ELASTIC NETWORKS INC, S-1/A, 2000-08-16

ELASTIC NETWORKS INC
S-1/A, 2000-08-16
TELEPHONE & TELEGRAPH APPARATUS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 2000.

REGISTRATION NO. 333-40500

PRE-EFFECTIVE
AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------

ELASTIC NETWORKS INC.

(Exact name of registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 3661 58-2418576
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

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6120 WINDWARD PARKWAY
SUITE 100
ALPHARETTA, GEORGIA 30005
(678) 297-3100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------

GUY D. GILL
ELASTIC NETWORKS INC.
6120 WINDWARD PARKWAY, SUITE 100
ALPHARETTA, GEORGIA 30005
(678) 297-3100

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

COPIES TO:

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<S> <C>
W. TINLEY ANDERSON, III, ESQ. MARK L. HANSON, ESQ.
SCOTT M. HOBBY, ESQ. JONES, DAY, REAVIS & POGUE
HUNTON & WILLIAMS 3500 SUNTRUST PLAZA
BANK OF AMERICA PLAZA, SUITE 4100 303 PEACHTREE STREET, NE
600 PEACHTREE STREET, NE ATLANTA, GEORGIA 30308
ATLANTA, GEORGIA 30308 (404) 521-3939
(404) 888-4000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------

CALCULATION OF REGISTRATION FEE

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<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value....................... $107,640,000 $28,417(3)
</TABLE>

(1) Includes 1,170,000 shares which the underwriters may purchase to cover
over-allotments, if any.

(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.

(3) $19,800 was previously paid. Accordingly, the amount of $8,617 (equal to
$28,417 less $19,800) is being paid with this filing.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

--------------------------------------------------------------------------------
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>

SUBJECT TO COMPLETION, DATED AUGUST 16, 2000

PROSPECTUS

7,800,000 Shares

[LOGO]

Common Stock

This is the initial public offering of common stock by Elastic
Networks Inc. We are selling 6,800,000 shares of our common stock and one of our
stockholders is selling 1,000,000 shares of our common stock. We estimate that
the initial public offering price will be between $10.00 and $12.00 per share.
We will not receive any of the proceeds from the sale of common stock by the
selling stockholder.

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

Prior to this offering, there has been no public market for our common
stock. We have applied to list our common stock on the Nasdaq National Market
under the symbol ELAS.

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

<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Elastic Networks, before offering expenses...... $ $
Proceeds to the selling stockholder......................... $ $
</TABLE>

Elastic Networks and the selling stockholder have granted the underwriters
an option for a period of 30 days to purchase up to 1,170,000 additional shares
of common stock at the offering price, less the underwriting discount.

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

Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CHASE H&Q ROBERTSON STEPHENS

UBS WARBURG LLC

, 2000
<PAGE>

PHOTOGRAPHS AND CAPTIONS

Center top: the Elastic Networks' logo superimposed over the words "Elastic
Networks," which appear numerous times from the left to the right side of the
page. Below the logo, centered and bold is the text "Providing next generation
DSL high-speed access solutions to telecommunications service providers,
simplifying the way users connect to the Internet."

1. Top left: color photograph of our DSLAM product encircled by a circle with a
line to the following description across the right side: "Our IP DSLAMs are
Internet protocol DSL access multiplexers that use EtherLoop DSL technology to
provide broadband access over existing copper telephone lines."

2. Middle left: color photograph of our server product encircled by a circle
with a line to the following description across on the right side: "Our server
contains software that provides tools for the remote management of our access
equipment. Optional YesWare software provides connectivity to users without
requiring them to reconfigure their computers, and offers service providers
billing interfaces."

3. Bottom left: color photograph of our DSL modem and optional Ethernet
extension port product encircled by a circle with a line to the following
description across on the right side: "Our DSL modems provide broadband access
over existing copper telephone lines using EtherLoop DSL technology when
connected to our IP DSLAM."

Elastic Networks, Elastic, EtherLoop, the Elastic logo, ELMo, Elite, Spectrum
Manager, YesWare, Storm System, BitStorm, MicroBurst, eSled, StormPort and
StormTracker are our trademarks. This prospectus also includes trademarks,
service marks and trade names of other companies. In addition, this prospectus
refers to market research reports prepared by various organizations, which
typically do not disclose their underlying limitations or assumptions. You
should not rely on these market reports as being necessarily indicative of
future developments.

<PAGE>
TABLE OF CONTENTS

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PAGE
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<S> <C>
Prospectus Summary.......................................... 3

Risk Factors................................................ 7

Cautionary Note Regarding Forward-Looking Statements........ 15

Use of Proceeds............................................. 15

Dividend Policy............................................. 15

Capitalization.............................................. 16

Dilution.................................................... 17

Selected Historical Financial Information................... 18

Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19

Business.................................................... 27

Management.................................................. 39

Related Party Transactions.................................. 46

Principal and Selling Stockholders.......................... 50

Description of Capital Stock................................ 52

Shares Eligible for Future Sale............................. 53

Underwriting................................................ 55

Legal Matters............................................... 58

Experts..................................................... 58

Additional Information...................................... 58

Index to Financial Statements............................... F-1
</TABLE>

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PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION ABOUT ELASTIC NETWORKS AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING, AS WELL AS OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, APPEARING
ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, YOU SHOULD READ
THE ENTIRE PROSPECTUS, ESPECIALLY THE RISKS DESCRIBED UNDER "RISK FACTORS,"
BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK.

ELASTIC NETWORKS INC.

We design, develop and market high-speed digital subscriber line, or DSL,
communications products. Our products enable service providers to deliver easy
to deploy and cost-effective broadband access solutions over the existing copper
telephone wire infrastructure. We design our products based on our patented
EtherLoop technology that combines the best attributes of DSL with those of
Ethernet technology to deliver a next generation access solution. EtherLoop's
advantages overcome many of the deployment, performance, cost and quality of
service limitations of conventional DSL technologies.

Our products consist of Internet protocol DSL access multiplexers that
connect DSL signals with the Internet and other networks, DSL modems and
complementary software. Our products can be deployed in various environments,
such as in a service provider's facility to reach business and residential users
or on any premises where multiple end users are located, including hotels,
multi-tenant business complexes, apartment buildings, condominiums and
university campuses. To date, our products have been deployed by domestic and
international service providers, including Beijing Keval On-Line Technology,
Ltd., CAIS Internet, Inc., Citizens Communications Company and Darwin
Networks, Inc. In addition to our direct selling efforts, we have distribution
arrangements with Nortel Networks Inc., Westcon Group Inc. and Williams
Communications Group Inc. that allow us to expand our market presence.

We were originally formed in January 1997 as the Elastic Networks group of
Nortel Networks Inc. and began doing business as a separate company in
May 1999. For the year ended December 31, 1999, we incurred a net loss of
approximately $20.9 million and used cash in operations of $16.4 million. Upon
completion of this offering, Nortel Networks Corporation and related entities
will own approximately 46% of our outstanding common stock.

MARKET OPPORTUNITY

The demand for broadband access is growing rapidly as the number of Internet
users continues to increase, and these users rely on the Internet for more
advanced applications such as e-commerce, telecommuting, distance learning and
online entertainment. As these applications require more bandwidth, the ability
to connect to the Internet at high speeds is becoming increasingly important.
DSL technology is designed to address this need by delivering broadband access
to end users over existing copper telephone wires, an infrastructure that
connects to over 850 million homes and businesses worldwide. However, to date
the deployment and maintenance of conventional DSL technologies have been
complex, costly and subject to quality of service issues. We believe that
widespread deployment of DSL services requires technology that overcomes these
challenges.

OUR SOLUTION AND STRATEGY

Our access solution enables service providers to simplify DSL deployment and
provides a cost-effective means of delivering high-speed access to more of their
subscriber base. Our EtherLoop-based products offer the following benefits:

- MAXIMIZE AVAILABLE BANDWIDTH. Our EtherLoop technology maximizes available
bandwidth by enabling both upstream and downstream access speeds of up to
4 megabits per second, or Mbps, based on end user demands. This technology
advantage over fixed bandwidth solutions provides the

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functionality to deliver an array of value-added business services and
applications on a common platform.

- AVOID INTERFERENCE. Our EtherLoop technology constantly monitors for
potential signal interference on each line over which EtherLoop signals
are transmitted and can automatically adjust transmission frequencies to
avoid potential signal degradation. This enables service providers to
deploy more broadband lines in the same bundled group of telephone lines,
and improves quality of service.

- EASY TO DEPLOY AND USE. Our access products are easy to deploy and do not
require re-engineering or rewiring of the local telephone network or time
consuming service calls. Our DSL modems are also designed for easy
installation, providing the end user with simple plug and play
connectivity.

- HIGHLY SCALABLE. Our products are designed for quick adjustment of
features such as line capacity and bandwidth, without the cost of
replacing the product.

- GREATER TRANSMISSION DISTANCE. Our technology also provides reliable
service coverage beyond the typical range of conventional DSL
technologies. With this extended reach, service providers are able to
maximize their technology investment to deliver high-speed access to more
of their subscriber base. Additionally, unlike conventional DSL
technologies, EtherLoop transmits signals in small packets that are
capable of being repeated to extend service over even greater distances.

Key elements of our strategy include:

- Continuing to capitalize on the advantages of our EtherLoop technology;

- Expanding our penetration within the broadband access market;

- Increasing our direct and indirect sales channels, and expanding
internationally;

- Leveraging our business relationships to improve our products, reduce our
costs and increase our speed to market; and

- Facilitating further market adoption by licensing our technology.

