individual defendants and we answered the demand by denying the claims and seeking an award of attorneys' fees and costs pursuant to the agreement for the proposed merger. The arbitration hearing was held in September 2000.

    On July 7, 2000, the Parties participated in a mediation of the dispute in San Jose, California before the Honorable (Ret.) Peter Stone of JAMS. The mediation resulted in a Stipulation for

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Settlement of the litigation. The Parties formalized the terms of settlement by entering a Settlement Agreement & Mutual General Release and Covenant Not to Sue (the "Agreement") dated August 21, 2000. The Company's former auditors also joined in the Agreement.

    Pursuant to the terms of the Agreement, in full settlement and compromise of all of Pacific Monolithics' claims against the Company and its current and former officers and directors, and in exchange for Pacific Monolithics full release thereof, the Company agreed to deliver to Pacific Monolithics the total sum of 213,333 shares of the Company's common stock, valued at $2,000,000 as of July 7, 2000.

    The Company delivered 213,333 shares of its common stock to Pacific Monolithics on September 14, 2000. On September 19, 2000, the Company filed, and the Santa Clara Superior Court entered, a Request for Dismissal with Prejudice of the lawsuit.

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

    None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information for Common Stock

    Our common stock was traded on the Nasdaq National Market under the symbol "HYBR" during the period from our initial public offering on November 12, 1997 through June 16, 1998. On June 17, 1998, trading in our common stock was suspended by the Nasdaq National Market, in response to our independent auditors, PWC, withdrawing their reports to our 1997 financial statements. The suspension continued until December 1, 1998, when our common stock was delisted by the Nasdaq National Market due to continuing noncompliance with listing requirements. From December 1, 1998 to July 5, 2000, our stock had been traded in the over-the-counter market on the pink sheets. On July 6, 2000, our stock was re-listed on Nasdaq. The table below shows the range of high and low closing sale prices reported. The table reflects inter-dealer prices without retail mark-up, mark down or commission. On February 28, 2001, the closing price of our common stock on the Nasdaq was $3.94.

	High		Low
First Quarter 1998	$	13.00	$	4.00
Second Quarter 1998	$	8.75	$	2.13
Third Quarter 1998		Not Traded
Fourth Quarter 1998	$	0.75	$	0.13
First Quarter 1999	$	1.25	$	0.13
Second Quarter 1999	$	2.88	$	0.38
Third Quarter 1999	$	9.03	$	2.00
Fourth Quarter 1999	$	20.00	$	4.75
First Quarter 2000	$	24.50	$	8.00
Second Quarter 2000	$	13.50	$	4.75
Third Quarter 2000	$	20.19	$	5.56
Fourth Quarter 2000	$	18.75	$	3.13

Stockholders

    As of December 31, 2000, there were approximately 660 holders of record of our common stock

Dividends

    We have not paid any cash dividends on our capital stock to date. We currently anticipate that we will retain any future earnings for use in our business and do not anticipate paying any dividends in the foreseeable future. The terms of our outstanding debentures and our agreement with Sprint prohibit us from paying any cash dividends without the consent of the debenture holders and Sprint.

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ITEM 6. SELECTED FINANCIAL DATA

    The following selected financial data should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.

				Years Ended December 31,
				2000			1999			1998			1997(1)			1996
STATEMENT OF OPERATIONS DATA:
Gross sales				$	29,924		$	13,423		$	12,418		$	4,120		$	2,962
Sales discounts					(7,129	)		(407	)		—			—			—
Net sales					22,795			13,016			12,418			4,120			2,962
Cost of sales					23,139			13,341			14,046			8,899			3,130
Gross profit					(344	)		(325	)		(1,628	)		(4,779	)		(168	)
Operating expenses:
	Research and development				6,715			4,191			7,771			7,831			5,076
	Sales and marketing				16,491			1,740			3,642			4,678			1,786
	General and administrative				11,625			7,660			8,933			2,964			1,714
	Asset impairment charge				—			—			1,250			—			—
	Write off of technology license				—			—			1,283			—			—
		Total operating expenses			34,831			13,591			22,879			15,473			8,576
			Loss from operations		(35,175	)		(13,916	)		(24,507	)		(20,252	)		(8,744	)
Interest income and other expense, net					(717	)		171			779			316			257
Interest expense					(1,311	)		(8,447	)		(897	)		(1,666	)		(28	)
Net loss				$	(37,203	)	$	(22,192	)	$	(24,625	)	$	(21,602	)	$	(8,515	)
Basic and diluted net loss per share				$	(2.03	)	$	(2.08	)	$	(2.37	)	$	(6.10	)	$	(3.36	)
Shares used in basic and diluted per share calculation (2)					18,309			10,678			10,410			3,541			2,535

	December 31,
	2000		1999			1998			1997(1)		1996
BALANCE SHEET DATA:
Cash and cash equivalents	$	1,878	$	13,394		$	3,966		$	27,143	$	3,886
Working capital		6,324		11,527			(812	)		23,795		6,944
Total assets		19,664		21,152			15,420			39,065		10,539
Long-term debt		5,632		23,978			419			654		472
Total stockholders' equity (deficit)		2,957		(9,820	)		2,702			27,303		7,709

(1)

All financial data in the table above as of and for the year ended December 31, 1997, as presented, reflect the restated financial statement.

(2)

See Note 3 of Notes to Financial Statements for an explanation of the number of shares used to compute basic and diluted net loss per share.

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

    THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS REPORT. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH AS STATEMENTS INDICATING THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON FORM 10-K.

Overview

General

    We are a broadband access equipment company that designs, develops, manufactures and markets wireless systems that provide high-speed access to the Internet for businesses and consumers. Our products greatly accelerate the response time for accessing bandwidth-intensive information. Since 1996, our principal product line has been the Hybrid Series 2000, which consists of head end routers, network and subscriber management tools and a line of wireless end-user routers or modems.

    We currently sell our products primarily in the United States and Canada, although we are pursuing opportunities in other countries and we think that international sales may represent an increasingly greater proportion of our sales in the future. Our customers primarily include broadband wireless system operators and national and regional telephone companies. A small number of customers have accounted for a substantial portion of our net sales, and we expect that trend to continue. As a result, we have experienced, and expect to continue to experience, significant fluctuations in our results of operations on a quarterly and an annual basis. The sales cycle for our products has been lengthy, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews. Any delay or loss of an order that is expected in a quarter can have a major effect on our sales and operating results for that quarter. The same is true of any failure of a customer to pay for products on a timely basis.

    The market for high-speed network connectivity products and services is intensely competitive and is characterized by rapid technological change, new product development, product obsolescence, and evolving industry standards. Our ability to develop and offer competitive products on a timely basis could have a material effect on our business. The market for our products has historically experienced significant price erosion over the life of a product, and we have experienced, and expect to continue to experience, pressure on our unit average selling prices. While we have initiated cost reduction programs to offset pricing pressures on our products, there can be no assurance that we will keep pace with competitive price pressures or improve our gross margins. Further, we anticipate that in the future the

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sales mix of our products will be increasingly weighted toward lower-margin products, thereby adversely affecting our gross margins.

    At December 31, 2000, we had 62 full-time employees and 18 local consultants, contractors, and temporary workers.

Revenue Recognition

    We normally ship our products based upon a bona fide purchase order and volume purchase agreement. We recognize revenue at the time a transaction is shipped and collection of the resulting account receivable is probable. Shipments on customer orders with acceptance criteria, installation criteria or rights of return are recognized as revenue only when the criteria are satisfied. Revenue related to shipments to distributors is normally recognized upon receipt of payment for such transactions. As of December 31, 2000, the total amount of shipments not recognized as revenue due to acceptance or testing criteria or because they were sold to a distributor was $5.6 million, of which $4.9 million was in connection with shipments to Sprint. Sprint's purchases of head end equipment are generally subject to testing and acceptance procedures and the Company anticipates that it will continue to defer recognition of revenue for those shipments until those procedures have been satisfied and the products have been accepted by Sprint. In 2000, the Company recognized $16.1 million as gross revenue from sales to Sprint Corporation.

    During 2000, we generally sold our software together with a one-year technical support contract, for which we charge separately, to provide upgrades, maintenance, system support and service. We recognized revenue on the software sale without reference to the maintenance contract, and we recognized revenue on the technical support contract over its term on a straight-line basis. Prior to 2000, we generally sold our software together with a three-year technical support contract for which we did not charge separately. We recognized the revenue attributable to these software and technical support contracts over the three-year period. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed.

    In September 1999, Sprint committed to purchase $10 million of our products subject to certain conditions. In connection with Sprint's commitment, we issued to Sprint warrants to purchase up to $8,397,873 in debentures that are convertible into 2,946,622 shares of our common stock at $2.85 per share. Ten percent of the warrants became exercisable on the shipment dates when aggregate shipments of products and services pursuant to purchase orders submitted by Sprint to the Company were at least $1million. Thereafter, each additional shipment of $1 million entitled Sprint to exercise an additional 10% of its warrants, until all shipments aggregated $10,000,000. In accordance with the Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," transactions in equity instruments with non-employees for goods or services are accounted for using the fair value method prescribed by SFAS 123. SFAS 123 requires that in each period in which the warrants are earned, a non-cash charge is to be recorded. The amount of such shipments during the year ended December 31, 2000 reached the $10,000,000 maximum and therefore, the warrants became fully exercisable. We originally determined that this warrant had an estimated value, using the Black-Scholes valuation model, of $16.1 million, which was fully applied as $2.5 million of sales discounts and $13.6 million of sales and marketing expense during the nine months ended September 30, 2000. As part of the year-end closing process, we determined that subsequent events and market conditions necessitated further analysis of the warrants' estimated value. In particular, the probability of Sprint's near term exercise of its warrants diminished with our success in raising equity capital in February 2001, Sprint's November 2000 announcement of its change in focus of its broadband efforts for consumers and small businesses, and the recent drop in our stock price. Consequently, we applied the Black-Scholes method using a longer expected life of the warrants, that is, the full contract term, and arrived at an estimated warrant value of $20.8 million. We applied the additional $4.7 million arising from this change in estimate as sales discounts in the fourth quarter of 2000.

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Warranty Costs

    We accrue for estimated warranty costs when the related sales revenue is recognized. Our modem manufacturer, Sharp Corporation, provides warranty on all cable routers manufactured by them. We provide a warranty on all head end equipment and CPE equipment that ranges between 12 and 18 months, and we typically provide a 90-day warranty on software media.

Net Losses

    We incurred net losses for the years ended December 31, 2000, 1999, and 1998 of $37,203,000, $22,192,000, and $24,625,000, respectively. Our accumulated deficit was $122,964,000 as of December 31, 2000. We expect to incur losses for the foreseeable future.

Results of Operations

Years Ended December 31, 2000, 1999, and 1998

NET SALES.  After non-cash sales discounts of $7,129,000 in 2000 and $407,000 in 1999, net sales increased 75% to $22,795,000 in 2000 from $13,016,000 in 1999 and 5% from $12,418,000 in 1998 to $13,016,000 in 1999. There were no non-cash sales discounts in 1998. Broadband wireless system operators accounted for 94% of sales in 2000, 48% in 1999, and 43% of sales in 1998. The growth in revenues in 2000 compared to 1999 is primarily due to increased sales of fixed broadband wireless equipment, particularly to Sprint Corporation and Look Communication. Although Look Communications purchased a substantial amount of our equipment in 2000, we expect to make limited sales to them in 2001.

    International sales accounted for 24% of gross sales in 2000, 5% in 1999, and 0% in 1998. In 2000, Hybrid systems were deployed in Canada, Ireland, Nigeria, Korea, Peru, and Argentina.

GROSS MARGIN.  Gross margin was negative 1.5% in 2000, negative 2.5% in 1999, and negative 13.1% in 1998. The improved gross margins from 1998 to 1999 and from 1999 to 2000 were due to a favorable change in the product mix, changes in the customer mix, increased volume spread over fixed cost of sales components, and improved margin for head end routers. We believe that in 2001 our existing customers are likely to purchase a greater proportion of CPEs relative to head end equipment as compared to 2000. We earn substantially higher margins on our head end equipment than on CPEs and, consequently, expect that gross margin for 2001 will decline unless we either make substantial head end sales to new customers or secure better margins on the CPEs that we sell to our current customers.

RESEARCH AND DEVELOPMENT.  Research and development expenses include ongoing head end and software development expenses as well as design expenditures associated with new product development, new product production, manufacturing cost reduction programs and improvements in the manufacturing of existing products. Research and development expenses were $6,715,000, $4,191,000, and $7,771,000 for 2000, 1999, and 1998, respectively. Research and development expenses included non-cash charges of $470,000, $668,000, and $0 in 2000, 1999, and 1998, respectively for compensation recognized on stock options granted at exercise prices below fair market value to employees and consultants engaged in research and development. The increase in research and development expenses in 2000 as compared to 1999 was primarily due to an increase in personnel costs, consulting fees, outside services, and project material costs. The decrease in research and development expenses in 1999 as compared to 1998 was due to reduced staffing and associated engineering costs.

SALES AND MARKETING.  Sales and marketing expenses include primarily salaries and related payroll costs for sales and marketing personnel, commissions, advertising, promotions and travel. Sales and marketing expenses were $16,491,000, $1,740,000, and $3,642,000 during 2000, 1999, and 1998,

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respectively and included charges related to the Sprint Warrant in 2000. Sales and marketing expenses included non-cash charges of $47,000, $88,000, and $0 in 2000, 1999, and 1998, respectively for compensation recognized on stock options granted at exercise prices below fair market value for employees and consultants engaged in sales and marketing. In 2000, the company incurred non-cash charges, totaling $13,671,000, due to the recording of the fair value of the earned, but unexercised Sprint warrants described above. The increase in sales and marketing expenses in 2000 as compared to 1999 was due to the Sprint warrant charge and to an increase in personnel costs and consulting fees. The decrease in sales and marketing expenses in 1999 as compared to 1998 was due principally to a decrease in headcount and related payroll costs and reduced expenses for advertising, promotion and travel. We expect to increase our sales and marketing expenses as we expand our sales and marketing efforts in future periods.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist mainly of salaries and benefits for administrative officers and support personnel, travel expenses, legal, accounting, and consulting fees. General and administrative expenses were $11,625,000, $7,660,000, and $8,933,000 during 2000, 1999, and 1998, respectively. General and administrative expenses included non-cash charges of $287,000, $219,000, and $0 during 2000, 1999, and 1998, respectively for compensation recognized on stock options granted at exercise prices below fair market value to employees and consultants engaged in providing general and administrative services. In addition, the 2000 general and administrative expenses also included non-cash charges of $3,176,000 relating to the separation of two executives of the Company, and $2,000,000 in connection with the Pacific Monolithics lawsuit (see Item 3 "Legal Proceedings"). No such charges were recorded to general and administrative expenses in 1999 and 1998. Excluding the non-cash charges described above, general and administrative expenses in 2000 decreased $1,279,000 compared to 1999. This decrease was due to further reductions in legal fees that were offset in part by increases in personnel related costs. The decrease in general and administrative expenses in 1999 as compared to 1998 was primarily due to a decrease in legal, audit and consulting fees offset by a slight increase in reserves in connection with the settlement of certain class action litigation and with an SEC investigation.

INTEREST INCOME (EXPENSE) AND OTHER.  The Company incurred net interest expense of $2,028,000, $8,276,000, and $118,000 in 2000, 1999, and 1998, respectively. In August 1999, we issued $18.1 million of convertible debentures that were converted into common stock in June 2000. In 2000, net interest expense included a premium paid on the conversion of the debentures resulting in a beneficial conversion element valued at $1,170,000. The increase in net interest expense in 1999 compared to 1998 was due to amortization of the deemed discount on the debentures of $7,400,000, which resulted from the difference between the conversion price of the convertible debentures and the then market price of our common stock. This deemed discount was amortized through December 31, 1999 (the date on which the debentures became convertible). Excluding the $7,400,000 discount in 1999, the increase in interest expense in 1999 compared to 1998 was due to accrued interest on the convertible debentures. Excluding the $1,170,000 premium paid in 2000 and the $7,400,000 deemed discount in 1999, interest expense would have been $858,000 and $876,000 in 2000 and 1999, respectively.