CORPORATE INFORMATION

We were incorporated as a Delaware corporation in September 1998 and began
doing business as a separate company in May 1999. Our principal executive office
is located at 6120 Windward Parkway, Suite 100, Alpharetta, Georgia 30005. Our
telephone number is (678) 297-3100 and our Web address is WWW.ELASTIC.COM.
Information contained on our Web site does not constitute part of this
prospectus, and you should rely only on the information contained in this
prospectus in deciding whether to invest in our common stock.

4
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THE OFFERING

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<S> <C>
Common stock offered by Elastic Networks................... 6,800,000 shares

Common stock offered by the selling stockholder............ 1,000,000 shares

Common stock to be outstanding after this offering......... 31,274,035 shares

Use of proceeds by Elastic Networks........................ To repay short term debt, to fund the
expansion of our business, our operating
deficits and other working capital needs,
as well as general corporate purposes.

Proposed Nasdaq National Market symbol..................... ELAS
</TABLE>

The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of June 30, 2000, and excludes:

- 5,297,662 shares of common stock issuable upon exercise of outstanding
options;

- 1,359,597 shares reserved for future grants under our 1999 stock incentive
plan; and

- 114,899 shares of common stock issuable upon exercise of outstanding
warrants.

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

EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS:

- REFLECTS THE CONVERSION OF ALL THE OUTSTANDING SHARES OF OUR SERIES A AND
B PREFERRED STOCK INTO 9,084,913 SHARES OF OUR COMMON STOCK, WHICH WILL
AUTOMATICALLY OCCUR ON THE CLOSING OF THIS OFFERING;

- REFLECTS THE AMENDMENT AND RESTATEMENT OF OUR CERTIFICATE OF INCORPORATION
AND BYLAWS, WHICH WILL OCCUR IMMEDIATELY BEFORE THE CLOSING OF THIS
OFFERING; AND

- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

5
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table is a summary of the financial data for our business. You
should read this information together with the financial statements and the
related notes appearing at the end of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For an explanation of the determination of the number of shares
used to compute historical and pro forma basic and diluted net loss per share,
see note 2 of the notes to our financial statements. The pro forma balance sheet
data summarized below gives effect to the conversion of all outstanding shares
of our preferred stock into 9,084,913 shares of our common stock, which will
automatically occur on the closing of this offering. The pro forma as adjusted
balance sheet data summarized below also reflects the sale of the common stock
offered by us at the estimated initial public offering price of $11.00 per
share, the mid-point of the estimated offering price range, after deducting
underwriting discounts and estimated offering expenses payable by us, and our
receipt and application of the net proceeds from this offering, including the
repayment of $4.0 million in short term debt incurred in August 2000.

<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 4,518 $ 4,518 $68,757
Working capital............................................. 7,567 7,567 71,806
Total assets................................................ 20,576 20,576 84,815
Capital lease obligations long term......................... 304 304 304
Redeemable convertible participating preferred stock........ 30,962 -- --
Total stockholders' equity (deficit)........................ (21,676) 9,286 77,525
</TABLE>

6
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RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ALL OF THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE MAKING A DECISION TO INVEST IN OUR COMMON
STOCK.

RISKS RELATED TO OUR BUSINESS

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

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

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

From inception through June 30, 2000, we incurred net losses totaling
approximately $53.9 million. As of June 30, 2000, we had an accumulated deficit
of $25.7 million. We expect to continue to make substantial expenditures for
sales and marketing, product development and other purposes, which may be fixed
in the short term. As a result, we expect to continue to incur losses in 2000,
as well as in future years. Our ability to increase revenues, and achieve and
maintain profitability in the future, will primarily depend on our ability to
increase sales of our products, reduce production and other costs and
successfully introduce new and enhanced versions of our existing products into
the marketplace. We cannot assure you that we will be able to increase our
revenues at a rate that equals or exceeds expenditures. Our failure to do so
will result in our incurring additional losses.

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

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

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

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

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

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

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

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

Fluctuations caused by these or other factors not presently known to us
could reduce the price of our common stock.

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

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

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

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

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

We derive substantially all of our revenues from sales of a limited number
of high-speed access products. The failure of any of our product offerings to
achieve and maintain a meaningful level of market penetration and customer
satisfaction would harm our revenues.

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

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

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

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

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

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

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

OUR DEPENDENCE ON A SINGLE CONTRACT MANUFACTURER COULD RESULT IN PRODUCT
DELIVERY DELAYS.

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

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

Revenues from customers outside of the United States accounted for about 12%
of our total revenues for the year ended December 31, 1999, and 15% of our total
revenues for the six months ended June 30, 2000. As a part of our strategy, we
intend to expand our sales in international markets. Sales to international
markets have the following material risks:

- longer receivables collection periods;

- potential increase in political and economic instability;

- difficulties and costs of staffing and managing foreign operations;

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

- unexpected changes in regulatory requirements;

- changes in import or export licensing requirements;

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

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

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

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

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

We were formed by means of a contribution agreement among Nortel Networks
Corporation, its subsidiary Nortel Networks Inc., and us. Under this agreement,
we issued Nortel Networks Inc. 15,384,614 shares of our common stock. Prior to
the closing of this offering, Nortel Networks Inc. will transfer approximately
million shares of our common stock to its parent, Nortel Networks Limited.
Messrs. Manley and Reid, appointed by Nortel Networks to our board of directors,
are executives of Nortel Networks. Although Nortel Networks Limited is selling
1.0 million shares of our common stock in this offering, after the offering
closes, the Nortel Networks entities will still own approximately 46%, or
14,384,615 shares, of our common stock. Additionally, Nortel Networks Inc. holds
a warrant to purchase an additional 51,230 shares of our common stock. Because
of this level of ownership, and because of their board representation, after the
offering Nortel Networks will continue to have the ability to exercise
significant control over our affairs. There also may be conflicts of interest
between us and Nortel Networks with respect to acquisitions, financings and
other corporate opportunities. Nortel Networks' ability to exercise significant
control could have the effect of delaying or preventing a change in control of
Elastic Networks and other strategic and operational initiatives, which could
harm our business and the price of our common stock.

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

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

Additionally, since we became a separate company, Nortel Networks has
provided us with insurance, access to software systems and other services under
a transition services agreement that terminates on November 12, 2000. Our
insurance benefits under this agreement automatically terminate on the closing
of this offering. We may not be able to obtain similar insurance at favorable
rates or access to similar software systems on commercially reasonable terms.
Finally, Nortel Networks has, from time to time, guaranteed the financing of
purchases of our equipment by one of our customers. Should Nortel Networks fail
to do this in the future, we may not be able to make sales we otherwise might
have made to that customer.

10
<PAGE>
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY, OR IF OTHERS USE OUR
INTELLECTUAL PROPERTY WITHOUT OUR PERMISSION, OUR COMPETITIVE POSITION MAY
SUFFER.

Our ability to compete and be successful is based, in part, on our
intellectual property. We rely on a combination of copyright, trademark, patent
and trade secret laws and contractual restrictions to establish and protect our
technology and other intellectual property. We require employees and consultants
and, when possible, suppliers, manufacturers and distributors, to sign
confidentiality agreements. However, we cannot assure you that our steps will be
sufficient to prevent misappropriation of our technology and other intellectual
property, or that our competitors will not independently develop technologies or
other intellectual property that are substantially equivalent or superior to
ours. In addition, the laws of many countries do not protect intellectual
property to the same extent as the laws of the United States. If our
intellectual property rights are not protected, our business may suffer. If we
have to bring a lawsuit against another entity that infringes or misappropriates
any of our intellectual property, we would likely have to divert significant
resources, both financial and human, in prosecuting the lawsuit.

We own U.S. patent number 5,912,895, titled "Information Network Access
Apparatus and Methods for Communicating Information Packets via Telephone
Lines." This patent issued on June 15, 1999 and expires on May 1, 2016. We also
have exclusive and non-exclusive licenses from Nortel Networks to other
technologies that we use in our business. However, our rights to our patent and
to all of these licensed technologies are subject to various licenses that
Nortel Networks, as the original owner, granted to other companies prior to
May 12, 1999. Therefore, we cannot assure you that our rights to these
technologies will allow us to prevent these companies and their licensees from
using these technologies. In addition, we have granted Nortel Networks licenses
to these technologies and to all improvements that we may acquire or make to
these technologies. We have also granted Nortel Networks a license to any
patents that we own, acquire, or result from our filing applications or from
obtaining a license, during any period that Nortel Networks owns more than 50%
of our voting securities. Although these licenses are subject to Nortel
Networks' obligation not to compete with us with respect to EtherLoop-based
products through May 12, 2002, there will be no contractual restrictions on
Nortel Networks' ability to engage in competitive activities with respect to
EtherLoop-based products after that date.

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

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

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

11
<PAGE>

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

We have rapidly and significantly expanded our operations since 1998. We
believe that further significant expansion will be required to address potential
growth in our client base and market opportunities in order for us to be
successful. During 1999, we increased the number of employees from 58 to 95, and
as of July 31, 2000, we had further increased that number to 167. To manage the
expected growth of our operations and personnel, we will be required to:

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

- install new management information systems;

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

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

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

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

If the net proceeds of this offering, our existing cash balances and cash
flows from operations are not sufficient to meet our liquidity needs, we will
need to raise additional funds. If additional funds are raised through the
issuance of equity securities, the percentage ownership of pre-existing
stockholders will be reduced. If additional funds are raised through the
issuance of debt or preferred equity securities, these securities would have
rights, preferences and privileges senior to those of the common stock.
Furthermore, the terms of any debt could impose restrictions on our operations.
If adequate funds are not available on acceptable terms, or are not available at
all, we may not be able to take advantage of market opportunities, develop new
products or otherwise respond to competitive pressures.