Liquidity and Capital Resources

    We have historically financed our operations primarily through a combination of debt, equity and equipment lease financing. In 1997, we raised $42.5 million in net proceeds through our initial public offering (in November 1997) and other debt and equity financing. By September 1999, our cash and cash equivalents had been virtually exhausted. In September 1999, we raised $18.1 million through the issuance and sale of convertible debentures to Sprint (in the amount of $11.0 million) and certain venture capital sources (in the amount of $7.1 million). During the quarter ended June 30, 2000, at the request of the Company, the holders agreed to convert the entire principal amounting to a face value

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of $18.1 million plus accrued interest through June 30, 2000 of $594,000, into 6,559,310 shares of common stock. Upon the conversion, we paid a premium, as an inducement to the holder's equivalent to the interest that would have been added to the principal of the debentures for the third and fourth quarters of 2000, amounting to $375,750. The premium was paid in the form of additional shares of common stock calculated at the conversion price of $2.85 per share and was equivalent to 131,842 shares of common stock.

    Additionally, Sprint acquired warrants to purchase up to $8.4 million of additional convertible debentures, which debentures were convertible at December 31, 2000 into 2,946,622 shares of common stock common stock, on the same terms as the convertible debentures referred to above. The warrants were issued in consideration for Sprint's obligation to purchase at least $10 million of our products. The amount of shipments in 2000 totaled at least $10,000,000. Assuming that as of December 31, 2000, Sprint exercised all its warrants, it would own 7,013,000 shares of our common stock, representing approximately 28.2% of the 24,881,570 shares of our common stock that would then be outstanding (assuming no other security holders exercised their options, warrants or conversion privileges). On a fully diluted basis, assuming that as of December 31, 2000 all other security holders exercised their options, warrants and conversion privileges as well as Sprint, Sprint would own approximately 21.6% of the 32,431,063 fully diluted shares of our common stock that would then be outstanding. The actual and fully diluted shares at December 31, 2000 do not include shares of underlying convertible debentures and warrants that we sold in February 2001.

    In addition to the above financing, we have outstanding a senior secured convertible debenture in the face amount of $5.5 million due in April 2002 and bearing interest at 12% per annum, payable quarterly. The conversion price is subject to weighted average antidilution provisions whereby, if we issue shares in the future for consideration below the existing conversion price, then (with certain exceptions) the conversion price will automatically be decreased, allowing the holder of the debenture to receive additional shares of common stock upon conversion.

    Pursuant to a Securities Purchase Agreement dated February 16, 2001 between the Halifax Fund, a fund managed by the Palladin Group, and the Company, we issued and sold to the Halifax Fund on February 16, 2001 certain securities. The securities included (i) a $7.5 million principal amount 6% Convertible Debenture due 2003, which will be convertible into shares of the Company's common stock; (ii) a common stock Purchase Warrant to purchase 833,333 shares of common stock at $9.00 per share (subject to adjustment) which is exercisable at the election of Palladin, or at the election of the Company at a price per share the lower of which is (a) $9.00 and (b) 94% of the daily volume weighted average price; and (iii) an Adjustment Warrant. The Adjustment Warrant will be exercisable beginning on the 18th day following the date (referred to in this discussion as the Effective Date) that there is declared effective by the Securities and Exchange Commission the registration statement that the Company is required to file with respect to the resale of the shares of common stock underlying the debentures and warrants. The Adjustment Warrant will only be exercisable, however, if the volume weighted average sale price for our common stock is not more than $7.2694 per share. The aggregate number of shares issuable pursuant to the exercise of the Adjustment Warrant will be determined by dividing $8,625,000 by the Adjustment Price, as defined below, and then subtracting the sum of the number of shares of common stock previously issued pursuant to the conversion of the debenture and the number issued upon any previous exercise of the Adjustment Warrant. The Adjustment Price is the average of the 15 lowest daily volume weighted average sale prices of the Company's common stock as reported on Nasdaq, not including the three lowest days, during the 65 trading day period following the Effective Date.  The adjustment price will not be below $3.50 per share. The adjustment warrant terminates three months after the end of the 65 trading day adjustment period. In consideration for such securities, Palladin paid an initial purchase price of $7,500,000. The Company granted to Palladin in the purchase agreement certain rights of first refusal, preemptive rights and other rights. Pursuant to

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the purchase agreement, Palladin and the Company also entered into a Registration Rights Agreement dated as of February 16, 2001.

    Net cash used in operating activities was $11,742,000, $8,017,000, and $19,302,000 during 2000, 1999, and 1998, respectively. The net cash used in operating activities in 2000 was primarily the result of our net loss of $37,203,000 and an increase in net current assets related to operating activities of $9,517,000, offset by the beneficial conversion of convertible debentures of $20,800,000, non-cash compensation charges of $4,596,000 recognized on the grant of stock and stock options to employees and consultants at exercise prices which were lower than fair market on the date of grant, non-cash charges related to the issuance of stock for settlement of litigation of $2,000,000, non-cash charges related to the issuance of common stock to induce conversion of debentures of $1,170,000, and an increase in current liabilities of $5,698,000. The net cash used in operating activities in 1999 was primarily the result of our net loss of $22,192,000, partially offset by non-cash charges attributable to the amortization of a deemed discount on the debentures amounting to $7,394,000, depreciation and amortization charges of $1,323,000, non-cash compensation charges of $1,031,000, and a reduction in net current operating assets of $3,158,000. Net cash used in operating activities in 1998 was primarily due to our net loss of $24,625,000, partially offset by non-cash charges of $6,336,000 and an increase in net current assets related to operating activities of $1,013,000.

    Net cash used in investing activities was $788,000, $21,000, and $3,014,000 in 2000, 1999, and 1998, respectively. Aggregate capital expenditures for property and equipment (primarily computers, leasehold improvements, furniture, fixtures and engineering test equipment) were $788,000, $21,000, and $3,907,000 in 2000, 1999, and 1998, respectively. The significant decrease in capital expenditures in 2000 and 1999 as compared to 1998 was primarily due to higher expenditures for leasehold improvements in 1998 that were offset by proceeds from short- term investments of cash reserves. In the past, we have funded a substantial portion of our property and equipment expenditures from direct vendor leasing programs and third party commercial lease arrangements. At December 31, 2000, we did not have any material commitments for capital expenditures.

    Net cash provided by financing activities of $1,014,000 in 2000 was primarily due from the net proceeds of $1,349,000 from the exercise of stock options. Net cash provided by financing activities was $17,981,000 in 1999 primarily due from proceeds from issuance of convertible debentures and related common stock warrants and from issuance of common stock for $18,446,000, offset by repayment of capital lease obligations amounting to $465,000. Net cash used in financing activities was $391,000 in 1998 primarily as a result of payment of $478,000 on capital lease obligations, partially offset by net proceeds of $87,000 from the exercise of stock options. At December 31, 2000, our liquidity consisted of cash and cash equivalents of $1,878,000 and working capital of $6,324,000.

    Other than the agreement with Palladin above, as of December 31, 2000 we have no available line of credit or other source of borrowings or financing. We believe that, with respect to our current operations, our cash balance, after giving effect to the financing completed in February 2001, plus revenues from operations and non-operating cash receipts will be sufficient to meet our working capital and expenditure needs through 2001. We may seek additional financing during 2001 through debt, equity or equipment lease financing, or through a combination of financing vehicles. There is no assurance that additional financing will be available to us on acceptable terms, or at all, when we require it.

Seasonality and Inflation

    We do not believe that our business is seasonal or is impacted by inflation.

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New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Under SFAS 133, gains or losses resulting from changes in the values of derivatives are to be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. This statement was amended by SFAS 137, issued in June 1999, such that it is effective for the Company's financial statements for the year ended December 31, 2001. The Company currently transacts substantially all of its revenues and costs in U.S. dollars and to date has not entered into any material amounts of derivative instruments. Accordingly, management does not currently expect adoption of this new standard to have a significant impact on the Company.

Risk Factors

    AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS REPORT ON FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE NOT AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED AND THE PRICE OF OUR COMMON STOCK COULD DECLINE.

WE LIKELY WILL NEED ADDITIONAL CAPITAL.

    Although we raised over $35 million in net proceeds from our initial public offering in November 1997, our capital resources were virtually exhausted by September 1999. In September 1999, we raised $18.1 million through the issuance and sale of convertible debentures. In February 2001, we entered an agreement with a fund of The Palladin Group under which we have received $7.5 million of cash financing and may receive up to an additional $7.5 million. While we believe we have sufficient capital to continue operations through the year 2001, we likely will be required to raise additional cash in the future to support further growth in our business. We have agreed with Sprint Corporation to manufacture, ship, test, install and perform maintenance on certain quantities of our products this year. In addition, we have agreed to provide other services including enhancing our existing products and developing certain new products. This agreement with Sprint and other orders that we have recently received will increase our need for capital.

    Our ability to raise additional capital may be limited by a number of factors, including (i) Sprint's veto rights, right of first refusal and other substantial rights and privileges, (ii) our dependence upon Sprint's business (which is not assured) and, to a lesser extent, the business of a few other customers, (iii) possible continuing uncertainties and concerns as a result of our past financial reporting difficulties, class action litigation and related issues, (iv) our need to increase our work force quickly and effectively and to reduce the cost of our existing products and develop new products, (v) uncertainty regarding our financial condition and results of operations, (vi) our history of heavy losses, and (vii) the other risk factors referred to below. We can give no assurance that we will be able to raise the additional capital we will need in the future or that any financing we may be able to obtain will not be on terms that are detrimental to our business and our ability to raise additional capital. We may not have sufficient capital or other resources necessary to meet the requirements of the Sprint

21

agreement and other large customers in the future. Accordingly, we may need to seek strategic alliances with other companies to assist in the development of new products and services. We might not be able to form such alliances at all or on terms that are beneficial for us.

WE ARE LARGELY DEPENDENT ON SPRINT.

    We expect that our future business will primarily come from wireless customers and Sprint has acquired or controls our principal wireless customers. Accordingly, our future business will be substantially dependent upon orders from Sprint or from companies selling to Sprint. Sprint is currently using our products in connection with its initial offering of wireless Internet access services. We have only a small number of other customers.

    Sprint also possesses substantial corporate governance rights. By virtue of the various agreements in connection with the purchase of $11 million in convertible debentures, Sprint may designate two directors of the Board. Under the terms of our agreements with Sprint, we cannot issue any securities (with limited exceptions) or, in most cases, take material corporate action without Sprint's approval. Sprint has other rights and privileges, including pre-emptive rights and a right of first refusal in the case of any proposed change of control transaction, which right of first refusal is assignable by Sprint to any third party. Furthermore, if Sprint exercises all its warrants (and assuming that no other warrant holders exercise), Sprint would own as of December 31, 2000, approximately 28.2% of our common stock on a beneficial ownership basis and 21.6% of our common stock on a fully diluted basis. As a result, Sprint will have a great deal of influence on us in the future. We have no assurance that Sprint will exercise this influence in our best interests, as Sprint's interests are in many respects different than ours (e.g., in deciding whether to purchase our products, in negotiating the price and other terms of any of those purchases and in deciding whether or not to support any future investment in us or any future strategic partnering or sale opportunity).

    We have entered into an equipment purchase agreement with Sprint that imposes substantial requirements on us. We must meet Sprint's schedule for the manufacture and shipment of products; we must develop certain new products and enhance existing products according to Sprint's schedule and specifications; we must perform substantial installation and maintenance services; and we have agreed to the "open architecture" principle whereby we will license our technology to qualified third parties. In addition, Sprint's obligation to purchase our products is subject to extensive testing and acceptance procedures. If we fail to meet the requirements of the agreement, we could be subject to heavy penalties, including the obligation to license our intellectual property rights to Sprint on a royalty-free basis and Sprint may gain access to key source code of our products.

CHANGES IN PLANS OR CIRCUMSTANCES AT OUR LARGEST CUSTOMERS COULD ADVERSELY AFFECT OUR SALES.

    In late 2000, Sprint completed a reorganization of its operations that included the business to which we sell our products. At that time, Sprint announced that in the residential and small business areas it was focusing its broadband efforts on the thirteen markets where it had already deployed systems and that once it reached a comfort level that products and services were in line with customer expectations and requirements that it would begin a nationwide deployment. In light of these plans, we expect to sell a relatively smaller amount of our higher margin head end equipment to Sprint until they commence their nationwide deployment and our sales and gross margins could be adversely affected.

    In late 2000, Look Communications, our second largest customer for that year, encountered difficulties in securing additional financing to support the continued growth of its operations. We believe that Look Communications is exploring alternatives to obtain additional financing but cannot be assured that it will succeed. We expect to make limited sales to Look Communications in 2001.

22

WE HAVE NOT BEEN PROFITABLE TO DATE, AND WE MAY NEVER BE PROFITABLE. WE EXPECT CONTINUING LOSSES FOR THE FORESEEABLE FUTURE.

    We have not been profitable to date, and we cannot assure that we will ever achieve or sustain profitability. We were organized in 1990 and have had operating losses every year to date. Our accumulated deficit was $122,964,000 as of December 31, 2000 and $85,761,000 as of December 31, 1999. The revenue and profit potential of our business is unproven. The market for our products has only recently begun to develop, is rapidly changing, has an increasing number of competing technologies and competitors, and many of the competitors are significantly larger than we are. We have experienced price pressure on sales of our products in the past and these pressures continue. We expect to incur losses for the foreseeable future.

WE MUST BE ABLE TO QUICKLY AND EFFECTIVELY DEVELOP NEW PRODUCTS, DEVELOP ENHANCEMENTS FOR OUR EXISTING PRODUCTS, AND DEPLOY OUR PRODUCTS ON A MUCH LARGER SCALE THAN WE HAVE IN THE PAST, AND WE MIGHT NOT BE ABLE TO MEET THESE CHALLENGES.

    In order to meet the existing and future demands of the broadband wireless and cable markets, we must develop new products and enhance our existing products. In addition, Sprint and other potential large scale customers will require us to demonstrate that our system can be successfully deployed on a much larger scale than it has been in the past. We might not be able to meet these challenges.

    Sprint and other potential customers are also requesting the ability to deploy equipment that can serve subscribers who do not have a direct line-of-sight to the base station's transmit and receive tower. In some regions only 30% of the potential subscribers can be reached with line-of-sight equipment. The non line-of-sight deployments require the wireless system to operate with significantly reduced signal levels and increased signal distortions. The effect and magnitude of these factors varies widely and depends on many environmental factors. Hybrid is developing new products to operate in some non line-of-sight locations. There is no assurance that these new products will successfully solve all the non line-of-sight problems or that the wireless operators will accept these new products. If another company is successful in deploying a cost effective non line-of-sight system before we do, our business will be adversely affected.

WE ARE LARGELY DEPENDENT ON THE BROADBAND WIRELESS MARKET, AN EMERGING MARKET SUBJECT TO UNCERTAINTIES.

    Prior to 2000, over half our sales have been to cable customers. We have been, as expected, essentially shut out of the market of new installations for cable customers by the general adoption of the DOCSIS standard. This is a standard to which our products do not conform. The wireless industry has not adopted DOCSIS. Accordingly, the DOCSIS standard has inhibited our sales to cable customers, but it has not, to date, affected our ability to market to wireless system operators.

    The market for broadband Internet access products has only recently begun to develop. In the past, the broadband wireless industry has been adversely affected by chronic under-capitalization. Recent investments by Sprint and Worldcom in wireless operators had a significant effect upon the industry. One effect has been to attract major competitors. Cisco is testing high-speed Internet access products for wireless applications using a new technology that Cisco claims will replace existing technologies, including ours. It is a variant of OFDM. We face other major competition in the wireless market as well.

    The wireless industry also competes with other technologies such as cable and DSL, to provide high-speed Internet access. Cable companies providing Internet access and telephone companies providing Internet access through DSL service are expanding into areas that were previously considered commercially reachable only by wireless service. The principal disadvantage of wireless is that it

23

currently requires a direct line-of-sight between the wireless operator's antenna and the customer's location. Physical interruptions such as buildings, trees or uneven terrain can interfere with reception, thus limiting broadband wireless system operators' customer bases. In addition, wireless customers face a number of licensing and regulatory restrictions.

    Conditions in the wireless market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. There can be no assurance that the wireless industry market will grow or that our products will be accepted in the emerging market.

EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES, AND TECHNOLOGICAL CHANGES MAY HURT OUR BUSINESS.

    Our products are not in compliance with the DOCSIS standard that has been adopted by cable operators or with the DAVIC standard that is supported in Europe. The emergence of these standards has hurt our cable business, and the adoption of wireless industry standards in the future could also have a similar adverse effect.

    The market for high-speed Internet access products is characterized by rapidly changing technologies and short product life cycles. The rapid development of new competing technologies increases the risk that our products could be rendered noncompetitive. Future advances in technology may not be beneficial to, or compatible with, our business and products, and we might not be able to respond to the changes in technology, or our response might not be timely or cost-effective. Market acceptance of new technologies and our failure to develop and introduce new products and enhancements to keep pace with technological developments could hurt our business.

    Some firms that are developing broadband wireless systems and products are much larger than we are. These firms and other smaller firms are not all using the same technological base and approach. In order to promote their products, these competing firms are seeking to develop consortia and other alliances to promote their technology as the industry standard. If technologies other than the approach we are pursuing are adopted as the standard, our products could lose acceptance in the marketplace and our growth would be seriously impaired.

WE FACE SIGNIFICANT COMPETITION, INCLUDING COMPETITION FROM LARGE COMPANIES.

    Our market is intensely competitive, and we expect even more competition in the future. Most of our competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support, and other resources, as well as greater name recognition and access to customers, than we have. One of our principal competitors, Cisco, has recently announced that it has a competitive wireless technology that will provide superior cost/benefit performance and will operate successfully in environments in which it is difficult to obtain a clear line-of-sight as well as environments with multi-path interference (around buildings, flat roofs and water, for example). Although we believe Cisco has not yet installed a commercially operating system using this technology, we cannot assure you that it will not do so or that Cisco's system will not provide benefits superior to ours. We believe that other companies also have products under development to mitigate line-of-sight limitations.

    We are primarily engaged in the market for FBBW high-speed Internet access equipment. In addition, our customers compete with other forms of high-speed Internet access including DSL and cable. While we believe our products and services are competitive with or superior to those of our competitors, our product development may be adversely affected by the lack of engineering resources. Conditions in our market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Similarly, the continued emergence or evolution of industry

24

standards or specifications may put us at a disadvantage in relation to our competitors. There can be no assurance that we will be able to compete successfully in the future.

    We have agreed with Sprint that in the future we will allow third parties to license our technology and offer products in competition with ours, using our technology. This could generate significant new competitive challenges for us. It might also not meet our objective of creating a defacto standard for working systems.

    Our business depends upon the technical success and working relationships of our allies producing other parts of the system. As an example, one transceiver must be installed for each Hybrid Wireless Broadband Router. California Amplifier has the major share of the transceiver market in Sprint and many other accounts and our customer sales would be limited if California Amplifier fails to meet their needs. Three vendors produce transmitters and the vendor is often chosen because their product already matches the transmitters in place when the spectrum is acquired. Two transmitter producers, Thomcast and EMCEE, resell Hybrid products. Many of the Sprint deployments use transmitters produced by ADC, a competitor to Hybrid. The head end down-converters and antennas are produced by this same group of companies. Andrew Corporation supplies transmitter antennas. The effective alliances in place that support free sales of our products may not continue to provide this support.

    To be successful, we must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. We must continue to develop products with improved performance over two-way wireless transmission facilities. There can be no assurance that we will meet these challenges.

WE FACE LITIGATION RISKS.

    We may be exposed to litigation in the future. Litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope of our patents, and to determine the validity and scope of the proprietary rights of others. Such litigation might result in substantial costs as well as a diversion of managerial resources and attention. Furthermore, our business activities may infringe upon the proprietary rights of others, and they may claim that our products infringe upon their proprietary rights. Any such claims, with or without merit, could result in significant litigation costs and diversion of management attention, as well as harm to our business, including having to enter into royalty and license agreements that may have terms that are disadvantageous to us. If litigation is successful against us, it could result in the invalidation of our proprietary rights and our incurring liability for damages, which could have a harmful effect on our business. We initiated one patent infringement litigation to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing terms that are in some respects favorable to them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that we propose in the future to sell our patents (whether separately or together with our other assets) to any third party. Nonetheless, we may find it necessary to institute further infringement litigation in the future and third parties may institute litigation against us challenging the validity of our patents. We may also face litigation over other aspects of our business, including employment or other commercial matters that, if concluded in a manner adverse to us, could adversely affect our operating results and financial condition.

MARKET PRESSURE TO REDUCE PRICES HAS HURT OUR BUSINESS AND THE PRESSURE IS LIKELY TO INCREASE.

    Historically, the market has demanded increasingly lower prices for our products and we expect downward pressure on the prices of our products to continue and increase. Our products are relatively expensive for the consumer electronics and the small office or home office markets. For example, customers who purchase one of our modems must usually also purchase an Ethernet adaptor. Market

25

acceptance of our products, and our future success, will depend in significant part on reductions in the unit cost of our client modems. Sprint and other large-scale customers have increased the downward pressure on our prices. Our ability to reduce our prices has been limited by a number of factors, including our reliance on a single manufacturer of our modems and on single-sources for certain components of our products. One of the principal objectives of our research and development efforts has been to reduce the cost of our products through design and engineering changes. We have no assurance that we will be able to redesign our products to achieve substantial cost reductions or that we will otherwise be able to reduce our manufacturing and other costs, or that any reductions in cost will be sufficient to improve our gross margins, which have historically been negative and which must substantially improve in order for us to operate profitably.

WE RELY ON A SINGLE MANUFACTURER FOR OUR END-USER PRODUCTS AND ON SINGLE-SOURCE COMPONENTS, AND SOME OF THE COMPONENTS ARE BECOMING OBSOLETE.

    We configure, test, and perform quality assurance procedures on the final product at the Hybrid facility. We outsource manufacturing of the product modules to third parties, while maintaining a limited in-house manufacturing capability for pre-production assembly and testing.

    Our Series 2000 client routers are manufactured by Sharp Corporation through an agreement we have had since early 1997 with Sharp and its distributor, Itochu Corporation. We have not developed an alternative manufacturing source given the quality of the Sharp product and our limited volumes. We continue cost reduction efforts in response to market pressures to reduce our prices. Given that Sharp remains our only manufacturing source of our routers and production rates remain level, our ability to reduce the manufacturing costs may be limited.

    Our CyberManager 2000 is built on the Ultra 10/Solaris platform by installing our proprietary network subscriber and network management software. Our CyberMaster Downstream Router and CyberMaster Upstream Router are built on Intel's Pentium-based PCI/ISA-based computer cards installed in a standard rack-mounted chassis from Industrial Computer Source. Our proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU.

    We are dependent upon these and other key suppliers for a number of components within our Series 2000 products. The WBR series routers use a Texas Instrument chip set for the 64-QAM demodulator. Hitachi is the sole supplier of the processors used in our routers. Intel is currently the sole supplier for certain components used in our products. There can be no assurance that these and other single-source components will continue to be available to us, or that deliveries to us will not be interrupted or delayed (due to shortages or other factors). Having single-source components also makes it more difficult for us to reduce our costs for these components and makes us vulnerable to price increases by the component manufacturer. Any significant interruption or delay in the supply of components for our products or any increase in our costs for components, or our inability to reduce component costs, could adversely affect our business.

OUR LONG SALES CYCLE MAKES IT DIFFICULT FOR US TO FORECAST REVENUES, REQUIRES US TO INCUR HIGH SALES COSTS AND AGGRAVATES FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. OUR SALES CYCLE MAY GET LONGER.

    The sale of our products typically involves a great deal of time and expense. Customers usually want to engage in significant technical evaluation before making a purchase commitment. There are often delays associated with our customers' internal procedures to approve the large capital expenditures that are typically involved in purchasing our products. This makes it difficult for us to predict revenue. In addition, since we incur sales costs before we make a sale or recognize related

26

revenues, the length and uncertainty of our sales cycle increases the volatility of our operating results because we may have high costs without offsetting revenues.

    Over the last year, the marketplace has consolidated so that our principal customers and potential customers are large service providers including telecommunications companies. This consolidation has greatly increased our selling expenses and lengthened our sales cycle.

INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.

    Although we currently sell our products primarily in the United States and Canada, we are pursuing opportunities in other countries and we believe that international sales may represent an increasingly greater proportion of our sales in the future. In 2000, international sales accounted for 24% of our gross sales, compared to 5% in 1999. To the extent that we sell our products internationally, such sales will be subject to a number of risks, including longer payment cycles, export and import restrictions, foreign regulatory requirements, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations, political and economic instability and reduced intellectual property protection. To increase our international coverage we rely on value added resellers ("VARs") or integrators. These VARs may not remain exclusive Hybrid distributors and will attempt rather to meet the needs of their customers. They also compete with each other in some areas so it may be difficult for Hybrid to protect its international distribution channels. In addition, the frequency spectrum and amount of spectrum available internationally varies from country to country. We will be dependent on our VARs to develop compliant transceivers and transmitters, which may slow deployment in some international markets.

WE DEPEND ON KEY PERSONNEL AND HIRING AND RETAINING QUALIFIED EMPLOYEES IS DIFFICULT.

    Our success depends in significant part upon the continued services of our key technical, sales and management personnel. Any officer or employee can terminate his or her relationship with us at any time. Our future success will also depend on our ability to attract, train, retain and motivate highly qualified technical, marketing, sales and management personnel. We are in an extremely tight labor market, and competition for such personnel is intense. There can be no assurance that we will be able to attract and retain key personnel. The loss of the services of one or more of our key personnel or our failure to attract additional qualified personnel could prevent us from meeting our product development goals and could have an extremely adverse effect on our business.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

    We rely on a combination of patent, trade secret, copyright and trademark laws in addition to contractual restrictions to establish and protect our intellectual property rights. We cannot assure that our patents will cover all the aspects of our technology that require patent protection or that our patents will not be challenged or invalidated, or that the claims allowed in our patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. We have initiated one patent infringement lawsuit to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing certain terms that are in some respects favorable for them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that in the future we propose to sell our patents (separately or together with our other assets) to any third party. We do not know whether we will bring litigation in the future in an effort to assert our patent rights, or whether other companies will bring litigation challenging our patents. Any such litigation could be time consuming and costly and could result in our patents being held invalid or unenforceable. Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents.

27

    We have entered into confidentiality and invention assignment agreements with our employees, and we enter into non-disclosure agreements with certain of our suppliers, distributors, and customers, in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we take to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent, as do the laws of the United States.

    We have in the past received, and may in the future receive, notices from certain persons claiming that our products, software or asserted proprietary rights infringe the proprietary rights of such persons. We expect that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in our market grows. While we are not currently subject to any such claim, any future claim, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us if at all.

    In the future, we may also file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or not, could result in substantial costs and diversion of management resources. As indicated above, we were engaged during 1998 in an infringement lawsuit that we brought against two alleged infringers. In 1999, in order to stop the diversion of resources caused by the litigation, we entered into a settlement pursuant to which the defendants obtained licenses to our products on terms that in certain respects were favorable to the defendants. Nonetheless, we may find it necessary to institute further infringement litigation in the future.

DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND PRODUCT LIABILITY.

    Products as complex as ours frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. In the past, such errors have occurred in our products and there can be no assurance that errors will not be found in our current and future products. The occurrence of such errors, defects or failures could result in product returns and other losses. They could also result in the loss of or delay in market acceptance of our products.

GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.

    We are subject to varying degrees of governmental, federal, state and local regulation. For instance, the jurisdiction of the FCC extends to high-speed Internet access products such as ours. The FCC has promulgated regulations that, among other things, prescribe the installation and equipment standards for communications systems. Furthermore, regulation of our customers may adversely affect our business.

    The capacity of downstream spectrum in the MMDS band is not a problem for current deployments but the upstream constraints severely limit capacity. Our customers generally only have MDS 1 and 2 for the return. This gives 12 MHz bandwidth enhanced to 50 MHz if using ten sector return antennas. Any increase in this capacity or the deployment of more cells usually requires additional spectrum. Each of our customers has filed for two-way operation in the MMDS band for the end of year 2000 but the FCC has to approve their filings. Operators in nearby cities must co-operate and show their plans do not cause interference. Delays in approvals by the FCC to open up MMDS spectrum to permit flexible use for upstream and downstream paths may adversely affect our future growth. If the FCC changes its decision to open the MMDS spectrum for full utilization, the future growth of the wireless industry could be limited.

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VOLATILITY OF OUR STOCK PRICE.

    The factors referred to in this "Risk Factors" section tend to cause our operating results to vary substantially from quarter to quarter. These fluctuations have adversely affected the prices of our common stock in the past and may adversely affect such prices in the future.

    Our common stock was delisted from the Nasdaq National Market and did not trade on Nasdaq between mid-June 1998 and July 6, 2000. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA

Independent Auditor's Report	31
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999	32
Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998	33
Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 2000, 1999, and 1998	34
Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998.	35
Notes to Financial Statements	36
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited). Two years ended December 31, 2000	54

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INDEPENDENT AUDITOR'S REPORT

The Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California

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

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

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

/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 16, 2001

31

HYBRID NETWORKS, INC.

BALANCE SHEETS

(in thousands, except per share data)

				December 31,
				2000			1999
ASSETS
Current assets:
	Cash and cash equivalents			$	1,878		$	13,394
	Accounts receivable, net of allowance for doubtful accounts of $200 in 2000 and 1999				7,699			1,138
	Inventories				7,303			3,755
	Prepaid expenses and other current assets				519			234
			Total current assets		17,399			18,521
Property and equipment, net					2,000			2,244
Intangibles and other assets					265			387
			Total assets	$	19,664		$	21,152
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Current portion of capital lease obligations				29			336
	Accounts payable				4,529			2,035
	Accrued liabilities and other				6,517			4,623
			Total current liabilities		11,075			6,994
Convertible debentures					5,500			23,827
Capital lease obligations, less current portion					—			29
Other long-term liabilities					132			122
			Total liabilities		16,707			30,972
Commitments and contingencies (Notes 6,8,9, and 10)
Stockholders' equity (deficit):
	Convertible preferred stock, $.001 par value:
		Authorized: 5,000 shares;
		Issued and outstanding: no shares in 2000 or 1999			—			—
	Common stock, $.001 par value:
		Authorized: 100,000 shares;
		Issued and outstanding: 21,935 shares in 2000 and 11,481 shares in 1999			22			11
	Additional paid-in capital				125,899			75,823
	Unrealized gain on available-for-sale securities				—			107
	Accumulated deficit				(122,964	)		(85,761	)
			Total stockholders' equity (deficit)		2,957			(9,820	)
			Total liabilities and stockholders' equity (deficit)	$	19,664		$	21,152

The accompanying notes are an integral part of these financial statements.

32

HYBRID NETWORKS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

				Years Ended December 31,
				2000			1999			1998
Gross sales				$	29,924		$	13,423		$	12,418
Sales discounts					(7,129	)		(407	)		—
Net sales					22,795			13,016			12,418
Cost of sales					23,139			13,341			14,046
Gross loss					(344	)		(325	)		(1,628	)
Operating expenses:
	Research and development				6,715			4,191			7,771
	Sales and marketing				16,491			1,740			3,642
	General and administrative				11,625			7,660			8,933
	Asset impairment charge				—			—			1,250
	Write off of technology license				—			—			1,283
		Total operating expenses			34,831			13,591			22,879
			Loss from operations		(35,175	)		(13,916	)		(24,507	)
Interest income and other expense					(717	)		171			779
Interest expense					(1,311	)		(8,447	)		(897	)
			Net loss	$	(37,203	)	$	(22,192	)	$	(24,625	)
Basic and diluted loss per share				$	(2.03	)	$	(2.08	)	$	(2.37	)
Shares used in basic and diluted per share calculation					18,309			10,678			10,410

The accompanying notes are an integral part of these financial statements.