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

Upon the completion of this offering, our executive officers, directors and
5% or greater stockholders, and their affiliates, will own an aggregate of
approximately 61.6% of our outstanding common stock. These stockholders, if
acting together, will be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combinations. This concentration of
ownership may have the effect of delaying, deterring or preventing a change in
control of Elastic Networks, which could prevent our stockholders from receiving
a premium for their common stock as part of any merger or other business
combination.

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

Immediately prior to the closing of this offering, our certificate of
incorporation and bylaws will be amended to provide for a classified board of
directors, to eliminate cumulative voting in the election of directors and to
restrict our stockholders from acting without a meeting. These provisions may
make some corporate actions more difficult and might delay or prevent a change
in control. Further, our board of directors will have the ability to issue up to
25 million shares of preferred stock with certain rights, preferences,
privileges and restrictions, including voting rights, that could be senior to
those of our

12
<PAGE>
common stock. New preferred stock might also be used to make acquiring control
of us more difficult. We have no current plans to issue shares of preferred
stock. We will also indemnify officers and directors against losses incurred in
legal proceedings to the broadest extent permitted by Delaware law.

RISKS RELATED TO OUR MARKET

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

The market for high-speed access products is characterized by rapid
technological developments, frequent enhancements to existing products, new
product introductions, changes in end user requirements and evolving industry
standards. Any technological advancements, whether in DSL or otherwise, or
product introductions that provide faster access, greater reliability, increased
cost-effectiveness or other advantages over our technology, could render our
product line obsolete. We cannot assure you that we will be able to respond
quickly and effectively to any of these changes or challenges. Moreover, in
order to respond quickly and effectively to all of these changes and challenges,
we must continually make investments in the development of new technologies and
the further advancement of our current technologies. However, the nature and
quantity of these investments cannot be definitively predicted, and we may not
have sufficient resources to make these investments.

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

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

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

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

In addition, many of our current and potential competitors have
significantly greater sales and marketing, technical, manufacturing, financial
and other resources than we do, such as AT&T and Time Warner in the cable
broadband market. The products and technologies offered by these competitors may
provide faster access and higher reliability than ours, and prove more
cost-effective for some end users. Commercial acceptance of any one of these
competing solutions could decrease the demand for our

13
<PAGE>

products, result in our loss of market share and reduce average selling prices
and the profit margins associated with our products.

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

The FCC regulates the telecommunications industry, including our company,
our products and our customers. The adoption of new FCC regulations affecting
the broadband access industry, our customers or our products may harm our
business. For example, FCC policies that affect the availability of data and
Internet services may impede our customers' penetration into certain markets or
affect the prices they charge. In turn, this may reduce their orders for our
products. In addition, international regulatory bodies are beginning to adopt
regulations and standards for the communications industry. These regulations and
standards may require us to make engineering or functional changes to our
products, or changes to our marketing and selling practices. Delays caused by
changes in our products or practices undertaken to comply with state, national
and international regulatory requirements, may result in order cancellations or
postponements of product purchases by our customers, which could harm our sales
and our reputation.

RISKS RELATED TO THIS OFFERING

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND WE CANNOT ASSURE YOU
THAT HOW WE INVEST THESE PROCEEDS WILL YIELD A FAVORABLE RETURN.

We intend to use the net proceeds from this offering to fund the expansion
of our business, our operating deficits and other working capital needs and for
general corporate purposes, as well as to repay short term debt. Thus, our
management will have broad discretion over how these proceeds are used and could
spend most of these proceeds in ways with which the stockholders may not agree.
We cannot assure you that the unapplied proceeds will be invested to yield a
favorable return.

DUE TO THE VOLATILE NATURE OF OUR INDUSTRY AND THE LACK OF A PRIOR PUBLIC MARKET
FOR OUR STOCK, OUR STOCK PRICE COULD EXPERIENCE SIGNIFICANT FLUCTUATIONS AND YOU
MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE YOUR PURCHASE PRICE.

Before this offering, there was no public market for our stock. An active
public market for our stock may not develop or be sustained after this offering.

In recent years, the stock market in general, and the stock prices of
technology companies in particular, have been extremely volatile. The following
factors could cause the market price of our stock to fluctuate significantly
from the price paid by investors in this offering:

- announcements by us or our competitors of significant contracts, new
products or technological innovations, acquisitions, strategic
relationships, joint ventures or capital commitments;

- changes in financial estimates by securities analysts;

- changes in market valuations of telecommunications companies; and

- fluctuations in stock market prices and volumes.

Our current stockholders hold a substantial number of shares which they will
be able to sell in the public market in the near future. Sales of a substantial
number of shares of our common stock after this offering could reduce the market
price of our stock. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock in the future at a
time and price that we deem appropriate.

14
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements that are not historical facts, but
rather are based on our current expectations, estimates and projections about
our industry and our management's beliefs and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks" and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, that are difficult to predict and
could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties are
described in "Risk Factors" and elsewhere in this prospectus. We caution you not
to place undue reliance on these forward-looking statements which reflect our
management's view only as of the date of this prospectus.

USE OF PROCEEDS

Assuming an initial public offering price of $11 per share, the mid-point of
the estimated offering price range, we estimate that we will receive net
proceeds from the sale of our common stock in this offering of approximately
$68.2 million, or approximately $74.2 million if the underwriters exercise their
over-allotment option. This estimate is after deducting underwriting discounts
and commissions and other fees and estimated expenses payable by us of
approximately $6.6 million, or approximately $7.0 million if the underwriters
exercise their over-allotment option. We will not receive any portion of the
proceeds from the sale of shares of stock by the selling stockholder.

We will use approximately $4.0 million of the net proceeds from this
offering to repay two secured promissory notes issued on August 4, 2000 to an
affiliate of the selling stockholder and to another stockholder. Each note bears
interest at the rate of 6% per year and matures on the earlier to occur of the
closing of this offering or February 1, 2001. We intend to use approximately
$20 million of the balance of the net proceeds from this offering to fund the
expansion of our business, approximately $20 million to fund our operating
deficits and the remainder of the net proceeds for other working capital needs
and for general corporate purposes. As part of our ongoing corporate development
activities, we expect we will consider acquisition opportunities, and may use a
portion of the net proceeds to acquire complementary businesses, products or
technologies.

We currently intend to use substantially all of the net proceeds for the
categories mentioned above. However, the precise allocation of funds among these
uses will depend on future technological, regulatory and other developments
which may affect our business or our industry. Until we use the net proceeds for
any particular purpose, we will invest them in short-term, investment-grade,
interest-bearing securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and
we do not anticipate doing so in the foreseeable future. It is the current
policy of our board of directors to retain earnings to finance the expansion of
our operations. The board of directors will determine future declaration and
payment of dividends, if any, in light of the then-current conditions, including
our earnings, operations, capital requirements, financial condition,
restrictions in financing agreements and other relevant factors.

15
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000:

- on an actual basis;

- on a pro forma basis to reflect the automatic conversion of all of our
outstanding shares of preferred stock into 9,084,913 shares of common
stock upon the closing of this offering; and

- on a pro forma as adjusted basis to reflect the sale of the common stock
offered by this prospectus at an estimated initial public offering price
of $11.00 per share, the mid-point of the estimated offering price range,
and the receipt of the net proceeds therefrom, after deducting the
estimated expenses, underwriting discounts and commissions payable by us
as if the sale of common stock and receipt of proceeds occured on
June 30, 2000.

This table contains unaudited information and should be read in conjunction
with our financial statements and related notes included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations long term...................... $ 304 $ 304 $ 304
Redeemable, convertible, participating preferred stock,
$0.01 par value, 7,799,386 shares authorized, 7,799,386
shares issued and outstanding, actual; no shares issued
and outstanding, pro forma; no shares issued and
outstanding, pro forma as adjusted..................... 30,962 -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value: 35,000,000 shares
authorized, 15,389,122 shares issued and outstanding,
actual; 24,474,035 shares issued and outstanding, pro
forma; 31,274,035 shares issued and outstanding, pro
forma as adjusted.................................... 154 245 313
Additional paid-in capital............................... 5,904 36,775 104,946
Deferred stock compensation.............................. (2,004) (2,004) (2,004)
Accumulated deficit...................................... (25,730) (25,730) (25,730)
-------- -------- ---------
Total stockholders' equity (deficit)................. (21,676) 9,286 77,525
-------- -------- ---------
Total capitalization................................. $(21,372) $ 9,590 $ 77,829
======== ======== =========
</TABLE>

This table excludes:

- 5,297,662 shares of common stock subject to options outstanding as of
June 30, 2000 under our 1999 stock incentive plan with a weighted average
exercise price of $2.59 per share, and 1,359,597 shares of common stock
available for future grant under the plan; and

- 114,899 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $6.83 per share.

From July 1, 2000 through August 11, 2000, we granted options under our 1999
stock incentive plan to purchase 47,000 shares of common stock with an exercise
price of $4.53 per share, and 77,500 shares of common stock with an exercise
price of $9.30 per share.