33

HYBRID NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)

		Preferred Stock			Common Stock
								Additional Paid-in Capital		Comprehensive Income(loss)			Accumulated Deficit						Comprehensive Loss
		Shares	Amount		Shares	Amount										Total
Balances, January 1, 1998		—	$	—	10,345	$	10	$	66,145	$	92		$	(38,944	)	$	27,303
	Exercise of common stock options	—		—	127		—		87		—			—			87
	Grant of stock bonus awards	—		—	1		—		5		—			—			5
	Charge due to acceleration of options	—		—	—		—		24		—			—			24
	Reclassification for gains included in net loss	—		—	—		—		—		(92	)		—			(92	)	$	(92	)
	Net loss	—		—	—		—		—		—			(24,625	)		(24,625	)		(24,625	)
Comprehensive loss		—		—	—		—		—		—			—			—		$	(24,717	)
Balances, December 31, 1998		—		—	10,473		10		66,261		—			(63,569	)		2,702
	Exercise of common stock options	—		—	251		—		345		—			—			345
	Stock issued for services	—		—	7		—		56		—			—			56
	Sales discount recognized on issuance of warrants to customers	—		—	—		—		407		—			—			407
	Compensation recognized on issuance of stock options	—		—	—		—		975		—			—			975
	Class action settlement stock issued	—		—	750		1		385		—			—			386
	Discount related to beneficial conversion of notes	—		—	—		—		7,394		—			—			7,394
	Unrealized gain on investments	—		—	—		—		—		107			—			107		$	107
	Net loss	—		—	—		—		—		—			(22,192	)		(22,192	)		(22,192	)
	Comprehensive loss	—		—	—		—		—		—			—			—		$	(22,085	)
Balances, December 31, 1999		—		—	11,481		11		75,823		107			(85,761	)		(9,820	)
	Exercise of common stock options	—		—	1,181		1		1,348		—			—			1,349
	Exercise of warrants	—		—	71		1				—			—			1
	Convertible debt conversion	—		—	6,691		7		19,930		—			—			19,937
	Stock Bonus	—		—	3		—		27		—			—			27
	Sales discount recognized on issuance of warrants to customer	—		—	—		—		20,800		—			—			20,800
	Compensation recognized on issuance of stock options	—		—	—		—		4,596		—			—			4,596
	Class action and other lawsuit settlement stock issued	—		—	2,508		2		3,301		—			—			3,303
	Discount related to beneficial conversion of notes	—		—	—		—		74		—			—			74
	Unrealized gain on investments	—		—	—		—		—		(107	)		—			(107	)	$	(107	)
	Net loss	—		—	—		—		—		—			(37,203	)		(37,203	)		(37,203	)
	Comprehensive loss	—		—	—		—		—		—			—			—		$	(37,310	)
Balances, December 31, 2000		—	$	—	21,935	$	22	$	125,899	$	—		$	(122,964	)	$	2,957

The accompanying notes are an integral part of these financial statements.

34

HYBRID NETWORKS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

				Years Ended December 31,
				2000			1999			1998
Cash flows from operating activities:
	Net loss			$	(37,203	)	$	(22,192	)	$	(24,625	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			1,139			1,323			1,883
		Amortization of discount related to beneficial conversion feature			—			7,394			—
		Issuance of stock for settlement of litigation			2,000			—			—
		Asset impairment charge			—			—			1,250
		Provision for doubtful accounts			—			—			200
		Provision for excess and obsolete inventory			(862	)		529			1,691
		Compensation recognized upon issuance of stock and stock options			4,596			1,031			—
		Common stock issued to induce conversion of debenture			1,170			—			—
		Beneficial conversion of convertible debentures			149			—			—
		Sales discounts recognized on issuance of warrants to customers			20,800			407			—
		Stock bonus			27			—			5
		Charge for accelerated vesting of options			—			—			24
		Interest added to principal of convertible debentures			368			226			—
		Gain on available for sale of securities			(107	)		107			—
		Write off technology license			—			—			1,283
		Change in assets and liabilities:			—
			Restricted cash		—			515			(515	)
			Accounts receivable		(6,561	)		295			(505	)
			Inventories		(2,686	)		940			(645	)
			Prepaid expenses and other current assets		(270	)		630			(502	)
			Accounts payable		2,494			(28	)		(222	)
			Other long term liabilities		8			68			—
			Accrued liabilities and other		3,196			738			1,376
			Net cash used in operating activities		(11,742	)		(8,017	)		(19,302	)
Cash flows from investing activities:
	Purchase of property and equipment				(788	)		(21	)		(3,907	)
	Disposal of property and equipment				—			—			74
	Change in other assets				—			—			(74	)
	Purchase of short-term investments				—			—			(11,772	)
	Proceeds from disposal of short-term investments				—			—			12,665
			Net cash used in investing activities		(788	)		(21	)		(3,014	)
Cash flows from financing activities:
	Repayment of capital lease obligations				(335	)		(465	)		(478	)
	Net proceeds from issuance of common stock				1,349			345			87
	Proceeds from issuance of convertible debentures and related common stock warrants				—			18,101			—
			Net cash provided by (used in) financing activities		1,014			17,981			(391	)
Increase (Decrease) in cash and cash equivalents					(11,516	)		9,943			(22,707	)
Cash and cash equivalents, beginning of period					13,394			3,451			26,158
Cash and cash equivalents, end of period				$	1,878		$	13,394		$	3,451
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
	Common stock issued to settle class action liability			$	1,303		$	386		$	—
	Property and equipment acquired under capital leases				—			—			280
	Common stock issued in conversion of convertible debt				18,694			—			—
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Interest paid				855			710			802
	Income taxes paid				—			—			—

The accompanying notes are an integral part of these financial statements.

35

HYBRID NETWORKS, INC

NOTES TO FINANCIAL STATEMENTS

1. FORMATION AND BUSINESS OF THE COMPANY

    The Company, which was incorporated in Delaware on June 6, 1990, is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high-speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the local connection to the end user which causes slow response time for those accessing bandwidth intensive information.

2. BASIS OF PRESENTATION

    The Company was organized in 1990 and has had operating losses since then. The Company's accumulated deficit was $122,964,000 as of December 31, 2000, and $85,761,000 as of December 31, 1999. Although the Company has raised large sums of capital in the past, including over $35 million in net proceeds from its initial public offering in November 1997, and over $18 million from the issuance and sale of convertible debentures in September 1999, and in February 2001, the Company entered an agreement with a fund of the Palladin Group that provided the Company with an initial $7.5 million in cash, and may provide the Company up to an additional $7.5 million in the future, the Company is losing money at a rate that will require it to raise additional capital in the future.

    The Company may seek additional financing during 2001 through debt, equity or equipment lease financing or through a combination of financing vehicles (including the possible exercise of warrants issued to Sprint Corporation ("Sprint") as discussed in Note 6). The Company's ability to continue as a going concern is dependent on obtaining additional financing to fund its current operations and, ultimately, generating sufficient revenues to obtain profitable operations. There is no assurance that the Company will be successful in these efforts.

    At December 31, 2000, the Company's liquidity consisted of cash and cash equivalents of $1,878,000 and working capital of $6,324,000. The Company's indebtedness consisted of $5.5 million in convertible debentures.. The Company believes that its cash balance, plus anticipated revenues from operations, and non-operating cash receipts will be sufficient to meet the Company's working capital and expenditure needs through the year 2001.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

    The Company's financial statements are based upon a number of significant estimates, including the estimated useful lives selected for property and equipment, accrued liabilities related to product warranties and litigation, and valuation allowances for accounts receivable, inventory and property and equipment. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that these estimates will be further revised in the near term and such revisions could be material.

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Fair Value of Financial Instruments

    The estimated fair values for financial instruments under SFAS No. 107 "Disclosures About Fair Value of Financial Instruments," are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The fair value of available-for-sale securities is based on market prices for the securities and is equivalent to its carrying value. The fair values of capital leases and convertible debentures are based upon borrowing rates that are available to the Company for obligations with similar terms, collateral, and maturity. At December 31, 2000, the estimated fair value of these liabilities approximate their carrying values.

Business Risks and Credit Concentration

    The Company sells its products primarily to broadband wireless system operators principally in North America. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company also maintains allowances for potential losses on collectability of accounts receivable, as needed, and such losses have been within management's expectations.

    The Company operates in the intensely competitive and rapidly changing communications industry which has been characterized by rapid technological change, evolving industry standards, and federal, state and local regulation which may impede the Company's penetration of certain markets.

    The Company currently operates in one industry segment with one product line. The Company's future success depends upon its ability to develop, introduce, and market new products, its ability to obtain components from key suppliers, obtaining sufficient manufacturing capacity, and the success of the broadband access business. The Company may experience future fluctuations in operating results and declines in selling prices.

    Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or groups of counter parties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions. In accordance with SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," financial instruments that subject the Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits, investments in commercial paper (which are classified as cash equivalents), and accounts receivable, which have no collateral or security.

    The Company derived 77% of its revenue in 2000 from two customers and this concentration represents a risk to the Company. If there were significant reductions in sales to these customers and should the Company be unable to replace this business with sales to alternative customers, there would be a negative impact on the Company.

    In accordance with SFAS No. 105, disclosure is required of significant concentrations of credit risk from one or more counterparties for all financial instruments. The Company had accounts receivable from two customers at December 31, 2000 that together represented 98% of total accounts receivable. The inability to collect receivables from either one of these customers would have a significant negative impact on the Company.

Cash and Cash Equivalents and Short-Term Investments

    Cash equivalents consist of highly liquid investment instruments with a maturity at the time of purchase of three months or less. Instruments with a maturity at the time of purchase of greater than three months but less than one year from the date of purchase are included in short-term investments.

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Inventories

    Inventories are stated at the lower of cost (first-in, first-out basis) or market.

Property and Equipment

    Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of two to five years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the lease term. The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures, which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed of, and the related accumulated depreciation or amortization is removed from the accounts, and any gains or losses are reflected in current operations.

Intangibles and Other Assets

    At December 31, 2000 and 1999, intangibles and other assets included deferred financing costs relating to fees incurred in connection with the issuance of a senior convertible debenture in April 1997. The deferred financing costs are amortized over the five-year life of the debenture (see Note 6). Total accumulated amortization of deferred financing costs as of December 31, 2000 and 1999 was $320,000 and $213,000, respectively. At December 31, 1997, intangibles also included the value assigned to the purchase of certain technologies relating to a technology support and development agreement signed in November 1997. In connection with entering into the technology support and development agreement, the Company issued a five-year warrant to purchase 458,295 shares of common stock at an exercise price of $10.91 per share. The amount attributed to the value of the warrants was $2,200,000. The Company periodically assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over the remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset to a net realizable value. The unamortized value of the technologies of approximately $1,283,000 was charged to expense in the second quarter of 1998 as it was determined to be of no further value to the Company.

Revenue Recognition

    We normally ship our products based upon a bona fide purchase order and volume purchase agreement. We recognize revenue at the time a transaction is shipped and collection of the resulting account receivable is probable. Shipments on customer orders with acceptance criteria, installation criteria or rights of return are recognized as revenue only when the criteria are satisfied. Revenue related to shipments to distributors is normally recognized upon receipt of payment for such transactions. As of December 31, 2000, the total amount of shipments not recognized as revenue due to acceptance or testing criteria or because they were sold to a distributor was $5.6 million, of which $4.9 million was in connection with shipments to Sprint. Sprint's purchases of head end equipment are generally subject to testing and acceptance procedures and the Company anticipates that it will continue to defer recognition of revenue for those shipments until those procedures have been satisfied and the products have been accepted by Sprint. In 2000, the Company recognized $16.1 million as gross revenue from sales to Sprint.

    During 2000, we generally sold our software together with a one-year technical support contract, for which we charge separately, to provide upgrades, maintenance, system support, and service. We recognized revenue on the software sale without reference to the maintenance contract, and we recognized revenue on the technical support contract over its term on a straight-line basis. Prior to 2000, we generally sold our software together with a three-year technical support contract for which we

38

did not charge separately. We recognized the revenue attributable to these software and technical support contracts over the three-year period. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed.

Product Development Costs

    Costs related to research, design and development of products are charged to research and development expenses as incurred. Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of certain software development costs from when technological feasibility is established, which the Company defines as completion of a working model and when the software is available for sale to the Company's customers. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

Stock-Based Compensation

    The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the Company will disclose the impact of adopting the fair value accounting of employee stock options. Transactions in equity instruments with non-employees for goods or services have been accounted for using the fair value method prescribed by SFAS 123.

Income Taxes

    The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the difference are expected to reverse.

Computation of Basic and Diluted Loss Per Share

    Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All such securities or other contracts were anti-dilutive for all periods presented and, therefore, excluded from the computation of loss per share.

Comprehensive Income (Loss)

    Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires that all items recognized under accounting standards as comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. Comprehensive income (loss) includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income (loss), include

39

foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The Company has presented comprehensive income (loss) for each period presented within the Statement of Stockholder's Equity (Deficit).

New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Under SFAS 133, gains or losses resulting from changes in the values of derivatives are to be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. This statement was amended by SFAS 137, issued in June 1999, such that it is effective for the Company's financial statements for the year ended December 31, 2001. The Company currently transacts substantially all of its revenues and costs in U.S. dollars and to date has not entered into any material amounts of derivative instruments. Accordingly, management does not currently expect adoption of this new standard to have a significant impact on the Company.

Reclassification

    Certain reclassifications have been made to the 1999 and 1998 financial statements in order to conform to the 2000 presentation. Such reclassifications had no effect on the previously reported net loss.

4. INVENTORIES

    Inventories are comprised of the following (in thousands):

	2000		1999
Raw materials	$	2,633	$	2,251
Work in progress		1,144		190
Finished goods		3,526		1,314
	$	7,303	$	3,755

    At December 31, 2000 and 1999, finished goods inventory included $2,730,000 and $0, respectively, of equipment that had been shipped to customers but for such shipments the related revenue was deferred pending final customer acceptance.

    The allowance for excess and obsolete inventory was $1,980,219 and $2,842,000 at December 31, 2000 and 1999, respectively. The provision for excess and obsolete inventory included in cost of sales was $235,000, $529,000 and $1,691,000 for the years ended December 31, 2000, 1999, and 1998, respectively.

40

5. PROPERTY AND EQUIPMENT

    Property and equipment consist of the following (in thousands):

	December 31,
	2000			1999
Machinery and equipment	$	3,828		$	3,059
Office furniture and fixtures		747			747
Leasehold improvements		1,922			1,914
		6,497			5,720
Less accumulated depreciation and amortization		(4,497	)		(3,476	)
	$	2,000		$	2,244

    Furniture and equipment purchased under capital leases included in the above table total $681,000 and $1,687,000 less accumulated amortization of $391,000 and $1,422,000 as of December 31, 2000 and 1999, respectively.

    Depreciation and amortization expense related to property and equipment was $1,139,000, $1,215,000, and $1,233,000 for the years ended December 31, 2000, 1999, and 1998, respectively.

    Due to the under utilization of the Company's San Jose headquarters, the 1998 financial statements include a fourth quarter charge of $1,250,000 reflecting the impairment of leasehold improvements and office furniture and fixtures.

6. CONVERTIBLE DEBENTURES

    In 1997, the Company issued a senior convertible secured debenture in the amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and maturing on April 30, 2002. An arrangement fee of $500,000 was paid by the Company. If the Company issues any shares (with certain exceptions for employee stock options and the like) for consideration less than the current conversion price, any such issuance would be subject to certain "weighted average" antidilution provisions.

    The debenture is collateralized by substantially all of the Company's assets. The Company is prohibited from making plant or fixed capital expenditures in excess of $5,500,000 and $11,000,000 during the 12 months ending March 31, 2000 and 2001, respectively. Additionally, the Company is prohibited from, among other things, declaring dividends, retiring any subordinated debt other than in accordance with the debenture's terms, or distributing its assets to any stockholder as long as the debenture remains outstanding.

    The Company's capital expenditures exceeded the maximum capital expenditures allowed for the 12 months ending March 31, 1999. The holder has waived this condition for the 12 month period ending March 31, 1999.

Issuances of Securities to Sprint Corporation and to Other Investors

    In September 1999, the Company issued to Sprint Corporation ("Sprint") a convertible debenture in the face amount of $11 million due in 2009 and bearing interest at 4% per annum, compounded monthly (accrued interest is automatically added to principal quarterly)(the "Sprint Debenture"). The Sprint Debenture was convertible at any time after December 31, 1999, at Sprint's option, into 3,907,775 shares of the Company's common stock at a conversion price of $2.85 per share (including accrued interest) (subject to adjustment). At any time on or after December 31, 2000, the Company could require the conversion of the Sprint Debenture. Concurrently with the issuance of the foregoing securities to Sprint, the Company issued to certain other investors for $7.1 million convertible debentures in the face amount of $7.1 million due in 2009 and bearing interest at 4% per annum,

41

compounded monthly (accrued interest is automatically added to principal quarterly). These debentures had substantially the same terms as the Sprint Debenture. Like the Sprint Debenture, these debentures were exercisable by the holders at any time after December 31, 1999, at their option, into 2,522,291 shares of the Company's common stock (subject to adjustment and including accrued interest). At any time on or after December 31, 2000, the Company could require the conversion of the debentures. The conversion price was $2.85. The investors that purchased the debentures were (i) partnerships associated with a firm of which a director of the Company is an executive partner; (ii) a partnership managed by a firm of which a former director (who was a director at the time of the investment) is a general partner; and (iii) an individual who is a director of the Company. During the quarter ended June 30, 2000, at the request of the Company, the holders agreed to convert the entire principal amounting to a face value of $18.1 million plus accrued interest through June 30, 2000, of $594,000, into 6,559,310 shares of common stock. Upon the conversion, we paid a premium as an inducement to the holders' equivalent to the interest that would have been added to the principal of the debentures for the third and fourth quarters of 2000, amounting to $375,750. The premium was paid in the form of additional shares of common stock calculated at the conversion price of $2.85 per share and was equivalent to 131,842 shares of common stock. The fair value of the stock was $8.87 per share at the time the premium was paid creating a beneficial conversion element valued at $1,170,000, which was recorded to interest expense at June 30, 2000.

    In September 1999, at the time of Sprint's purchase of our debentures, we issued to Sprint, warrants to purchase up to $8.4 million of additional convertible debentures (subject to the shipment of up to $10 million of products and services pursuant to purchase orders) which debentures will be convertible into up to 2,946,622 shares of our common stock on the same terms and conditions as the convertible debentures referred to above. Ten percent of the warrants became exercisable on the shipment dates when aggregate shipments of products and services pursuant to purchase orders submitted by Sprint to the Company were at least $1 million. With each additional $1 million of shipments, Sprint was entitled to exercise an additional 10% of the warrants until the aggregate shipments were $10,000,000. In accordance with the Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," transactions in equity instruments with non-employees for goods or services are accounted for using the fair value method prescribed by SFAS 123. SFAS 123 requires that in each period in which the warrants are earned, a non-cash charge will be recorded. The amount of such shipments during the year ended December 31, 2000 reached the $10,000,000 maximum and, based on the warrants' conversion ratio, this amount gave Sprint the right to receive 2,946,622 shares of the Company's common stock under the warrants, if exercised in full. The final value of this purchase right, using the Black-Scholes valuation model, was $20,800,000. Of this amount, $7,129,000 was recorded as a direct sales discount to offset recognized sales to Sprint. The balance of $13,671,000 was recorded as an operating expense of the Sales and Marketing department.

    Assuming as of December 31, 2000, that Sprint would exercise all of its purchase warrants, it would own 7,013,068 shares of our common stock, representing approximately 28.2% of the 24,881,570 shares of our common stock that would then be outstanding (assuming no other security holders exercised their options, warrants or conversion privileges). On a fully diluted basis, assuming that as of December 31, 2000, all other security holders exercised their options, warrants and conversion privileges as well as Sprint, Sprint would own approximately 21.6% of the 32,431,063 fully diluted shares of our common stock that would then be outstanding. In addition, under the terms of our agreements with Sprint, Sprint has substantial rights with respect to our corporate governance. Two of our directors are Sprint designees, and we cannot issue any securities (with limited exceptions) or, in most cases, take any material corporate action without Sprint's approval. Sprint has other rights and privileges as well, including pre-emptive rights and a right of first refusal in the case of any proposed change of control transaction, which right of first refusal is assignable by Sprint to any third party.

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    The Company also issued to Sprint in September 1999 a $1,000 debenture due in 2009 which is convertible by Sprint at any time into a newly created Series J preferred stock of the Company. Under the purchase agreement for the debentures and under the terms of the Series J preferred stock, Sprint has the right to elect two directors to the Company's board of directors and Sprint's approval will be required for many types of decisions involving corporate governance (including veto rights over most material actions the Company might take, see Note 10 below). In addition, Sprint has certain rights of first refusal and preemptive rights in respect of certain issuance's of securities by the Company and other rights, including a right of first refusal with respect to any change of control agreement (as defined), which right of first refusal it can assign to third parties.

7. ACCRUED LIABILITIES AND OTHER

    Accrued liabilities and other consists of the following (in thousands):

	2000		1999
Accrued payroll and related accruals	$	813	$	173
Accrued class action settlement and related legal expenses		775		2,946
Deferred revenue and customer deposits		3,916		797
Other liabilities		1,013		707
	$	6,517	$	4,623

8. COMMITMENTS

Lease Obligations

    The Company entered into certain non-cancelable operating and capital lease commitments, which expire at various dates through April 2004. Capital leases bear interest at rates ranging from 7.6% to 10.1%. Future minimum lease payments under all non-cancelable leases are as follows (in thousands):

	Capital Leases			Operating Leases
2001	$	30		$	899
2002					950
2003					976
2004					406
Thereafter
		30		$	3,231
Less amount representing interest		(1	)
		29
Less current portion		(29	)
	$	—

    Rent expense for 2000, 1999 and 1998 was approximately $926,000, $1,064,000, and $955,000, respectively.

    The Company's only long-term operating lease is for approximately 55,000 square feet of office, research and development, and manufacturing space in San Jose, CA. This sublease expires in April 2004.

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Employment Agreements

    The Company has entered into employment agreements with two officers and retention agreements with two others. The agreements provide for aggregate annual salaries of $1,240,000 until the employee voluntarily terminates or renegotiates the agreement. The agreements may be canceled at any time for cause. If the Company terminates the agreements for reasons other than cause, aggregate severance due under the agreements would be $1,240,000.

9. CONTINGENCIES

Class Action Litigation

    In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against the Company, two of its directors, four former directors and two former officers. The lawsuits were brought on behalf of purchasers of the Company's common stock during the class period commencing November 12, 1997 (the date of the Company's initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits (the State Actions) also named as defendants the underwriters in the Company's initial public offering, but the underwriters have since been dismissed from the cases.

    The complaints in the State Actions claimed that the Company and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements used in connection with the Company's initial public offering and the financial statements issued subsequently during the class period, as well as related statements made on behalf of the Company during the initial public offering and subsequently regarding the Company's past and prospective financial condition and results of operations, were false and misleading. The complaints also alleged that the Company and the other defendants made these misrepresentations in order to inflate the price of the Company's common stock for the initial public offering and during the class period. The Company and the other defendants denied the charges of wrongdoing.

    In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California (the Federal Actions). Both of the Federal Actions were brought against the same defendants as the State Actions, except that the second Federal Action also named as a defendant Price Waterhouse Coopers, LLP (PWC), the Company's former independent accountants. (The underwriters in the Company's initial public offering were named as defendants in the first Federal Action lawsuit but were subsequently dismissed.) The class period for the first Federal Action is from November 12, 1997 to June 1, 1998, and the class period in the second Federal Action extends to June 17, 1998. The complaints in both Federal Actions claimed that the Company and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. The Company and the other defendants denied these charges of wrongdoing.

    The Company and the other parties (other than PWC) to the State Actions and the Federal Actions reached an agreement to settle the lawsuits in March 1999, which agreement was approved by the U.S. District Court for the Northern District of California in June 1999. In November 1999, the settlement of State Actions and the Federal Actions became final. The time to appeal from the court's approval of the settlement has expired. Under the settlement, (i) the Company's insurers paid $8.8 million on the behalf of the Company and the officer and director defendants, and (ii) the Company issued 3,045,000 shares of common stock to the plaintiffs and their counsel (750,000 shares were issued in November 1999, and 2,295,000 shares were issued in February 2000), representing 21.9% of the shares of the Company's common stock that were outstanding at the end of February 2000. As a result of the settlement and a related agreement between the Company and its insurers, the Company has paid, and will not be reimbursed by its insurers for, $1.2 million in attorneys fees and other

44

litigation expenses that would otherwise be covered by its insurance, and the Company does not have insurance coverage for the attorneys fees and expenses relating to the settlement that it incurs in the future.

SEC Investigation

    In October 1998, the Securities and Exchange Commission began a formal investigation of the Company and certain individuals with respect to the Company's 1997 financial statements and public disclosures. The Company produced documents in response to the Securities and Exchange Commission's subpoena and cooperated with the investigation. A number of current and former officers and employees and outside directors testified before the Securities and Exchange Commission's staff.

    In November 1999, the SEC staff attorneys informed the Company in writing that the staff intended to file a civil injunctive action and seek civil monetary penalties against the Company for alleged violations of the federal securities laws.

    On June 29, 2000, the SEC filed in the United States District Court for the Northern District of California a complaint against the Company and three former employees. On the same day, the court approved the Company's settlement with the SEC and entered judgment against the Company. The court's order enjoins the Company from violating the books and records and related provisions of the federal securities laws but does not include any monetary penalties or an injunction against the violation of the antifraud provisions of the securities laws. At December 31, 2000, the Company has accrued $775,000 in legal fees in connection with this settlement and related continuing matters. The Company does not believe, based on current information, that the order will have a material adverse impact on the Company's business or financial condition.

Pacific Monolithics Lawsuit

    In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against the Company, two of its directors, four former directors (one of whom was subsequently dismissed), a former officer and PWC. The lawsuit concerns an agreement that the Company entered into in March 1998 to acquire Pacific Monolithics through a merger, which acquisition was never consummated. The complaint alleged that the Company induced Pacific Monolithics to enter into the agreement by providing it with financial statements, and by making other representations concerning the Company's financial condition and results of operations, which were false and misleading, and further alleged that the Company wrongfully failed to consummate the acquisition. The complaint claimed the defendants committed breach of contract and breach of implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint sought compensatory and punitive damages according to proof, plus attorneys' fees and costs. In July 1999, the court granted the Company's motion to compel arbitration and to stay the lawsuit pending the outcome of the arbitration.

    In October 1999, the plaintiff filed a demand for arbitration against the Company and the individual defendants with the San Francisco office of the American Arbitration Association. In the demand, the plaintiff alleged claims for breach of contract, breach of implied covenant of good faith and fair dealing, fraud and negligent misrepresentation arising out of the proposed merger between the two companies. The demand sought unspecified compensatory and punitive damages, pre-judgement interest and attorneys' fees and costs. In November 1999, the Company and the individual defendants answered the demand by denying the claims and seeking an award of attorneys' fees and costs pursuant to the agreement for the proposed merger. The arbitration hearing was scheduled to be held in September 2000.

45

    On July 7, 2000, the Parties participated in a mediation of the dispute in San Jose, California before the Honorable (Ret.) Peter Stone of JAMS. The mediation resulted in a Stipulation for Settlement of the litigation. The Parties formalized the terms of settlement by entering a Settlement Agreement & Mutual General Release and Covenant Not to Sue (the "Agreement") dated August 21, 2000. The Company's former auditors also joined in the Agreement.

    Pursuant to the terms of the Agreement, in full settlement and compromise of all of Pacific Monolithics' claims against the Company and its current and former officers and directors, and in exchange for Pacific Monolithics full release thereof, the Company agreed to deliver to Pacific Monolithics the total sum of 213,333 shares of the Company's common stock, valued at $2,000,000 as of July 7, 2000.

    The Company delivered 213,333 shares of its common stock to Pacific Monolithics on September 14, 2000. On September 19, 2000, the Company filed, and the Santa Clara Superior Court entered, a Request for Dismissal with Prejudice of the lawsuit.

10. STOCKHOLDERS' EQUITY

Preferred Stock

    The Board of Directors has authorized the issuance of up to 5,000,000 shares of undesignated preferred stock and the Board has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. In September 1999, the Board authorized a Series J preferred stock with special voting rights; including the right to elect two members of the Board and veto rights over the following:

•

adopting an Annual Business Plan (as defined) or taking any actions that materially deviate from such plan;



•

making any capital expenditures in excess of $2 million in the aggregate in any fiscal year, except to the extent contemplated in the Annual Business Plan;



•

making any acquisition or disposition of any interests in any other person or business enterprise or any assets, in a single transaction or a series of related transactions, in which the fair market value of the consideration paid or received by the Company exceeds $1 million;



•

organizing, forming or participating in any joint venture or similar entity involving the sharing of profits in which the assets or services to be contributed or provided by the Company to such joint venture or other entity have a fair market value in excess of $1 million;



•

forming a subsidiary;



•

issuing any common stock, preferred stock or other capital stock or any stock or securities (including options and warrants) convertible into or exercisable or exchangeable for common stock, preferred stock or other capital stock or amending the terms of any such stock or securities or any agreements relating thereto (other than employee stock options approved by the Board of Directors of the Company and common stock issued upon exercise thereof) or effecting any stock split or reverse stock split or combination;



•

entering into any transaction between the Company, on the one hand, and any affiliate or associate of the Company (as defined), on the other, other than the payment of compensation and other benefits to employees and directors in the ordinary course of business;



•

declaring or paying any dividend or other distribution with respect to the capital stock of the Company;

46

•

incurring any indebtedness for borrowed money or capital lease obligations that are not expressly contemplated in the then-current Annual Business Plan in excess of $250,000 in the aggregate during any fiscal year;



•

amending the Company's Certificate of Incorporation or Bylaws or creating or amending any stockholders' rights plan;



•

declaring bankruptcy; or



•

liquidating or dissolving the Company.

    None of the Series J preferred stock was outstanding at December 31, 2000.

Initial Public Offering and Conversion of Preferred Stock

    In November 1997, the Company filed a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The offering was completed on November 12, 1997. In connection with the initial public offering, all outstanding shares of preferred stock were converted into shares of common stock.

Warrants

    The Company has historically issued warrants in connection with its various rounds of financing, equipment lease lines, and transfers of technology. Warrants have been valued using the Black-Scholes Option Pricing Model.

    In connection with the issuance of Series G preferred stock in July 1996, and the 1996 equipment lease line, the Company issued warrants to purchase 58,021 and 5,802 shares of common stock, respectively, at $10.34 per share. During 2000, a warrant to purchase 58,021 shares was exercised for a net exercise of 22,039 shares of common stock. The remaining warrants are exercisable at any time and expire in August 2006.

    In connection with the issuance of convertible promissory notes in June 1996, which were later converted into Series G preferred stock, the Company issued warrants to purchase 167,037 shares of common stock at $4.73 per share. In connection with the issuance of Series D preferred stock May 1995, the Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225 shares was exercised for a net exercise of 99,850 shares of common stock. During 2000, a warrant to purchase 53,213 shares was exercised for a net exercise of 39,682 shares of common stock. The remaining warrants are exercisable at any time and expire in June 2001.

    During 1996, the Company issued warrants, at $.001 per warrant, to purchase 76,245 shares of common stock at $4.73 per share. In connection with technology transferred and the 1995 equipment lease line, the Company issued warrants to purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per share. During 1996, a warrant to purchase 169,259 shares was exercised for a net exercise of 91,921 shares of common stock. During 2000, a warrant to purchase 6,005 shares was exercised for a net exercise of 4,905 shares of common stock. The remaining warrants are exercisable at any time and 70,240 expire in June 2001 and 8,466 expire August of 2005.

    In September 1997, the Company issued warrants to purchase 252,381 shares of common stock in connection with the convertible subordinated notes payable, at an exercise price of $10.91. In October 1997, the Company issued warrants to purchase 2,659 shares of common stock in connection with obtaining a bank credit facility at an exercise price of $10.91. In November 1997, warrants to purchase 151,267 shares of common stock were exercised for a net exercise of 76,096 shares of common stock. During 2000, a warrant to purchase 18,599 shares was exercised for a net exercise of 4,818 shares

47

of common stock. These warrants are exercisable at any time and 82,515 expire in September 2002 and 2,659 expire in October 2002.

    In November 1997, the Company issued a five year warrant to purchase 458,295 shares of common stock at an exercise price of $10.91 per share, in connection with a technology support and development arrangement.

    In June 1999, the Company issued a five year warrant to purchase 210,000 shares of common stock at an exercise price of $0.50 per share to two customers in accordance with their volume purchase agreements. The fair value of the warrants of $407,000 was recorded as a discount on sales.

    In September 1999, the Company issued to Sprint Corporation warrants to purchase $8.4 million of convertible debentures, as described in Note 6 of the Notes to Financial Statements. These debentures are convertible to 2,946,622 shares of common stock at an exercise price of $2.85 per share. The fair value of these warrants amounted to $20,800,000. Of this amount, $7,129,000 was recorded as a direct sales discount and the balance of $13,671,000 was recorded as an operating expense of the Sales and Marketing department. Substantially all of the warrants are subject to net exercise provisions. The Company has reserved shares for the exercise of all the warrants.