16
<PAGE>
DILUTION

Our pro forma net tangible book value as of June 30, 2000 was approximately
$9.3 million, or $.38 per share of common stock. Pro forma net tangible book
value represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. Without taking into
account any other changes in the net tangible book value after June 30, 2000,
other than to give effect to our sale of the 6,800,000 shares of common stock
offered by this prospectus at an estimated initial public offering price of
$11.00 per share, the mid-point of the estimated offering price range, and our
receipt of the estimated net proceeds from the sale, our as adjusted pro forma
net tangible book value as of June 30, 2000 would have been approximately
$77.5 million or $2.48 per share. This represents an immediate increase in pro
forma net tangible book value of $2.10 per share to existing stockholders and an
immediate dilution of $8.52 per share to new investors. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Estimated initial public offering price per share........... $11.00
Pro forma net tangible book value per share as of
June 30, 2000............................................. $ .38
Increase per share attributable to this offering.......... 2.10
-----
Pro forma net tangible book value per share after this
offering................................................ 2.48
------
Dilution per share to new investors......................... $ 8.52
======
</TABLE>

The following table summarizes, on a pro forma as adjusted basis as of
June 30, 2000, the differences between existing stockholders and the new
investors with respect to the number of shares of common stock purchased from
Elastic Networks, the total consideration paid and the average price per share
paid, before deducting the underwriting discounts and commissions and estimated
offering expenses payable by Elastic Networks.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 24,474,035 78.3% $ 33,512,134 30.9% $ 1.37
New investors.................... 6,800,000 21.7 $ 74,800,000 69.1 $11.00
---------- -------- ------------ --------
Total.......................... 31,274,035 100.0% $108,312,134 100.0%
========== ======== ============ ========
</TABLE>

The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of June 30, 2000. As of June 30, 2000, there were
options outstanding to purchase a total of 5,297,662 shares of common stock with
a weighted average exercise price of $2.59 per share and one warrant outstanding
to purchase 12,439 shares of common stock with an exercise price of $2.76 per
share. Subsequent to June 30, 2000, we issued warrants to purchase 102,460
shares of common stock with an exercise price of $7.32 per share. Also
subsequent to June 30, 2000, we issued options to purchase 47,000 shares of our
common stock with an exercise price of $4.53 per share and 77,500 shares of
common stock with an exercise price of $9.30 per share.

17
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION

Our selected historical financial information as of December 31, 1998 and
1999, and for each of the years in the three-year period ended December 31,
1999, have been derived from our financial statements, included elsewhere in
this prospectus, which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included elsewhere in this prospectus.
The selected financial information as of June 30, 2000 and for each of the six
month periods ended June 30, 1999 and 2000 has been derived from our unaudited
financial statements included elsewhere in this prospectus. For an explanation
of the determination of the number of shares used to compute basic and diluted
net loss per share, see note 2 of the notes to our financial statements. In the
opinion of management, these unaudited statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and results of operations for
these periods.

You should read the following selected historical financial and operating
data in conjunction with the discussion in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and the related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $ -- $ 233 $ 8,215 $ 2,600 $ 14,693
Cost of revenues.......................................... -- 2,146 14,290 5,509 14,131
------- -------- -------- -------- --------
Gross profit (loss)..................................... -- (1,913) (6,075) (2,909) 562
Operating expenses:
Sales and marketing..................................... 644 3,431 5,169 1,834 6,082
Research and development................................ 3,335 8,191 7,386 3,316 4,758
General and administrative.............................. 524 1,695 2,276 710 2,299
Stock compensation...................................... -- -- 39 39 723
------- -------- -------- -------- --------
Total operating expenses.............................. 4,503 13,317 14,870 5,899 13,862
------- -------- -------- -------- --------
Operating loss...................................... (4,503) (15,230) (20,945) (8,808) (13,300)
Other income (expense), net............................... -- -- 90 19 3
------- -------- -------- -------- --------
Net loss................................................ (4,503) (15,230) (20,855) (8,789) (13,297)
Accretion of series A preferred stock..................... -- -- (333) (67) (266)
------- -------- -------- -------- --------
Net loss attributable to common stockholders.............. $(4,503) $(15,230) $(21,188) $ (8,856) $(13,563)
======= ======== ======== ======== ========
Basic and diluted net loss per common share............... $ (0.27) $ (0.93) $ (1.29) $ (0.54) $ (0.83)
======= ======== ======== ======== ========
Weighted average shares used in computing basic and
diluted net loss per common share....................... 16,385 16,385 16,386 16,385 16,389
======= ======== ======== ======== ========
Pro forma basic and diluted net loss per common share
(unaudited)............................................. $ (1.05) $ (0.56)
======== ========
Weighted average shares used in computing unaudited pro
forma basic and diluted net loss per share amounts
(unaudited)............................................. 20,263 24,188
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ -- $ 5,613 $ 4,518
Working capital (deficit)................................... (2,955) (1,256) 7,567
Total assets................................................ 1,735 9,869 20,576
Capital lease obligations long-term......................... -- 100 304
Redeemable convertible participating preferred stock........ -- 7,965 30,962
Total stockholders' equity (deficit)........................ (3,521) (9,009) (21,676)
</TABLE>

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
THE RELATED NOTES.

OVERVIEW

We design, develop and market high-speed DSL communications products that
enable service providers to deliver cost effective and easy to deploy broadband
access to their customers over the existing copper telephone wire
infrastructure.

On January 1, 1997, Nortel Networks Corporation and its subsidiary Nortel
Networks Inc. established the Elastic Networks group to pursue the development
of EtherLoop technology and products. On September 22, 1998, Nortel Networks
incorporated a wholly-owned subsidiary, Elastic Networks Inc. On May 12, 1999,
Nortel Networks transferred the assets of the Elastic Networks group to us in
exchange for 15,384,614 shares of Elastic Networks' common stock. Also, on
May 12, 1999, we sold 3,876,923 shares of our series A preferred stock for
$12.6 million, comprised of $10.6 million in cash and $2.0 million in notes
receivable that have since been paid. We maintain a relationship with Nortel
Networks, including as a distribution and technology partner. Additionally, we
currently pay Nortel Networks a 2.5% royalty on sales of EtherLoop-based
products. Our obligation to pay this royalty will cease on the closing of this
offering.

Since we were formed in January 1997 as a division of Nortel Networks
through mid 1999, our operating activities related primarily to developing our
EtherLoop technology and complementary software, building and testing prototype
products, building our technical support infrastructure, commencing the staffing
of our sales and marketing organization and establishing relationships with our
customers. In mid 1999, we commenced shipment of our commercial products and
have continued making investments to grow our business. As of June 30 2000, we
had an accumulated deficit of $25.7 million.

Our revenues have been generated principally from the sales of our first
generation DSL access multiplexers, or DSLAMs, which are known as ELMo DSLAMs
and which connect DSL modem signals to the Internet, our Elite DSL modems and,
to a lesser extent, our complementary software. We began limited shipment of our
first release DSLAM, the ELMo 8, in the second quarter of 1999. We began
shipping the ELMo 120 in the third quarter of 1999. Our recently announced Storm
System family of DSL access equipment, which we expect to begin shipping in the
fourth quarter of 2000, evolves our current product line. We expect to continue
to invest in product enhancements and new product development in order to
increase bandwidth and functionality and decrease cost. Additionally, we plan to
pursue both an original equipment manufacturer licensing strategy for our DSL
modems and a technology licensing strategy for our software and patented
EtherLoop technology. These licensing strategies are primarily intended to
accelerate our market penetration and to increase our gross margin.

We recognize revenues from product sales upon shipment if collection of the
resulting receivable is probable, product pricing is fixed and determinable and
product returns are reasonably estimated. Revenues on products shipped on a
trial basis are recognized when products are accepted by the customer. Estimated
sales returns are based on historical experience by product and are recorded at
the time the product revenues are recognized. We currently have licensing
revenues and anticipate we will recognize increased licensing revenues in the
future. Technology licensing revenues are recognized ratably over the term of
the related agreement.

For the fiscal year ended December 31, 1999, sales to Darwin and Nortel
Networks accounted for 81% of our revenues as follows: sales to Darwin accounted
for 41% of our revenues and sales to Nortel Networks, which included indirect
sales to Westcon, accounted for 40% of our revenues. In March 2000, we entered
into a separate distribution arrangement with Westcon under which Westcon agreed
to purchase our products directly from us instead of through our distributors.
For the six months ended

19
<PAGE>

June 30, 2000, sales to Darwin, Nortel Networks and Westcon accounted for 76% of
our revenues as follows: sales to Darwin accounted for 41% of revenues, sales to
Nortel Networks accounted for 21% of our revenues and sales to Westcon accounted
for 14% of our revenues. We expect to continue to be dependent upon a relatively
small number of customers, although the specific customers may vary from period
to period. Also, the sales to our customers may be impacted by the potential
seasonal nature of their capital expenditures. In order to continue growing our
revenues and attain profitability, we must continue to invest in our
international operations. To date, our international sales have been denominated
in U.S. dollars and, accordingly, we have not been exposed to fluctuations in
non-U.S. currency exchange rates. In the future a portion of our international
sales may be denominated in currencies other than U.S. dollars, which would
expose us to gains and losses upon exchange rate fluctuations. For the six
months ended June 30, 2000, 15% of our revenues were generated from
international sales.

Our gross margin is affected by many factors including competitive pricing
pressures, fluctuations in manufacturing volumes, costs of components and
sub-assemblies, and the mix of products or system configurations sold.
Additionally, our gross margin may fluctuate due to changes in our mix of
distribution channels. Our negative gross margin in 1999 was due primarily to
our sales of the first generation ELMo 8 access equipment. To date, gross margin
on sales of our DSLAMs has been higher than the gross margin on sales of our DSL
modems. Our gross margin was positive in the first six months of 2000, and we
expect our gross margin to increase in the future as we lower the cost of our
existing products, commence the sale of our Storm System family of products and
increase our licensing revenues.

We currently outsource our manufacturing and supply chain management
operations to Sanmina. Sanmina conducts manufacturing engineering, quality
assurance, program management and product repairs. For this reason, a
significant portion of our cost of revenues consists of payments to Sanmina. If
we cease our relationship with Sanmina, we may be responsible for purchasing
some of their raw material inventory used to manufacture our products.

Research and development expenses primarily consist of salaries and related
personnel expenses, contractor and consultant fees, and prototype expenses
related to the design, development, testing and enhancement of our products. We
expense all research and development expenses as incurred. We believe that
continued investment in research and development is critical to attaining our
strategic sales and cost-reduction objectives and, as a result, we expect these
expenses to increase in absolute dollars in the future, but to decline as a
percentage of revenues.

We sell our products through a direct sales force and selected distributors
to domestic and international telecommunications and in-building service
providers. Sales and marketing expenses consist of employee salaries,
commissions, travel and related expenses for personnel engaged in marketing,
sales and sales support functions. These expenses also include trade show and
promotional expenses. We expect these expenses to continue to increase in the
future as we address additional domestic and international markets. Sales and
marketing expenses as a percentage of revenues have not significantly changed in
each of the last two quarters ended June 30, 2000 even as we made significant
investments in our sales force and marketing initiatives. We expect these
expenses to decline as a percentage of revenues in the future.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources and administrative
personnel, facilities expenses, information systems and other general corporate
expenses. We expect general and administrative expenses to increase in absolute
dollars as we add personnel and incur additional costs related to the growth of
our business and operations as a public company, but decline as a percentage of
revenues.

In connection with our grant of stock options during the year ended
December 31, 1999 and the six months ended June 30, 2000, we recorded deferred
compensation of $0 and $2.0 million, respectively. Stock-based compensation
includes the amortization of stock compensation charges resulting from the grant
of stock options to employees with exercise or sales prices that may be deemed
for accounting purposes to be below the fair market value of our common stock on
the date of grant and compensation

20
<PAGE>

expense associated with the grant of stock options to non-employees. Deferred
compensation amounts are amortized over the vesting periods of the applicable
options, which are generally four years. The compensation expense associated
with options granted to non-employees is recorded at the time services are
provided. See note 11 to our financial statements.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues......................................... 100% 100% 100% 100%
Cost of revenues....................................... 921 174 212 96
------ ------ ------ ------
Gross profit (loss)................................ (821) (74) (112) 4
Operating expenses:
Sales and marketing.................................. 1,473 63 71 41
Research and development............................. 3,515 90 128 32
General and administrative........................... 727 28 27 16
Stock compensation................................... -- -- 1 5
------ ------ ------ ------
Total operating expenses........................... 5,715 181 227 94
------ ------ ------ ------
Operating loss................................... (6,536) (255) (339) (90)
Other income (expense), net............................ -- 1 1 --
------ ------ ------ ------
Net loss......................................... (6,536)% (254)% (338)% (90)%
====== ====== ====== ======
</TABLE>

SIX MONTHS ENDED JUNE 30, 1999 AND 2000

TOTAL REVENUES. Revenues increased from $2.6 million for the six months
ended June 30, 1999 to $14.7 million for the six months ended June 30, 2000.
This increase was primarily due to the successful transition from development of
our products to commencement of commercial operations and a significant increase
in the sales of our ELMo 120, which we introduced in the third quarter of 1999.
For the six months ended June 30, 1999, and June 30, 2000, we generated revenues
from international sales of $162,000 and $2.2 million, respectively.

GROSS PROFIT (LOSS). Gross profit (loss) improved from a loss of
$2.9 million for the six months ended June 30, 1999 to a profit of $562,000 for
the six months ended June 30, 2000. The improvement in gross profit (loss), in
absolute dollars and as a percentage of revenues, was primarily the result of
sales of our ELMo 120 and declines in component costs.

SALES AND MARKETING. Sales and marketing expenses increased from
$1.8 million for the six months ended June 30, 1999 to $6.1 million for the six
months ended June 30, 2000. This increase was primarily a result of increases in
staffing for marketing, account management, customer support and direct sales,
as well as increases in sales commissions. This increase in sales and marketing
expenses was also the result of our increased investment in international
operations. Sales and marketing expenses as a percentage of revenues
significantly decreased as a result of the increase in our revenues.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$3.3 million in the six months ended June 30, 1999 to $4.8 million in the six
months ended June 30, 2000. This increase in our research and development
expenses was primarily a result of additional hardware and software

21
<PAGE>

development personnel. Research and development expenses as a percentage of
revenues significantly decreased as a result of the increase in our revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $710,000 for the six months ended June 30, 1999 to $2.3 million for the six
months ended June 30, 2000. This increase was a result of an increase in
personnel related costs, and increased expenditures on legal, accounting,
information systems and consulting fees. The increase in our general and
administrative expenses was required to support the growth in our operations,
commercial activities and customer base. General and administrative expenses as
a percentage of revenues decreased as a result of the increase in our revenues.

STOCK COMPENSATION. Stock-based compensation expense was $723,000 in the
first six months of 2000, an increase of $684,000 from $39,000 in the first six
months of 1999. The increase was due to the amortization of deferred stock-based
compensation resulting from the granting of additional stock options to
employees during the three months ended June 30, 2000 and compensation expense
associated with the grant of options to non-employees.

OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased from
$19,000 for the six months ended June 30, 1999 to $3,000 for the six months
ended June 30, 2000, resulting primarily from an increase in interest income
offset by royalty payments to Nortel Networks. Our royalty obligations to Nortel
Networks will terminate on the closing of this offering.

YEARS ENDED DECEMBER 31, 1998 AND 1999

TOTAL REVENUES. Revenues increased from approximately $233,000 in the year
ended December 31, 1998 to $8.2 million in the year ended December 31, 1999.
This increase was primarily due to the successful transition from development of
our products to commencement of commercial operations and a significant increase
in the sales of our ELMo 8 and ELMo 120 access equipment that we introduced in
mid 1999. We generated revenues from international sales of $0 for the year
ended December 31, 1998 and $948,000 for the year ended December 31, 1999.

GROSS PROFIT (LOSS). Gross profit (loss) declined from a loss of
$1.9 million in the year ended December 31, 1998 to a loss of $6.1 million in
the year ended December 31, 1999. The increase in gross loss was primarily the
result of our selling products at prices that were less than our costs during
each year, together with increases in sales of our products. Additionally,
significant manufacturing support costs were incurred in the fourth quarter of
1999 while the products were undergoing continued redesign aimed at cost
reduction. The majority of these costs were non-recurring in nature, and were
incurred as we moved from manufacturing prototype products to manufacturing and
selling commercial products.

SALES AND MARKETING. Sales and marketing expenses increased from
$3.4 million in the year ended December 31, 1998 to $5.2 million in the year
ended December 31, 1999. This increase was primarily a result of increases in
staffing for marketing, account management, customer support and direct sales,
as well as increases in sales commissions. The majority of the increase in sales
and marketing expenses occurred in the fourth quarter of 1999 in support of the
ELMo 120 launch and the expansion of our international business.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$8.2 million in the year ended December 31, 1998 to $7.4 million in the year
ended December 31, 1999. This decrease in our research and development expenses
was primarily a result of a reduction in contract development costs and the
replacement of contractors with full time employees. We expect to increase
expenditures in research and development programs in future periods for the
purposes of reducing the costs of our products and enhancing current and
developing new products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.7 million in the year ended December 31, 1998 to $2.3 million in the
year ended December 31, 1999. This increase was

22
<PAGE>
primarily a result of an increase in personnel-related costs and increased
expenditures on legal, accounting, information systems and consulting fees. The
increase in our general and administrative staffing was required to support the
growth in our operations, commercial activities and customer base.

STOCK COMPENSATION. Stock-based compensation expenses were $39,000 in 1999
and $0 in 1998. The increase in stock-based compensation was due to the
amortization of deferred stock-based compensation resulting from the grant of
stock options to non-employees.

OTHER INCOME (EXPENSE), NET. Other income (expense), net improved from $0
in the year ended December 31, 1998 to $90,000 in the year ended December 31,
1999 resulting primarily from an increase in interest income partially offset by
an increase of royalties paid to Nortel Networks. Our royalty obligations to
Nortel Networks terminate on the closing of this offering.

YEARS ENDED DECEMBER 31, 1997 AND 1998

TOTAL REVENUES. Revenues increased from $0 in the year ended December 31,
1997 to $233,000 in the year ended December 31, 1998. This increase was due
primarily to licensing revenues related to our EtherLoop technology and limited
sales of our initial products. During 1997 and 1998 we continued to develop our
EtherLoop technology and DSL access products, but none of these products was
commercially released during these periods.

GROSS PROFIT (LOSS). Gross profit (loss) declined from $0 in the year ended
December 31, 1997 to a loss of $1.9 million in the year ended December 31, 1998.
The decrease in gross profit (loss) was primarily the result of significant
amounts of manufacturing costs we incurred in support of our DSL access
products.

SALES AND MARKETING. Sales and marketing expenses increased from $644,000
in the year ended December 31, 1997 to $3.4 million in the year ended
December 31, 1998. This significant increase was primarily a result of increases
in staffing for marketing, account management, customer support and direct
sales.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$3.3 million in the year ended December 31, 1997 to $8.2 million in the year
ended December 31, 1998. This significant increase in our research and
development expenses was primarily a result of additional hardware and software
development personnel, including contractor expenses, related to the ongoing
commercial development of our products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $524,000 in the year ended December 31, 1997 to $1.7 million in the year
ended December 31, 1998. This increase was primarily a result of an increase in
personnel-related costs and increased expenditures on legal, accounting,
information systems and consulting fees. The increase in our general and
administrative staffing was required to support the growth in our operations,
commercial activities and customer base.