    A summary of outstanding warrants as of December 31, 2000 follows:

Number Outstanding	Exercise Price		Expiration Date
644,411	$	4.73	June 2001
458,295		10.91	November 2002
82,515		10.91	September 2002
2,659		10.91	October 2002
2,946,622		2.85	September 2004
210,000		0.50	June 2005
8,466		4.73	August 2005
5,802		10.34	August 2006
4,358,770

Stock Option Plans

    In January 1999, the Company adopted a 1999 Officer Stock Option Plan and reserved 1,000,000 shares for issuance to officers of the Company or of a parent or subsidiary of the Company. In May 1999, the Company adopted a 1999 Stock Option Plan and, as amended in August 1999 and October 1999, reserved 4,000,000 shares for issuance to employees (including officers and directors who are also employees) or consultants of the Company or of a parent or subsidiary of the Company who meet the suitability standards set forth by this plan. The 1999 Officer Stock Option Plan and the 1999 Stock Option Plan will terminate ten years from the effective date or, if earlier, the date of stockholder approval of termination.

    In September 1997, the Company adopted the 1997 Equity Incentive Plan and reserved a total of 1,750,000 shares for issuance to employees, officers, directors, consultants, independent contractors, and advisors. The number of shares outstanding will increase automatically by 5% of the outstanding shares each year unless waived by the Board of Directors. In 1999, the Company increased the number of shares reserved for issuance under the 1997 Equity Incentive Plan by 523,501 shares. The 1997 Equity Incentive Plan expires in September 2007. Also in September 1997, the Company adopted the 1997 Directors' Stock Option Plan under which 100,000 shares of common stock have been reserved for issuance. The Directors' Plan provides for the grant of non statutory stock options to non-employee directors of the Company and expires in September 2007.

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    In December 1996, the Company adopted the 1996 Equity Incentive Plan and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants, independent contractors and advisors. In June 1997, the Company increased the number of shares reserved for issuance under the 1996 Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in December 2006.

    In December 1995, the Company adopted the Executive Officer Incentive Plan and reserved 370,370 shares of common stock for issuance to the Company's chief executive officer and other senior executive officers. In 1996 and 1997, the Company increased the number of shares reserved under this plan by 129,630 and 62,963, respectively. In the event of a merger, consolidation, liquidation or similar change of control transaction as a result of which the participants' responsibilities and position with the Company are materially diminished, options granted under this plan become fully exercisable and remain so for one year thereafter. This plan will expire in December 2005.

    In October 1993, the Company adopted the 1993 Equity Incentive Plan, and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants and advisors. In 1995, 1996 and 1997, the Company increased the number of shares reserved for issuance under the 1993 Equity Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993 Equity Incentive Plan expires in October 2003.

    Under all of the plans, the exercise price of incentive stock options may not be less than the fair market value of the shares on the date of grant (not less than 110% of fair market value if the option is granted to a 10% stockholder). Under all of the plans other than the 1999 Stock Option Plan, nonqualified stock options may not be granted at less than 85% of fair market value on the date of grant. Options and stock awards generally vest 12.5% six months from date of grant and 2.0833% per month thereafter; although certain options vest over a shorter period of time, and the vesting of certain options accelerates in certain circumstances. Stock options generally expire three months after termination of employment and five years from date of grant, subject to exceptions in certain cases.

    Activity under the plans is set forth below (in thousands, except per share data):

		Shares Available		Options Outstanding		Value of Options Outstanding			Weighted Average Exercise Price
Balances, January 1, 1998		2,024		1,926			5,885			3.06
	Options granted	(1,445	)	1,445			4,527			3.13
	Stock bonus award	(1	)	—			—			—
	Options canceled	511		(509	)		(1,871	)		3.66
	Options exercised			(127	)		(87	)		0.70
Balances, December 31, 1998		1,089		2,735			8,454			3.09
	Additional shares reserved	5,524
	Options granted	(4,075	)	4,075			9,015			2.21
	Options canceled	1,664		(1,664	)		(4,388	)		2.64
	Options exercised			(251	)		(357	)		1.42
Balances, December 31, 1999		4,202		4,895		$	12,724		$	2.60
	Additional shares reserved
	Options granted	(2,442	)	2,442			30,319			12.42
	Options canceled	1,086		(1,085	)		(6,365	)		5.86
	Options exercised			(1,181	)		(11,842	)		10.04
Balances, December 31, 2000		2,846		5,071			24,836		$	4.90

49

    For the years ended December 31, 2000, 1999, and 1998, the weighted average fair value of options granted was $12.25, $2.04, and $2.34 per share, respectively.

    As of December 31, 2000, the stock options outstanding were as follows (in thousands, except per share data):

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.50 to $0.54	1,037	5.74	$	0.50	611	$	0.50
$1.08 to $2.19	397	3.02		2.14	175		2.08
$3.63 to $5.13	1,111	3.75		3.74	371		3.86
$5.31 to $8.78	653	5.29		7.35	195		8.31
$9.00 to $11.25	528	4.51		9.99	20		10.61
$12.19 to 19.75	1,345	4.17		16.60	281		17.03
	5,071	4.49	$	7.48	1,653	$	5.27

    As of December 31, 1999 and 1998, options to purchase 1,658,000 and 917,000 shares were exercisable at an average weighted exercise price of $1.87 and $2.56 per share, respectively.

    The Company has elected to continue to follow the provisions of APB 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS 123. Compensation cost has been recognized for the Company's stock option plans under APB 25 where options were granted to employees at an exercise price, which is below market value at the date of grant. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in years ended 2000, 1999, and 1998 consistent with the provisions of SFAS 123, the Company's net loss and net loss per share for 2000, 1999, and 1998 would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):

	Years Ended December 31,
	2000			1999			1998
Net loss as reported	$	(37,203	)	$	(22,192	)	$	(24,625	)
Net loss—pro forma	$	(42,857	)	$	(23,061	)	$	(25,109	)
Net loss per share—as reported	$	(2.03	)	$	(2.08	)	$	(2.37	)
Net loss per share—pro forma	$	(2.34	)	$	(2.16	)	$	(2.41	)

    The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years.

    In accordance with the provisions of SFAS 123, the fair value of each option is estimated using the following weighted average assumptions for grants during 2000, 1999, and 1998: dividend yield of 0%, volatility of 0% for options issued prior to the Company's Initial Public Offering, 113% in 1998, 117% in 1999, and 124.7% in 2000, risk-free interest rates at the date of grant, and an expected term of four years.

Employee Stock Purchase Plan

    In September 1997, the Company's Board of Directors approved an Employee Stock Purchase Plan. Under this plan, employees of the Company can purchase common stock through payroll

50

deductions. A total of 225,000 shares have been reserved for issuance under this plan. As of December 31, 2000, no shares had been purchased and all employees have withdrawn from the plan.

11. INCOME TAXES

    Provision for income taxes for each of the years ended December 31, 2000, 1999, and 1998 was $0.

    Total income tax benefit differed from the amounts computed by applying the U.S. federal statutory tax rates to pre-tax income as follows:

		For the Years Ended
		2000		1999		1998
Total benefit computed by applying the U.S. statutory rate		-34.00	%	-34.00	%	-34.00	%
	Permanent differences	1.08	%	11.40	%	0.10	%
	Change in valuation allowance	32.92	%	22.60	%	33.90	%
		0	%	0	%	0	%

    Temporary differences which gave rise to significant portions of deferred tax assets are as follows (in thousands):

		December 31,
		2000			1999
Current deferred assets:
	Allowance for doubtful accounts	$	80		$	80
	Inventory reserves		789			1,132
	UNICAP		666			644
	Unearned revenue		1,552			302
	Accrued liabilities		1,022			1,443
	Book compensation for stock options		9,977			417
	Total current deferred assets		14,086			4,018
	Valuation allowance		(14,086	)		(4,018	)
		$	—		$	—
Long-term deferred assets:
	Net operating loss carryforwards	$	21,006		$	16,946
	Capitalized research expenditures		7,775			7,146
	Tax credit carryforwards		2,884			2,524
	Depreciation and amortization		843			679
Total long-term deferred assets			32,508			27,295
Valuation allowance			(32,508	)		(27,295	)
		$	—		$	—

    In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of losses, recent increases in expense levels, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, the lack of carryback capacity to realize deferred tax assets, and the uncertainty regarding market acceptance of the Company's products. The

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Company will continue to assess the realizability of the deferred tax assets in future periods. The valuation allowance increased by $15,281,000 and $3,721,000 in 2000 and 1999, respectively. The Company had federal and state net operating loss carry forwards of approximately $56,046,000 and $22,060,000, respectively, as of December 31, 2000 available to offset future regular and alternative minimum taxable income. The Company's net operating loss carry forwards expire in 2001 through 2020 if not utilized.

    In addition, at December 31, 2000, the Company had the following available credits to offset future tax liabilities:

	Reporting		Dates
Federal research and development credit	$	1,729,000	2007-2015
State research and development credit		1,016,000	None
State manufacturing investment credit		140,000	2002-2008

    The Company's net operating loss and tax credit carry forwards may be subject to limitation in the event of ownership changes, as defined by tax laws.

12. EMPLOYEE BENEFIT PLAN

    The Company adopted a defined contribution retirement plan (the "Plan"), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The Plan covers essentially all employees. Eligible employees may make voluntary contributions to the Plan up to 15% of their annual compensation and the employer is allowed to make discretionary contributions. In 2000, 1999, 1998, the Company made no employer contributions.

13. RELATED PARTY TRANSACTIONS

    The Company had net sales to stockholders of $482,000 for the year ended December 31, 1998.

    See also Notes 6, 10, and 14 for transactions with Sprint.

14. BUSINESS SEGMENT AND MAJOR CUSTOMERS

    The Company operates in a single industry segment and primarily sells its products to customers in the U.S. and Canada. Sales by product category during 2000 consist of 6% to cable customers and 94% to wireless customers. In 1999, 52% of sales were to cable customers and 48% to wireless customers. In 1998, 57% of sales were to cable customers and 43% to wireless customers. Sales to international customers represented 24%, 5%, and 0% of revenues in 2000, 1999, and 1998, respectively. International sales in any one geographic area other than Canada were insignificant.

    Individual customers that comprise 10% or more of the Company's gross sales are as follows:

	Years Ended December 31,
	2000		1999		1998
Sprint Corporation	54	%	28	%	—
RCN Corporation	—		31	%	25	%
Look Communications Inc.	23	%	—		—
Knology Holdings, Inc.	—		—		13	%

    At December 31, 2000 and 1999, these customers accounted for $7,530,000 and $423,000, respectively, and 98% and 32%, respectively, of total accounts receivable.

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15. SUBSEQUENT EVENTS

    Pursuant to a Securities Purchase Agreement dated February 16, 2001 between the Halifax Fund, a fund managed by The Palladin Group, the Company issued and sold to Palladin on February 16, 2001 certain securities. The securities included (i) a $7.5 million principal amount 6% Convertible Debenture due 2003, which will be convertible into shares of the Company's common stock; (ii) a common stock Purchase Warrant to purchase 833,333 shares of common stock at $9.00 per share (subject to adjustment) which is exercisable at the election of Palladin, or at the election of the Company at a price which is the lower of (a) $9.00 and (b) 94% of the daily volume weighted average price; and (iii) an Adjustment Warrant. The Adjustment Warrant will be exercisable beginning on the 18th day following the date (referred to in this discussion as the Effective Date) that there is declared effective by the Securities and Exchange Commission the registration statement that the Company is required to file with respect to the resale of the shares of common stock underlying the debentures and warrants. The Adjustment Warrant will only be exercisable, however, if the volume weighted average sale price for our common stock is not more than $7.2694. The aggregate number of shares issuable pursuant to the exercise of the Adjustment Warrant will be determined by dividing $8,625,000 by the Adjustment Price, as defined below, and then subtracting the sum of the number of shares of common stock previously issuable pursuant to the conversion of the debenture and the number issued upon any previous exercise of the Adjustment Warrant. The Adjustment Price is the average of the 15 lowest daily volume weighted average sale prices of the Company's common stock as reported on Nasdaq, not including the three lowest days, during the 65 trading day period following the Effective Date. The adjustment price will not be below $3.50. The adjustment warrant terminates three months after the end of the 65 trading day adjustment period. In consideration for such securities, Palladin paid an initial purchase price of $7,500,000. The Company granted to Palladin in the purchase agreement certain rights of first refusal, preemptive rights and other rights. Pursuant to the purchase agreement, Palladin and the Company also entered into a Registration Rights Agreement dated as of February 16, 2001.

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SUPPLEMENTARY FINANCIAL DATA:

HYBRID NETWORKS, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands, except per share data)

		Three Months Ended												Three Months Ended
		Mar. 31, 2000			June 30, 2000			Sept. 30, 2000			Dec. 31, 2000			Mar. 31, 1999			June 30, 1999			Sept. 30, 1999			Dec. 31, 1999
Net sales		$	1,677		$	2,747		$	5,475		$	12,896		$	4,123		$	3,004		$	3,319		$	2,570
Gross profit (loss)			(189	)		(1,558	)		992			411			(141	)		(1,345	)		259			902
Income (loss) from continuing operations			(7,711	)		(8,994	)		(12,823	)		(5,647	)		(3,050	)		(4,282	)		(2,663	)	$	(3,921	)
	Net (loss)	$	(7,963	)	$	(10,667	)	$	(12,939	)	$	(5,634	)	$	(3,253	)	$	(4,489	)	$	(4,663	)	$	(9,787	)
Earnings per share:
Basic:		$	(0.57	)	$	(0.73	)	$	(0.61	)	$	(0.26	)	$	(0.31	)	$	(0.43	)	$	(0.44	)	$	(0.88	)
	Net (loss)	$	(0.57	)	$	(0.73	)	$	(0.61	)	$	(0.26	)	$	(0.31	)	$	(0.43	)	$	(0.44	)	$	(0.88	)
Diluted:		$	(0.57	)	$	(0.73	)	$	(0.61	)	$	(0.26	)	$	(0.31	)	$	(0.43	)	$	(0.44	)	$	(0.88	)
Net (loss)		$	(0.57	)	$	(0.73	)	$	(0.61	)	$	(0.26	)	$	(0.31	)	$	(0.43	)	$	(0.44	)	$	(0.88	)

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

None

54

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

    The information required by Item 10 regarding our directors is incorporated by reference to the information under the caption "Proposal No. 1—Election of Directors" in Company's definitive Proxy Statement for the Company's annual stockholders' meeting in 2001 (the "Proxy Statement") which Hybrid will file with the Securities and Exchange Commission within 120 days after the end of the calendar year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information regarding this item is incorporated herein by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information with respect to this item is incorporated herein by reference from the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement.