23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following tables present unaudited quarterly operating results in
dollars and as a percentage of revenues. We believe this information reflects
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. The results for any quarter are
not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................... $ 344 $ 2,256 $ 1,164 $ 4,451 $ 6,189 $ 8,504
Cost of revenues.................. 803 4,706 1,844 6,937 6,056 8,075
------- ------- ------- ------- ------- -------
Gross profit (loss)........... (459) (2,450) (680) (2,486) 133 429
Operating expenses:
Sales and marketing............. 909 925 1,001 2,334 2,486 3,596
Research and development........ 1,643 1,673 1,717 2,353 2,080 2,678
General and administrative...... 375 335 794 772 1,290 1,009
Stock compensation.............. -- 39 -- -- -- 723
------- ------- ------- ------- ------- -------
Total operating expenses...... 2,927 2,972 3,512 5,459 5,856 8,006
------- ------- ------- ------- ------- -------
Operating loss.............. (3,386) (5,422) (4,192) (7,945) (5,723) (7,577)
Other income (expense), net....... -- 19 99 (28) 44 (41)
------- ------- ------- ------- ------- -------
Net loss...................... $(3,386) $(5,403) $(4,093) $(7,973) $(5,679) $(7,618)
======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................... 100% 100% 100% 100% 100% 100%
Cost of revenues.................. 233 209 158 156 98 95
---- ---- ---- ---- ---- ----
Gross profit (loss)............. (133) (109) (58) (56) 2 5
Operating expenses:
Sales and marketing............. 264 41 86 52 40 42
Research and development........ 478 74 148 53 34 31
General and administrative...... 109 15 68 17 21 12
Stock compensation.............. -- 1 -- -- -- 9
---- ---- ---- ---- ---- ----
Total operating expenses...... 851 131 302 122 95 94
---- ---- ---- ---- ---- ----
Operating loss.............. (984) (240) (360) (178) (93) (89)
Other income (expense), net....... -- 1 8 (1) 1 --
---- ---- ---- ---- ---- ----
Net loss...................... (984)% (239)% (352)% (179)% (92)% (89)%
==== ==== ==== ==== ==== ====
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Prior to May 1999, we operated as a division of Nortel Networks and all
operating deficits and capital expenditures were funded by Nortel Networks.
Since we became a separate company on May 12, 1999, we have financed our
operations and capital expenditures through the sale of equity and debt
securities and leases for capital equipment. On May 12, 1999, we sold shares of
our series A preferred stock for $12.6 million comprised of $10.6 million in
cash and $2.0 million in notes that have since been paid. On

24
<PAGE>

February 14, 2000, we sold shares of our series B preferred stock for
$20.9 million, which resulted in a significant increase in our working capital
during the six months ended June 30, 2000.

At June 30, 2000, we had cash and cash equivalents and short term
investments of $4.5 million. On August 4, 2000, we borrowed $4.0 million under
two secured promissory notes issued to an affiliate of the selling stockholder
and another stockholder. Each note is for an aggregate principal amount of up to
$5.0 million, is secured by all of our assets, bears interest at a rate of 6%
per year and matures on the earlier to occur of the closing of this offering or
February 1, 2001. In connection with this financing, we also issued warrants to
these stockholders to purchase 102,460 shares of our series B preferred stock at
any time prior to the closing of this offering, or our common stock upon or
after the closing of this offering. These warrants are valued at approximately
$657,000 and will be amortized to interest expense over the life of the notes.
Upon the closing of this offering, we will repay these notes and they will no
longer be available to us.

Cash used in operating activities was $11.9 million for the period ended
December 31, 1998 and $16.4 million for the period ended December 31, 1999. The
increase in cash used for operating activities for the year ended December 31,
1999 compared to the year ended December 31, 1998 was primarily due to increases
in net losses, accounts receivable and inventories as a result of the
introduction of and growth in demand for our products. This increase was
partially offset by increases in accounts payable and other accruals. Cash used
in operating activities for the period ended December 31, 1997 was $3.0 million
due to net losses of $4.5 million, partially offset by an increase of
liabilities of $1.5 million.

Cash used in investing activities was $1.3 million for the period ended
December 31, 1998 and $2.4 million for the period ended December 31, 1999. The
increase in cash used for investing activities for the year ended December 31,
1999 compared to the prior year was primarily due to the net purchase of
$1.8 million in short term investments, partially offset by a reduction in
capital expenditures. Investing activities for the period ended December 31,
1997 consisted of expenditures for plant and equipment of $28,000.

Cash provided by financing activities was $13.2 million for the period ended
December 31, 1998 and $22.7 million for the period ended December 31, 1999. For
the year ended December 31, 1998, cash was provided by Nortel Networks to fund
our operations during periods of operating losses and capital expenditures. The
increase in cash provided by financing activities for the year ended
December 31, 1999 compared to the year ended December 31, 1998 was primarily due
to the issuance of our series A preferred stock for $10.6 million in cash and
$11.9 million of cash provided by Nortel Networks prior to May 12, 1999 in
support of our operating losses and asset purchases. Financing activities for
the period ended December 31, 1997 consisted of funding by Nortel Networks of
$3.0 million.

Our future capital requirements will depend upon many factors, including
sales of our products, the timing of research and product development efforts
and the expansion of our marketing efforts. We expect to continue to expend
amounts on property and equipment related to the expansion of facility
infrastructure, computer equipment and for research and development laboratory
and test equipment to support on-going research and development operations. We
have no material commitments other than obligations under our operating and
capital leases and our two secured promissory notes. In future periods, we
anticipate increases in working capital on a period-to-period basis primarily as
a result of planned increased product revenues.

We believe that our cash and cash equivalent balances, short-term
investments and our expected net proceeds from this offering will be sufficient
to satisfy our cash requirements for at least the next 12 months. We intend to
invest our cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.

Inflation has had no material impact on our operations to date.

COMPENSATION ARRANGEMENTS

In fulfillment of compensation arrangements between Nortel Networks and some
of our employees relating to their prior employment with Nortel Networks, Nortel
Networks has agreed to pay these

25
<PAGE>

employees, if they are still working for Elastic Networks at the time of
payment, an aggregate of approximately $13.4 million in cash. Of this amount,
two-thirds will be paid at the time at which Nortel Networks' ownership of our
outstanding common stock falls below 50% and the remaining one-third will be
paid on the first anniversary of that date. Upon the completion of this
offering, Nortel Networks will own approximately 46% of our outstanding common
stock and will make a payment of approximately $9.0 million to these employees;
on the first anniversary of that date, Nortel Networks will make a payment of
approximately $4.4 million.

We will record compensation expense of approximately $9.0 million on the
completion of this offering and approximately $4.4 million over the following
twelve months, and will record capital contributions from Nortel Networks in
equivalent amounts.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our investments are exposed to changes in interest rates primarily on our
investments in certain held-to-maturity securities. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to
interest rate changes. A hypothetical 100 basis point adverse move in interest
rates along the entire interest rate yield curve would not materially effect the
fair value of interest sensitive financial instruments we held as at June 30,
2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board, or FASB, issued
FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION (AN INTERPRETATION OF THE ACCOUNTING PRINCIPLES BOARD OPINION
NO. 25). Among other issues, this interpretation clarifies:

- the definition of employee for purposes of applying Opinion 25;

- the criteria for determining whether a plan qualifies as a noncompensatory
plan;

- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and

- the accounting for an exchange of stock compensation awards in a business
combination.

This interpretation became effective July 1, 2000, but certain conclusions
in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. We are in the process of evaluating this new statement.

In June 1998, the FASB issued Statements of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities," or SFAS No. 133,
as amended by Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities Deferral of the Effective Date
of FASB Statement No. 133," which established accounting and reporting standards
of derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and certain hedging activities. We
are in the process of evaluating the effects of these new statements.

In 1999, Staff Accounting Bulletin, or SAB, No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, was issued. The SAB provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. Although SAB No. 101 does not change any of the accounting profession's
existing rules on revenue recognition, it draws upon existing rules and explains
how the SEC staff applies those rules, by analogy, to other transactions that
existing rules do not specifically address. SAB No. 101, as amended by SAB
No. 101B, becomes effective for the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. We are in the process of assessing the impact
of SAB No. 101 on our financial statements. However, we do not expect that the
adoption of SAB No. 101 will have a material impact on our financial statements.

26
<PAGE>
BUSINESS

OVERVIEW

We design, develop and market high-speed DSL communications products that
enable service providers to deliver cost-effective and easy-to-deploy broadband
access solutions to their customers over the existing copper telephone wire
infrastructure. We design our products based on our patented EtherLoop
technology to overcome many of the limitations of conventional DSL technologies
and improve quality of service. The performance and cost advantages of our
EtherLoop technology allow service providers to maximize their infrastructure
investment to meet their customers' growing demand for broadband access and new,
value-added services.

MARKET OPPORTUNITY

GROWING DEMAND FOR BROADBAND ACCESS

International Data Corporation projects that the number of worldwide
Internet users will grow from about 240 million in 1999 to over 600 million by
2003. As Internet usage becomes more prevalent, it is also becoming more
sophisticated. Businesses and individuals are using the Internet for more
advanced, mission critical activities such as e-commerce, customer support,
virtual private networking, telecommuting and distance learning. The Internet is
also quickly evolving into a highly interactive medium for communications,
entertainment and other applications, all of which require high-speed Internet
connectivity. However, we believe the true benefits of the interactive Internet
will not be realized without technology improvements in the portion of the
telephone network between the end user's premises and the service provider's
central office, known as the last mile or the local loop.

The growing demand for broadband access presents an attractive new market
opportunity for service providers. The Telecommunications Act of 1996 has
facilitated this market opportunity by enabling open access to the existing
local copper wire network to new communications service providers, such as
competitive local exchange carriers, or CLECs. According to the Association for
Local Telecommunications Services, the number of CLECs grew from about 50 in
1996 to over 375 by the end of 1999, and these CLECs are investing on average
over $1 billion per month, in the aggregate, on their networks. As competition
increases, service providers will need to offer a broader range of voice, data
and other value-added offerings in order to effectively differentiate their
services. We believe that the proliferation of new services will create a
greater need for broadband access.

While the market opportunity to deliver broadband access is significant, its
current penetration rates outside of the larger business market remain low. In
the United States, according to International Data Corporation statistics, of
the small businesses with Internet access in 1999, more than 90% still used
conventional dial-up connections rather than dedicated high-speed connections.
Data communication speeds have traditionally been limited because the existing
telecommunications equipment was originally built to support analog voice rather
than bandwidth intensive data. There are a number of existing high-speed digital
access technologies that are intended to address the connectivity limitations,
including integrated services digital network, or ISDN, T-1 digital transmission
technology, fiber optics and cable and wireless solutions. However, these
technologies have their own limitations, such as high cost, complex deployment
and security and performance issues. DSL technology was developed to overcome
some of these issues by taking advantage of the existing copper wire
infrastructure while providing a cost-effective connectivity solution for that
part of the network between the end user and the end user's service provider.

DSL TECHNOLOGY OVERVIEW

DSL technology has the capability to enable broadband data transmission at
speeds up to one hundred times faster than those of traditional analog
technology, using the same copper telephone wires. A DSL solution typically
consists of the end user's DSL modem and a DSL access multiplexer, or DSLAM,
that connects the signals from users' DSL modems with the Internet or other
networks. The DSLAM is located in a service provider's facility or on the
premises where multiple end users are located, such as hotels, multi-tenant
business complexes and apartment buildings.

27
<PAGE>
Conventional DSL access technologies have several key advantages that
include:

- HIGH-SPEED ACCESS. DSL technology provides high-speed, fixed upstream and
downstream broadband access at speeds ranging from 150 kilobits per
second, or Kbps, up to millions of bits per second.

- SECURE, DEDICATED BANDWIDTH. Unlike shared services such as cable, DSL
technology provides a dedicated point-to-point connection, increasing line
security and maintaining high levels of performance even as new users are
added to the network.

- WIDESPREAD COVERAGE. According to the International Telecommunications
Union, the worldwide installed base of copper telephone lines exceeds
850 million, providing the capability to deploy DSL services to a
significant base of potential end users.

Despite their advantages, conventional DSL technologies have significant
limitations, such as:

- INEFFICIENT BANDWIDTH UTILIZATION. Conventional DSL technologies have
fixed upstream and downstream bandwidth, and they cannot automatically
allocate bandwidth depending on usage needs. As a result, they do not
efficiently utilize available bandwidth to manage the amount of data
transmitted through the line to support bandwidth intensive, interactive
Internet applications.

- SIGNAL INTERFERENCE. Sending high-speed data requires substantial signal
levels and power, which, when delivered through the copper wire, can lead
to signal leaks and create interference with the other signals in the same
bundle of lines. This problem is known as cross talk interference. Since
conventional DSL technologies operate with a continuously powered fixed
frequency transmission signal, they do not have the flexibility to monitor
other line signals and adjust the frequency of the signal to avoid
interference.

- COMPLEX, COSTLY DEPLOYMENT AND OPERATION. The installation of conventional
DSL technologies is often a time consuming, manual process. Service
providers must generally test and adjust the copper telephone lines during
installation in order to overcome transmission obstacles caused by the
presence of different sized wires within the network and improperly
connected line extensions. This process requires costly, labor intensive
service calls and increases installation time. Also, most DSL equipment
requires a conversion of the communications signal between a
communications standard known as asynchronous transfer mode, or ATM, and
Internet protocol, or IP, the Internet communications standard. This
conversion adds further complexity and cost.

- LIMITED SCALABILITY. Each type of conventional DSL technology addresses
different needs such as distance, speed or voice. However, they are not
compatible with each other. This incompatibility prevents the service
provider from delivering, and the end user from experiencing, the full
range of benefits that DSL technologies promise.

- DISTANCE LIMITATIONS. DSL is limited by the end user's distance from the
DSLAM. The signal strength sent across the copper line dissipates the
farther it travels between the DSLAM and the end user, currently limiting
reliable DSL deployment to distances of about 18,000 feet.

While conventional DSL technologies provide multiple benefits, we believe
that the majority of service providers have been unable to cost-effectively
provide widespread DSL services to their customers because of its limitations.

THE ELASTIC NETWORKS SOLUTION

Our patented EtherLoop technology provides a next generation access solution
that overcomes many of the limitations of conventional DSL technologies. Our
access solution enables service providers to simplify DSL deployment and
provides a cost-effective means of delivering high-speed access to more of their
subscriber base. Our products can be deployed in a service provider's facility
to reach business and

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<PAGE>

residential users or on any premises where multiple end users are located such
as hotels, multi-tenant business complexes, apartment buildings, condominiums
and university campuses.

Our solution offers the following benefits:

- MAXIMIZE AVAILABLE BANDWIDTH. Our products enable service providers to
deliver an array of services and applications, including Internet access,
virtual private networking, videoconferencing, video on demand and
IP-based voice services, on a common platform. Our access products and
EtherLoop technology currently allow our customers to deliver bandwidth of
up to 4 Mbps, automatically allocating downstream and upstream bandwidth
based on user requirements. This capability enables service providers to
maximize available bandwidth and provide additional revenue generating
services.

- AVOID INTERFERENCE. Our EtherLoop technology constantly monitors
interference on each line over which EtherLoop signals are transmitted. It
can automatically adjust transmission frequencies in order to avoid
potential noise and interference caused by other high-speed data services.
EtherLoop also adjusts its transmission frequency to avoid interfering
with other signals in the same bundle of lines. These advantages enable
service providers to deploy more broadband lines in each bundle of lines
while providing a higher quality of service.

- EASY TO DEPLOY AND USE. Our products allow service providers to
cost-effectively utilize the existing copper wire infrastructure to easily
deploy high-speed access to their subscribers. Unlike most other access
products, our technology can be deployed without the need for costly
re-engineering or rewiring of the local network or time consuming service
calls. Our customer premises equipment products, such as or DSL modems,
allow for quick and easy end user installation, reducing the need for
professional installation services. Further, our YesWare software enables
end users to easily and quickly access the Internet without having to
install special software or modify computer settings.

- HIGHLY SCALABLE. Our access products incorporate interchangeable modules,
which enable the quick adjustment of features without the cost of having
to replace the entire DSLAM or customer premises equipment. Service
providers can easily and quickly increase bandwidth and increase or change
the number of lines served to address functionality and cost requirements.
Because EtherLoop-based products are designed for deployment in outside
plant applications, such as locations serviced by local digital
communications service providers and multi-tenant business complexes,
service providers can use our products to reach more of their subscribers.

- GREATER TRANSMISSION DISTANCE. Our technology also provides reliable
service coverage beyond the typical range of conventional DSL
technologies. With this extended reach, service providers are able to
deliver high-speed access to more of their subscriber base. Additionally,
unlike conventional DSL technologies, EtherLoop transmits signals in small
packets that are capable of being repeated to extend service over even
greater distances.

STRATEGY

Our objective is to become a leading provider of next generation DSL access
technology. Key elements of our strategy include:

- CONTINUING TO CAPITALIZE ON THE ADVANTAGES OF OUR ETHERLOOP
TECHNOLOGY. We will continue to devote substantial resources to further
develop our EtherLoop technology to enhance the functionality, bandwidth
and scalability of our access solutions. Our recently announced Storm
System products are designed to enhance scalability by increasing upstream
and downstream access speeds to 6 Mbps and above and by significantly
increasing the number of DSL connections provided by each access
multiplexer. Additionally, we will continue enhancing our software
solutions to provide tools that increase the value-added functionality of
our products, including bandwidth

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<PAGE>

management, provisioning and quality of service offerings. As our
EtherLoop technology continues to advance, we believe that we will be able
to effectively service a greater percentage of the significant market for
high-speed access.

- EXPANDING OUR PENETRATION WITHIN THE BROADBAND ACCESS MARKET. We plan to
expand our distribution channels to meet the growing demand for business
and residential broadband access. While we initially focused our sales
efforts on the hospitality industry, we have since expanded these sales
efforts to reach other market opportunities. Our products are now deployed
in diverse in-building environments, including hotels, apartment buildings
and university campuses, as well as in central office facilities. Our new
Storm System products will also allow us to expand product deployment to
the large number of subscribers served by providers of local digital
communications equipment.

- INCREASING OUR DIRECT AND INDIRECT SALES CHANNELS AND EXPANDING
INTERNATIONALLY. We intend to utilize our direct and indirect sales
channels to increase market penetration of our access products. We will
continue to increase our sales presence in the growing U.S. and Asian
markets. We also plan to expand our sales efforts into other emerging
international markets such as Europe and Latin America. To complement our
direct channels, we intend to strengthen our relationships with resellers
and other distributors, such as Nortel Networks, Westcon and Williams
Communications.

- LEVERAGING OUR BUSINESS RELATIONSHIPS. We have established business
relationships with a variety of companies, including Nortel Networks and
Texas Instruments for technology and product development and Sanmina for
manufacturing. These relationships enable us to leverage the
infrastructure and capabilities of established industry leaders, helping
us to improve our products, lower our costs and increase our speed to
market. We intend to continue to develop these and additional business
relationships.