55

PART IV

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

			Page No.
(a)		Documents filed as part of this Report:
	1.	FINANCIAL STATEMENTS. See the Index to Financial Statements at Item 8 of this Report	30
	2.	FINANCIAL STATEMENT SCHEDULES. Schedules not listed below have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the financial statements or related notes.
		Schedule II—Valuation and qualifying accounts	61
	3.	EXHIBITS. The following exhibits are filed as part of, or incorporated by reference into, this report on Form 10-K:

		Incorporated by Reference
Exhibit No.	Exhibit	Form	File No.	Filing Date	Exhibit No.	Filed Herewith
3.01	Registrant's Amended and Restated Certificate of Incorporation.	S-1	333-36001	11-11-97	3.03
3.02	Certificate of Designations of Series J Non-Convertible Preferred Stock of the Registrant.	8-K	000-23289	09-24-99	3.1
3.03	Registrant's Amended and Restated Bylaws, as amended on March 22, 2001					X
10.01	Amended and Restated Investors Rights Agreement dated as of September 18, 1997 between Registrant and certain investors, as amended October 13, 1997 and as amended November 6, 1997.	S-1	333-36001	11-11-97	10.01
10.02	Registrant's 1993 Equity Incentive Plan.(2)	S-1	333-36001	11-11-97	10.02
10.03	Registrant's 1996 Equity Incentive Plan.(2)	S-1	333-36001	11-11-97	10.03
10.04	Registrant's Executive Officer Incentive Plan.(2)	S-1	333-36001	11-11-97	10.04
10.05	Registrant's 1997 Equity Incentive Plan.(2)	S-1	333-36001	11-11-97	10.05
10.06	Registrant's 1997 Directors Stock Option Plan.(2)	S-1	333-36001	11-11-97	10.06
10.07	Registrant's 1997 Employee Stock Purchase Plan.(2)	S-1	333-36001	11-11-97	10.07
10.08	Registrant's 1999 Stock Option Plan.(2)	10-K	000-23289	03-24-00	10.08
10.09	Registrant's 1999 Officer Stock Option Plan.(2)	10-K	000-23289	03-24-00	10.09
10.10	Form of Indemnity Agreement entered into by Registrant with each of its directors and officers.(2)	S-1	333-36001	11-11-97	10.08

56

10.12	Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior Secured Convertible $5.5 Million Debenture Due 2002 and Security Agreement and Senior Secured Convertible $5.5 Million Debenture Due 2002.	S-1	333-36001	11-11-97	10.12
10.15	Collaboration Agreement among Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996 and Addendum No. 1 thereto dated November 25, 1996.	S-1	333-36001	11-11-97	10.15
10.16	Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.(1)	S-1	333-36001	11-11-97	10.16
10.17	Stipulation of settlement, dated March 3, 1999 among the Registrant and lead counsel for the plaintiffs in class action litigation against the Registrant	10-K	000-23289	03-24-00	10.17
10.24	Sublease between the Registrant and Viking Freight, Inc. dated February 9, 1998.	S-4	333-52083	05-07-98	10.24
10.26	Employment Letter from the Registrant to Judson Goldsmith dated November 12, 1998.(2)	10-K	000-23289	06-14-99	10.26
10.27	Product Purchase Agreement between the Registrant and RCN Operating Services, Inc. dated June 30, 1997	10-K	000-23289	06-14-99	10.27
10.28	Securities Purchase Agreement between Sprint Corporation and the Registrant dated August 30, 1999.	8-K	000-23289	09-24-99	10.1
10.29	Warrant Agreement between Sprint Corporation and the Registrant dated as of September 9, 1999.	8-K	000-23289	09-24-99	10.2
10.30	Amendment to Warrant Agreement between Sprint Corporation and the Registrant dated as of April 21, 2000.					X
10.31	1999 Amended and Restated Investor Rights Agreement dated as of September 9, 1999.	8-K	000-23289	9-24-99	10.3
10.32	Amendment to 1999 Amended and Restated Investor Rights Agreement dated as of February 28, 2001					X

57

10.33	Form of 4% Convertible Class A Debenture due 2009.	8-K	000-23289	09-24-99	10.4
10.34	Form of 4% Convertible Class B debenture due 2009.	8-K	000-23289	09-24-99	10.5
10.35	Securities Purchase Agreement among the Registrant and certain investors dated as of August 30, 1999.	8-K	000-23289	09-24-99	10.6
10.36	Form of 4% Convertible Debenture due 2009.	8-K	000-23289	09-24-99	10.7
10.37	Purchase of Equipment and Services Agreement between Sprint/United Management Company and the Registrant dated May 1, 2000.	8-K	000-23289	05-10-00	10.8
10.38	Amendment #1 to Purchase of Equipment and Services Agreement between Sprint/United Management Company and the Registrant effective as of December 22, 2000.					X
10.39	Amendment #2 to Purchase of Equipment and Services Agreement between Sprint/United Management Company and the Registrant effective as of December 22, 2000.					X
23.01	Consent of Independent Auditors					X

(1)

Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from the filing and have been filed separately with the SEC.



(2)

Represents a management agreement or compensatory plan.

(b)

Reports on Form 8-K.

    The following Current Reports on Form 8-K were filed by the Company since September 30, 2000.

1.

On November 15, 2000, we filed a current report on Form 8-K that we expect to record a non-cash charge of approximately $1,275,000 in the fourth quarter of 2000 related to the resignation of its former CFO, Thara Edson.

2.

On February 22, 2001, we filed a current report on Form 8-K to report the consummation of our financing agreement with The Halifax Fund, a fund managed by The Palladin Group. The only exhibits filed with the report were the Securities Purchase Agreement, a form of the 6% Convertible Debenture, a form of the Common Stock Purchase Warrant, a form of the Adjustment Warrant, and the Registration Rights Agreement.

(c)

Exhibits. See (a)(3) above.

(d)

Financial Statement Schedules. See (a)(2) above.

58

SIGNATURES

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

March 30, 2001	HYBRID NETWORKS, INC.
	By:	/s/ MICHAEL D. GREENBAUM Michael D. Greenbaum Chief Executive Officer

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

Name	Title	Date
PRINCIPAL EXECUTIVE OFFICER
/s/ MICHAEL D. GREENBAUM Michael D. Greenbaum	Chief Executive Officer, Director	March 30, 2001
PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER:
/s/ JUDSON GOLDSMITH Judson Goldsmith	Vice President, Finance Chief Financial Officer	March 30, 2001
ADDITIONAL DIRECTORS:
/s/ JAMES R. FLACH James R. Flach	Chairman, Board of Directors	March 30, 2001
/s/ A. ALLAN KURTZE A. Allan Kurtze	Director	March 30, 2001
/s/ PHILLIP J. KUSHNER Phillip J. Kushner	Director	March 30, 2001
/s/ GARY M. LAUDER Gary M. Lauder	Director	March 30, 2001
/s/ CAMERON M. REJALI Cameron M. Rejali	Director	March 30, 2001

59

INDEPENDENT AUDITOR'S REPORT

The Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California

    Our report on the financial statements of Hybrid Networks, Inc. is included on page 31 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14 (a) (2) of this Form 10-K.

    In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.

/s/ HEIN + ASSOCIATES LLP

Hein + Associates LLP
Certified Public Accountants
Orange, California
February 16, 2001

60

HYBRID NETWORKS, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

For the year ended:	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions		Balance at End of Period
December 31, 2000	$	200	$	—	$	—	$	—	$	200
December 31, 1999		200		—		—		—		200
December 31, 1998		—		200		—		—		200

INVENTORY RESERVES

For the year ended:	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Additions Charged to Other Accounts		Deductions			Balance at End of Period
December 31, 2000	$	2,842	$	235	$	—	$	(1,097	)	$	1,980
December 31, 1999		3,135		529		—		(822	)		2,842
December 31, 1998		3,015		1,691		—		(1,571	)		3,135

61

QuickLinks

TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
HYBRID NETWORKS, INC. BALANCE SHEETS (in thousands, except per share data)
HYBRID NETWORKS, INC. STATEMENTS OF OPERATIONS (in thousands, except per share data)
HYBRID NETWORKS, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (in thousands)
HYBRID NETWORKS, INC NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT

EX-3.03

EXHIBIT 3.03

AMENDED AND RESTATED BYLAWS
OF
HYBRID NETWORKS, INC.
(A Delaware corporation)
ARTICLE I
OFFICES

    SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

    SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of Delaware, as the board of Directors may from time to time authorize or the business of the corporation may require.

ARTICLE II
MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS

    SECTION 3. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors shall be held either at a place within or without the State of Delaware, or by means of remote communication as the Board of Directors in its sole discretion may determine and as stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, if any, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

    SECTION 4. ANNUAL MEETING. Annual meetings of stockholders, commencing with the year 1991, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting.

    SECTION 5. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of stockholders.

    SECTION 6. SPECIAL MEETINGS.

    (a) Special meetings of the stockholders, for any purpose or purposes, may be called by the Chairman of the Board of Directors, or by the Chairman or the Secretary at the written request of a majority of the total number of directors which the corporation would have if there were no vacancies.

    (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the stockholders, such officer forthwith shall cause notice to be given to the stockholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than 10 nor more than 60 days after receipt of such request. If such notice is not given within 20 days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 6 shall be construed as limiting, fixing or affecting the time or date when a meeting of stockholders called by action of the Board of Directors may be held.

    SECTION 7. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to Section 6 (b) above, notice of each meeting of stockholders shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Section 8(b) of these Bylaws) to each stockholder entitled to vote at that meeting (see Section 14 below), by the Secretary, assistant secretary or other person charged with that duty, not less than 10 nor more than 60 days before such meeting.

    Notice of any meeting of stockholders shall state the date, place (if any), and hour of the meeting and,

    (a) in the case of a special meeting, the general nature of the business to be transacted;

    (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the stockholders; and

    (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election.

    At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business started in the notice of such meeting and any other business as may properly come before the meeting.

    SECTION 8. MANNER OF GIVING NOTICE.

    (a) Notice of any meeting of stockholders shall be given either personally or by first-class mail, telegraphic or other written communication, addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that stockholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.

    If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that addresses, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the stockholder on written demand by the stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice.

    An affidavit of mailing of any notice or report in accordance with the provisions of this Section 8(a), executed by the Secretary, Assistant Secretary or any transfer agent, shall, in the absence of fraud, be prima facie evidence of the giving of the notice.

    (b) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation, or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

2

    An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission in accordance with this Section 8(b) shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

    SECTION 9. QUORUM AND TRANSACTION OF BUSINESS.

    (a) At any meeting of the stockholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by law or by the Certificate of Incorporation, and except as provided in Section 9(c).

    (b) At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (1) pursuant to the corporation's notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in this bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this bylaw.

    For business to be properly brought before any meeting by a stockholder pursuant to clause (3) of this Section 9 (b), the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 20 days nor more than 60 days prior to the date of the meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf of the proposal is made and (iv) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business.

    Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at a meeting except in accordance with procedures set forth in this Section 9 (b). The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by this Section 9 (b), and if such person should so determine, such person shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 9 (b), a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 (b).

    (c) The stockholders present at a duly called or held meeting of the stockholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

    (d) In the absence of a quorum, no business other than adjournment may be transacted, except as described in Section 9 (c).

    SECTION 10. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the

3

affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting.

    In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place, if any, of such adjourned meeting pursuant to Sections 7 and 8; provided that if any of the following three events occur, such notice must be given:

    (1) announcement of the adjourned meeting's time and place, if any, is not made at the original meeting which it continues or

    (2) such meeting is adjourned for more than 30 days from the date set for the original meeting or

    (3) after the adjournment a new record date is fixed for the adjourned meeting.

    At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting.

    SECTION 11. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES.

    (a) Subject to this Section 11(b), the transactions of any meeting of stockholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof.

    (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting.

    (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

    (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 7 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting.

    SECTION 12. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon the closing of the corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of the corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting.

    SECTION 13. VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 14. If authorized by the Board of Directors, the ballot may be submitted by electronic transmission in the manner provided by law.

    Unless otherwise provided in the Certificate of Incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder.

4

    Any stockholder may vote part of such stockholders shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares such stockholder is entitled to vote.

    SECTION 14. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held (which place shall be specified in the notice of the meeting); or, on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting). The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.

    SECTION 15. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of three years from the date of its execution, unless the proxy provides for a longer period. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law, and, if authorized by the Board of Directors, may be submitted by electronic transmission in the manner provided by law.

    SECTION 16. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board of Directors may appoint one or more persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholders proxy shall, appoint a person to fill that vacancy.

    These inspectors shall: (i) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (ii) receive votes, ballots, or consents; (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote; (iv) count and tabulate all votes or consents; (v) determine when the polls shall close; (vi) determine the result; and (vii) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.

ARTICLE III
BOARD OF DIRECTORS

    SECTION 17. POWERS. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders.

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    SECTION 18. NUMBER OF DIRECTORS. The authorized number of directors of this corporation shall be not less than five and not more than nine. As of the date of the adoption of these amended and restated bylaws, the number of directors shall be 6, and thereafter the number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies. No reduction in the number of directors shall remove any director prior to the expiration of such director's term of office. Any bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors shall require the affirmative vote of a majority of the total number of directors which the corporation would have if there were no vacancies. In the event of any increase or reduction in the authorized number of directors: (i) each director then serving shall nevertheless continue as a director of the class of which such director is a member until the expiration of such director's current term, or such director's earlier resignation, removal from office or death, and (ii) the newly created or eliminated directorship or directorships resulting from such increase or reduction shall be apportioned by the Board of Directors, by resolution adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies, among the three classes of directors so as to maintain such classes as nearly equal in number as possible.

    SECTION 19. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be divided into three classes. The term of office of the first class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 1998; the term of office of the second class, which class shall consists of one director, shall expire at the annual meeting of stockholders held in 1999; and the term of office of the third class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 2000. Thereafter, each term of each class shall expire at each third succeeding annual meeting of stockholders after the meeting of stockholders at which the director or directors in such class were elected. Each Director shall serve until his or her successor is elected and qualified, or until his or her earlier resignation or removal.

    Nominations for election to the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors of the corporation, must be preceded by notification in writing received by the Secretary of the corporation not less than 20 days nor more than 60 days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee:

    (a) the name, age, residence, address, and business address of each proposed nominee and of each such person;

    (b) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person;

    (c) the amount of stock of the corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and

    (d) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the corporation will or may be a party.

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    The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a nomination not preceded by notification made in accordance with the foregoing procedure shall be disregarded.

    SECTION 20. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 22 to take office on the date that the resignation becomes effective.

    SECTION 21. REMOVAL. The entire Board of Directors or any individual director may be removed from office, with or without cause, by the affirmative vote of at least a majority of the combined voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class.

    SECTION 22. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if stockholders fail to elect the full authorized number of directors at an annual meeting of stockholders or if, for whatever reason, there are fewer directors on the Board of Directors than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office for the remainder of the term of the class of the director for which such vacancy exists and until their earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute.

    SECTION 23. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 23 may be held without notice.

    SECTION 24. TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors may participate in a meeting through use of conference telephone or other communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting.

    SECTION 25. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two directors.

    SECTION 26. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24, shall be delivered personally, orally or in writing, or by telephone, telegraph, facsimile, electronic mail or other means of electronic transmission, to each director at least 48 hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

    SECTION 27. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not

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stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors.

    SECTION 28. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing or by electronic transmission to such action. Such written consent or consents or electronic transmission of transmissions shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors.

    SECTION 29. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Certificate of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 30 of these bylaws.

    SECTION 30. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than 24 hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.

    SECTION 31. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting.

    SECTION 32. COMPENSATION. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

    SECTION 33. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

    In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

    Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation,

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recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors.

    Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

ARTICLE IV
OFFICERS

    SECTION 34. OFFICERS. The officers of the corporation shall be a President, Chief Financial Officer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide.

    SECTION 35. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President, a Treasurer, and a Secretary and may choose Vice Presidents. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board.

    SECTION 36. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such Officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary.

    SECTION 37. RESIGNATION. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice.

    SECTION 38. REMOVAL. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice.

    Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 35, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors.

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    SECTION 39. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office.

    SECTION 40. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He/she shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law.

    SECTION 41. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors.

    SECTION 42. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Sections 34 and 35 or otherwise pursuant to these bylaws.

    SECTION 43. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall:

    (a) Keep, or cause to be kept, minutes of all meetings of the corporation's stockholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form.

    (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's stockholders, showing the names and addresses of all stockholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form.

    (c) Give, or cause to be given, notice of all meetings of stockholders, directors and committees of the Board of Directors, as required by law or by these bylaws.

    (d) Keep the seal of the corporation, if any, in safe custody.

    (e) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws.

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    If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge Such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors.

    SECTION 44. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:

    (a) Be responsible for all functions and duties of the treasurer of the corporation.

    (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation.

    (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors.

    (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors.

    (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so.

    (f)  Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws.

    If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors.

    SECTION 45. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation.

ARTICLE V
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS

    SECTION 46. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount.

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    SECTION 47. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firms, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances.

    SECTION 48. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositories as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable.

    SECTION 49. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made, without counter-signature by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation.

ARTICLE VI
CERTIFICATES FOR STOCK AND THEIR TRANSFER

    SECTION 50. CERTIFICATE FOR STOCK. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.

    In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon.

    If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of

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such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

    SECTION 51. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation.

    SECTION 52. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do.

    SECTION 53. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both.

ARTICLE VII
INSPECTION OF CORPORATE RECORDS

    SECTION 54. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.

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    SECTION 55. INSPECTION BY STOCKHOLDERS.

    (a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in the State of Delaware or at its principal place of business.

    (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 43 and shall be open to inspection by the stockholders at all reasonable times during office hours. A current copy of these bylaws shall be furnished to any stockholder upon written request.

    SECTION 56. WRITTEN FORM. If any record subject to inspection pursuant to Section 55 is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form.

ARTICLE VIII
MISCELLANEOUS

    SECTION 57. FISCAL YEAR. Unless otherwise freed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year.

    SECTION 58. ANNUAL REPORT.

    (a) Subject to the provisions of Section 58 (b), the Board of Directors shall cause an annual report to be/sent to each stockholder of the corporation in the manner provided in Section 8 of these bylaws not later than 120 days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall be sent to stockholders at least 15 (or, if sent by third-class mail, 35) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates.

    (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived.

    SECTION 59. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 14 shall apply with respect to notice of meetings, votes, and contents and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopt the resolutions relating thereto, or the 60th day prior to the date of such other action or event, whichever is later.

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    Only stockholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Certificate of Incorporation, by agreement or by law.

    SECTION 60. BYLAW AMENDMENTS. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to make, alter, amend and repeal these bylaws subject to the power of the holders of capital stock of the corporation to alter, amend or repeal the bylaws; provided, however, that, with respect to the powers of holders of capital stock to make, alter, amend and repeal bylaws of the corporation, notwithstanding any other provision of these bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the corporation required by law, these bylaws or any preferred stock, the affirmative vote of the holders of at least a majority of the combined voting power of all of the then-outstanding shares entitled to vote generally in the election of directors, voting together as a single class, shall be required to make, alter, amend or repeal any provision of these bylaws.

    SECTION 61. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive.

    SECTION 62. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

    SECTION 63. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.

    Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE IX.
INDEMNIFICATION OF DIRECTORS AND OFFICERS

    SECTION 64. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an executive officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest

15

extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 66 with respect to proceedings to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation.

    SECTION 65. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 64 shall include the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 65 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 64 and 65 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators.

    SECTION 66. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 64 or 65 of this ARTICLE IX is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE IX or otherwise shall be on the corporation.

16

    SECTION 67. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this ARTICLE IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation's Certificate of Incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

    SECTION 68. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

    SECTION 69. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any officer, employee or agent of the corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and executive officers of the corporation.

17

EX-10.30

EXHIBIT 10.30

AMENDMENT TO WARRANT AGREEMENT

    This Amendment (the "Amendment") is entered into as of April 21, 2000 between Sprint Corporation, a Kansas corporation (the "Purchaser"), and Hybrid Networks, Inc., a Delaware corporation (the "Company"), and amends the Warrant Agreement dated as of September 9, 1999 between the Purchaser and the Company (the "Warrant Agreement"). Except as otherwise defined herein, the capitalized terms herein shall have the same meanings as those terms have in the Warrant Agreement.

    The parties hereto agree as follows:

1.

The first three sentences of Section 2(b) of the Warrant Agreement are hereby amended in their entirety as follows:

    (b) None of the Warrants shall be exercisable until the earliest date on which the shipment of at least $1,000,000 of products by the Company is scheduled to be made by the Company, in accordance with the terms of the Equipment Purchase Agreement, in purchase orders submitted to the Company under the Equipment Purchase Agreement. On such date, 10% of the Warrants (rounded to the nearest whole Warrant) shall become exercisable. Thereafter, an additional 10% of the Warrants (rounded to the nearest whole Warrant) shall become exercisable for each additional $1,000,000 of shipments as are scheduled to be made by the Company in accordance with the terms of the Equipment Purchase Agreement, in purchase orders submitted by the Purchaser to the Company under the Equipment Purchase Agreement, such that the entire amount of Warrants shall be exercisable when $10,000,000 of such shipments have been so scheduled to be made.

2.

No other amendment is made to the Warrant Agreement. The Warrant Agreement, as amended as provided in Section 1, continues in full force and effect.

    IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written.

HYBRID NETWORKS, INC.

By:  Michael D. Greenbaum
Chief Executive Officer

SPRINT CORPORATION

By: 

Its: 

EX-10.32

EXHIBIT 10.32

AMENDMENT NO. 1
OF
1999 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
OF
HYBRID NETWORKS, INC.

    This Amendment is made effective as of February 28, 2001, between Hybrid Networks, Inc. (the "Company") and holders of a majority Registrable Securities outstanding under that certain Amended and Restated Investor Rights Agreement dated September 9, 1999 (the "Investor Rights Agreement") between the Company and the Securities Holders (as defined in the Investors Rights Agreement). Except as provided otherwise herein, the capitalized terms in this Amendment shall have the same meaning as set forth in the Investors Rights Agreement.

RECITALS

    WHEREAS, the Company has on February 16, 2001 completed the sale of its securities (the "Financing") to a fund of The Palladin Group L.P. and the Company is required in connection therewith to register for resale by the investor common stock underlying the securities so sold under a Registration Statement(s) filed with the Securities and Exchange Commission.

    WHEREAS, in connection with the Financing, the Company and the undersigned desire to amend the Investors Rights Agreement as provided herein.

AGREEMENT

    NOW THEREFORE, pursuant to Section 2.7 of the Investor Rights Agreement, the Company and the undersigned hereby amend Section 1.2.2 of such agreement by adding to Section 1.2.2(a) the following as a new last sentence of such Section.

Notwithstanding the foregoing, this Section 1.2.2 shall not apply to the registration of securities under the initial registration statement filed pursuant to the obligations of the Company under that certain Registration Rights Agreement dated February 16, 2001 between the Company and Halifax Fund, L.P., as the Purchaser thereunder.

    This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one instrument.

    Executed effective as of the date first set forth above.

COMPANY:

HYBRID NETWORKS, INC.

By: 

Name: 

Title: 

Signature Page to
Amendment No. 1 of 1999 Amended and Restated Investor Rights Agreement

SPRINT CORPORATION
By:
Its:
Address:	2330 Shawnee Mission Parkway Westwood, Kansas 66205
Facsimile Number: (913) 624-8426

[Signature Page to Amendment of 1999 Amended and Restated Investor Rights Agreement]

Signature Page to
Amendment No. 1 to 1999 Amended and Restated Investor Rights Agreement

Gary M. Lauder
Address:	88 Mercedes Lane Atherton, CA 94027
Facsimile Number: (650) 323-2172

[Signature Page to Amendment of 1999 Amended and Restated Investor Rights Agreement]

Signature Page to
Amendment No. 1 to 1999 Amended and Restated Investor Rights Agreement

ACCEL IV L.P.		ACCEL KEIRETSU L.P.
By: Accel IV Associates L.P.		By: Accel Partners & Co., Inc.
Its: General Partner		Its: General Partner
By:		By:
Its:		Its:
Address:	One Palmer Square Princeton, NJ 08542	Address:	One Palmer Square Princeton, NJ 08542
Facsimile Number: (609) 683-0384		Facsimile Number: (609) 683-0384

ACCEL INVESTORS '95 L.P.		ELLMORE C. PATTERSON PARTNERS
By:		By:
Its:		Its:
Address:	One Palmer Square Princeton, NJ 08542	Address:	One Palmer Square Princeton, NJ 08542
Facsimile Number: (609) 683-0384		Facsimile Number: (609) 683-0384

[Signature Page to Amendment of 1999 Amended and Restated Investor Rights Agreement]

Signature Page to
Amendment No. 1 to 1999 Amended and Restated Investor Rights Agreement

ACCEL VII L.P.		ACCEL INTERNET FUND III L.P.
By: Accel VII Associates L.L.C.		By: Accel Internet Fund Associates L.L.C.
Its: General Partner		Its: General Partner
By:		By:
Its: Managing Member		Its: Managing Member
Address:	One Palmer Square Princeton, NJ 08542	Address:	One Palmer Square Princeton, NJ 08542
Facsimile Number: (609) 683-0384		Facsimile Number: (609) 683-0384

ACCEL INVESTORS '99 L.P.
By:
Its:
Address:	One Palmer Square Princeton, NJ 08542
Facsimile Number: (609) 683-0384

[Signature Page to Amendment of 1999 Amended and Restated Investor Rights Agreement]

EX-10.38

EXHIBIT 10.38

AMENDMENT #1

Hybrid Networks, Inc. and Sprint/United Management Company
Equipment and Services Agreement

    This is an Amendment ("Amendment") to the Equipment and Services Agreement ("Agreement") dated May 1, 2000, between Sprint/United Management Company ("Sprint"), a Kansas corporation, with offices at 2330 Shawnee Mission Parkway, Westwood, Kansas 66205 and Hybrid Networks, Inc. ("Hybrid"), a Delaware corporation, with its principal offices at 6409 Guadalupe Mines Road, San Jose, CA 95120.

    This Amendment shall be effective (the "Effective Date") as of December 22, 2000.

    In order to facilitate the Parties working relationship, Sprint and Hybrid have agreed to certain modifications in the Agreement as follows:

1.

Hybrid will, if and when Sprint requests, provide all available resources for the purpose of resolving those performance problems that prevent the Phoenix system from satisfying the Final Acceptance Test Criteria. Without limiting Hybrid's obligations under the Agreement or the foregoing sentence:

1.1

Hybrid will continue to develop diagnostic software to troubleshoot the system and will provide such software to Sprint within a reasonable time after such software becomes available.

1.2

Hybrid will continue to commit to provide assistance in improving the upstream data throughput by utilizing the dedicated channel.

2.

Hybrid will continue the Warranty Period for Equipment:

2.1

In all of the launched, and to be launched markets, identified below, regardless of whether such markets have achieved Final Acceptance, for the later of Final Acceptance of the Phoenix system or the Warranty Period as specified under the Agreement.

Launched Markets:
1. Tucson	P.O. #1281864
2. Colorado Springs	P.O. #1324720
3. Detroit	P.O. #1442941
4. San Jose	P.O. #1354384
5. San Francisco	P.O. #1324723
6. Kansas City (lab system)	P.O. #1404175
Launched or To Be Launched Markets:
1. Houston	P.O. #1412652
2. Denver	P.O. #1421715
3. Salt Lake City	P.O. #1464478
4. Wichita	P.O. #1447013
5. Melbourne	P.O. #1551222
6. Oklahoma City	P.O. #1551226
7. Fresno	P.O. #1551219
8. Chicago	P.O. #1474021
9. Chicago	P.O. #1551229

1

2.2

In all of the unlaunched markets, identified below, for the later of: (a) Final Acceptance of Phoenix; or (b) Eighteen (18) months from the date of installation of such Equipment, the installation to occur no later than December 31, 2001.

Unlaunched Markets:
1. Omaha	P.O. #1467307
2. Spokane	P.O. #1473715
3. Cincinnati	P.O. #1551211
4. Ft. Pierce	P.O. #1507336
5. Greeley	P.O. #1551556
6. Seattle	P.O. #1442703
7. South Bend	P.O. #1473714

And,

2.3

For any Equipment retained by Sprint from any of the following Purchase Orders:

Purchase Order 21-0001717968	Any Equipment except from deleted lines 1,2,3,6,7
Purchase Order 21-0001715685	Any Equipment except from deleted lines 2,3,4,6,7
Purchase Order 21-0001738557	Any Equipment except from deleted lines 3,4,5,6,7

for the later of: (a) Final Acceptance of Phoenix; or (b) Eighteen (18) months from the date of installation of such Equipment, the installation to occur no later than December 31, 2001.

3.

Hybrid agrees to provide access to Median Access Control ("MAC") level source code via a License Agreement, for the limited and specific purposes contained in said License Agreement, which is attached hereto and made a part of this Amendment.

4.

Hybrid agrees to waive any cancellation charges or fees of any kind associated with cancelled or modified orders due to changes in Sprint market launch activity, for the following purchase orders:

Purchase Order 21-0001717968	Delete Lines 1,2,3,6,7
Purchase Order 21-0001715685	Delete Lines 2,3,4,6,7
Purchase Order 21-0001738557	Delete Lines 3,4,5,6,7

5.

Sprint agrees to pay the actual amount, up to $1.00, of the previously specified $1.00 fee under Section 2.3 of the Agreement for affixing the Sprint brand label to all production Sprint SAM modems.

6.

Unless otherwise specified in this Amendment, all capitalized terms used herein shall have the meanings set forth in the Agreement.

7.

In the event of a conflict between the terms of this Amendment and the terms of the Agreement and the Schedules attached thereto, the terms of the Agreement shall control the rights and obligations of the parties regarding the subject matter in question.

8.

All other terms and conditions of the Agreement remain unchanged. Except as specifically stated, nothing in this Amendment waives either party's rights under the Agreement.

2

    IN WITNESS WHEREOF, each party has executed this Amendment by a duly authorized representative. The parties acknowledge that they have read, understood and agreed to the terms of this Amendment.

SPRINT/UNITED MANAGEMENT COMPANY	HYBRID NETWORKS, INC.
By:	By:
Name: Kevin L. Neuer	Name: Judson W. Goldsmith
Title: Director, Network Architecture & Technology	Title: Vice President of Finance

Dated: 
Dated: 

3

EX-10.39

EXHIBIT 10.39

AMENDMENT #2
to the
Purchase of Equipment and Services Agreement
Between
Sprint/United Management Company
And
Hybrid Networks, Incorporated

    This is the Second Amendment ("Amendment 2") to the Purchase of Equipment and Services Agreement ("Agreement") dated May 1, 2000, between Sprint/United Management Company ("Sprint"), a Kansas corporation, with offices at 2330 Shawnee Mission Parkway, Westwood, Kansas 66205 and Hybrid Networks, Inc. ("Hybrid"), a Delaware corporation, with its principal offices at 6409 Guadalupe Mines Road, San Jose, CA 95120.

    This Amendment 2 shall be effective (the "Effective Date") as of December 31, 2000.

    In order to facilitate the parties' working relationship, Sprint and Hybrid have agreed to certain modifications of the Agreement and the December 22, 2000 Amendment to the Agreement ("Amendment 1"), as follows:

1.

Notwithstanding anything else set forth in the Agreement or in Amendment #1, the Warranty Period for all Equipment, shipped by Hybrid prior to the Effective Date of this Amendment #2, shall be 18 months from the date of shipment. The Warranty Period is independent of Substantial Completion and Final Acceptance of any System, including but not limited to Sprint's Final Acceptance of the Phoenix System (P.O. #1233953). In the case of Software, the Warranty Period is 90 days from the date of shipment by Hybrid to Sprint of the Software. Equipment or Software that is corrected or replaced pursuant to warranty is warranted only for the remaining portion of the original 18-month or original 90-day Warranty Period, respectively.

2.

All elements of "Project: SAM" noted on Schedule A to the May 1, 2000 High Level Requirements letter specified in Paragraph 1.24 of the Agreement are deleted from Schedule A and inserted instead in Schedule B to that May 1, 2000 High Level Requirements letter. The December, 2000 date for release of the SAM Modem and Headend to Sprint for testing is deleted and instead, the "Project: Sam" will be scheduled on a "best efforts" basis after further project, product and business definition. Notwithstanding the foregoing and for the avoidance of any doubt, moving "Project: Sam" from Schedule A to Schedule B does not impact the pricing of any CPE Equipment, which is $195.00 per CPE Equipment as of December 1, 2000.

3.

If the Phoenix System does not achieve Final Acceptance on or prior to December 31, 2001, Hybrid shall, at its sole option and discretion, either: (i) issue a credit to Sprint against any then outstanding invoices and future purchases in the amount of $661,640.65; or (ii) pay to Sprint the sum of $661,640.65. The failure of the Phoenix System to achieve Final Acceptance on or prior to December 31, 2001 shall not constitute a breach by Hybrid of the Final Acceptance provisions of the Agreement, Amendment 1 or Amendment 2 as they relate to the Phoenix System. The parties understand and agree that Sprint's waiver of this particular breach is not and will not be construed to be a waiver of any other right or remedy that Sprint may have under the Agreement, Amendment #1 or Amendment #2, including, without limitation, other rights or remedies related to the Phoenix System.

4.

Unless otherwise specified in this Amendment #2, all capitalized terms used herein shall have the meanings set forth in the Agreement.

1

5.

In the event of a conflict between the terms of this Amendment 2 and the terms of Amendment 1 or the Agreement, the terms of this Amendment 2 shall control.

6.

All other terms and conditions of the Agreement, including Amendment 1 remain unchanged. Except as specifically stated herein, nothing in this Amendment 2 waives either party's rights under the Agreement or Amendment 1.

    IN WITNESS WHEREOF, each party has executed this Amendment 2 by a duly authorized representative. The parties acknowledge that they have read, understood and agreed to the terms of this Amendment 2.

SPRINT/UNITED MANAGEMENT COMPANY	HYBRID NETWORKS, INC.
By:	By:
Name:	Name: Judson W. Goldsmith
Title:	Title: Vice President of Finance
Dated:	Dated:

2

EX-23.1

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EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

    We consent to the incorporation by reference in the Registration Statement (333-40027) on Form S-8 of Hybrid Networks, Inc., of our report dated February 16, 2000, relating to the balance sheets as of December 31, 2000 and 1999 and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Hybrid Networks, Inc.

/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
March 29, 2001

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