- DEVELOPING OUR LICENSING STRATEGY. We plan to license our EtherLoop
technology to third parties to facilitate integration of our technology
into new product developments. Additionally, we intend to license our
YesWare software as a stand-alone application to in-building operators to
allow them to increase their control over their telecommunications access
billing and management functions. Furthermore, we plan to pursue a
strategy of entering into relationships with original equipment
manufacturers to expand the market penetration of our customer premises
equipment. By licensing our technology and entering into original
equipment manufacturer relationships, we can increase market adoption of
our technology, help promote new applications for our access solution and
improve our margins.

CORE TECHNOLOGY

Our patented EtherLoop technology combines the benefits of Ethernet
technology and conventional DSL into a next generation DSL technology. EtherLoop
technology leverages Ethernet's ability to efficiently transmit signals by
dividing large amounts of data into smaller packets that are transmitted in
intervals or bursts. EtherLoop utilizes DSL's ability to transmit these data
packets over existing copper telephone lines. EtherLoop's unique technology
advantages deliver a robust access solution with the following benefits:

ETHERLOOP AUTOMATICALLY ALLOCATES BANDWIDTH. EtherLoop constantly monitors
both upstream and downstream data signal bandwidth requirements and
automatically allocates all available bandwidth for maximum utilization. For
instance, if the downstream signal needs only 10% of the available bandwidth,
but the upstream signal needs 90%, EtherLoop will allocate the necessary
bandwidth to the upstream signal. As bandwidth requirements change, EtherLoop
reallocates the available bandwidth, providing enhanced performance over other
fixed bandwidth solutions.

30
<PAGE>

ETHERLOOP REDUCES INTERFERENCE. EtherLoop technology reduces interference
in telephone lines caused by the presence of multiple signals within the same
bundle of lines, by transmitting small packets of data in bursts, instead of a
constant signal stream. As a result, EtherLoop can actively monitor and adjust
its transmission frequency to avoid interference and conflicts with other
signals in the the same bundle of lines, all without sacrificing speed or data
quality. This automatic frequency adjustment can also increase speed and data
quality because it greatly reduces the need for retransmission of signals
degraded by line interference and transmission conflicts. This functionality
also allows service providers the flexibility to deploy our solution in the same
bundle of lines with other voice and high-speed data services without
compromising signal quality.

ETHERLOOP PROVIDES IP CONNECTIVITY. EtherLoop eliminates the need for
conversion of data between asynchronous transfer mode and Internet protocol.
This efficient form of data communications reduces costs and complexity,
increases the amount of data transmitted through the line and improves the
quality of service.

ETHERLOOP-BASED PRODUCTS ARE EASY TO INSTALL AND REDUCE THE NEED FOR SERVICE
CALLS. Unlike many conventional DSL technologies, EtherLoop reduces the
complexity and expense of the installation process and increases deployment
speed. Our solution generally does not require local telephone line network
re-engineering or rewiring as EtherLoop can operate on copper phone lines
regardless of changes in wire sizes within the network and improperly connected
telephone line extensions. Without the need to recondition or rewire the lines,
our EtherLoop technology significantly reduces the requirement for installation
service calls. Our technology also allows end users to easily connect to the
Internet, reducing the need for professional installation.

ETHERLOOP ENABLES HIGH-SPEED DATA TRANSMISSION OVER LONGER
DISTANCES. Communications speed and bandwidth decrease as the distance between
the end user and the service provider's Internet connection increases. EtherLoop
addresses this limitation by combining Ethernet's data packet transmission
technology with advanced frequency adjustment capabilities to provide high-speed
communications beyond the reach of conventional DSL technologies. EtherLoop
continually monitors and determines the characteristics of each line to provide
the best frequency and bandwidth available. In addition, we are currently
developing technology to incorporate into our DSL solution that will be able to
leverage the efficiencies of data packet delivery to extend the signal out to
longer distances while maintaining high data transmission speeds and signal
quality.

PRODUCTS

We provide an end-to-end solution of Internet protocol DSL access
multiplexers, DSL modems and complementary software, either as a complete
solution or as individual components. Service providers use our products to
deliver DSL broadband access services to their end users. These products are
installed in telecommunications service provider facilities, such as central
office locations, or on any premises where multiple end users are located, such
as multi-tenant buildings and hotels. The following diagram highlights where our
products reside in the typical network.

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<PAGE>
[GRAPHIC]

1. In the top left corner are the words "Central Office" and images of our IP
DSLAM and Server that contains system management software with lines connecting
both to graphics of a public telephone network slightly above and an Internet
"cloud" below. In the top right corner is a box with the words "In-Home" at the
top and a picture of our DSL Modem with lines connecting it to a desktop
computer and a telephone to the right. Below the "In-Home" box is a box with the
words "In-Office" at the top and pictures of our DSL Modem with lines connecting
it to a desktop computer, a telephone and our Ethernet extension port that
connects to a laptop computer. Dashed lines are drawn from these figures to our
"Central Office" images.

2. In the bottom left corner are the words "In-Building" and images of our IP
DSLAM and Server that contains YesWare software with lines connecting both to
graphics of a public telephone network slightly above and an Internet "cloud"
above. A dashed line connects this to a box to the right with the words "In-
Room" at the top that includes a picture of a standard hotel telephone with our
eSled DSL Modem which is attached to the bottom of the hotel telephone and
connected by a line to a laptop computer.

In addition to the features inherent in our core EtherLoop technology,
including Internet protocol connectivity, automatic bandwidth allocation,
reduced interference, ease of deployment and greater transmission distances, our
products offer many additional features discussed below.

CURRENT PRODUCTS

ELMO 8 IP DSLAM. The ELMo 8 IP DSLAM offers the following features:

- Ability to provide service to up to eight lines;

- Up to eight modem cards with 4 Mbps of dedicated bandwidth;

- A filter card for directing voice traffic to the public telephone network;

- A port card for distributing high speed data traffic to an external wide
area network device;

32
<PAGE>

- Compliance with Networking Equipment Building Standards Level 3 and 10
Base-T Ethernet standards; and

- A 48 volt power card.

ELMO 120 IP DSLAM. The ELMo 120 IP DSLAM offers the following features:

- Ability to provide service to up to 120 lines;

- Up to ten modem cards, each supporting up to twelve lines sharing 4 Mbps
of bandwidth;

- An optional filter shelf supporting up to 120 lines that directs voice
traffic to the public telephone network;

- A port card for distributing high speed data traffic to an external wide
area network device;

- Compliance with Networking Equipment Building Standards Level 3 and 10/100
Base-T Ethernet standards; and

- A 48 volt power card.

ELITE MODEM. The Elite is the EtherLoop modem connecting end user voice and
data equipment to the network. It offers the following features:

- Up to 4 Mbps of bandwidth that is automatically allocated upstream and
downstream depending on usage requirements;

- A standard Ethernet 10 Base-T connector and phone jack;

- Easy to install--plugs into a standard wall jack;

- Always connected to the network--no need to dial-up;

- Supports both single user and small work group applications; and

- Powered by 110/120 VAC.

We also offer an auxiliary connection device, an Ethernet extension port, to
connect the end user's device to the Elite modem where there is limited desktop
space.

ESLED. This product attaches to the bottom of Teledex manufactured hotel
telephones and provides the same connectivity as our standard Elite modem
without occupying additional desktop space.

YESWARE. Our YesWare software, which resides on our Linux-based YesWare
server, provides port authorization, billing and provisioning and administrative
functions to network managers of EtherLoop-based high-speed access services.
With YesWare operations, administration, maintenance and provisioning software,
network managers can assign modems to individual users, monitor performance,
remotely download new firmware to modems and troubleshoot network issues. In
addition, for hospitality customers, YesWare visitor-based networking software
enables customer plug and play connectivity with no laptop reconfiguration,
direct or credit card billing for hotel guests, interface to hotel property
management systems and other revenue generating features.

RECENTLY ANNOUNCED PRODUCTS

In June 2000, we announced our Storm System family of products, which we
expect to begin shipping in the fourth quarter of 2000. The Storm System family
evolves our current product line in the following ways:

- Storm System Internet protocol DSL access multiplexers are designed on a
single shelf chassis, based on the ELMo 120 architecture;

33
<PAGE>

- Additional modem cards enable our access equipment to support greater
bandwidth and access lines;

- The introduction of Internet protocol policy management that allows
service providers to intelligently manage bandwidth, access and service
characteristics in order to provide new multi-media services; and

- The introduction of a wide area network device that provides
high-bandwidth connectivity between our access equipment and the network.

The Storm System family consists of the following products designed to
enable the complete delivery and management of Internet protocol services:

- BITSTORM IP DSLAMS. This product will deliver automatically allocated
bandwidth of up to 6 Mbps and beyond over a single copper line. Added
capability can be provided by the optional layer 3 switch and the
subscriber management gateway. The layer 3 switch eliminates traditional
routers, sets priorities for network traffic and manages bandwidth. The
subscriber management gateway feature enables service providers to manage
bandwidth allocation, monitor network activity, provide online security
functions and perform other subscriber management services.

- STORMPORT MODEM DEVICES. The StormPort family of end user devices will
connect end user voice and data equipment to our access equipment, which
is connected to the network, and enable plug and play connectivity.

- STORMTRACKER. StormTracker software, which will reside on our Linux-based
BitStorm server, will provide operations, administration, maintenance and
provisioning tools to enable easy management of Storm System components.
StormTracker will also include Spectrum Manager, an optional feature that
allows service providers to control EtherLoop's line interference
monitoring-and-avoidance technology. The Spectrum Manager feature will
also permit the graphical display of line transmission characteristics.

- MICROBURST. This Internet protocol remote access device will permit two or
more DSL signals to travel over the same circuit. It is designed for
deployment in outside plant applications, such as locations serviced by
local digital communications service providers and multi-tenant business
complexes.

RESEARCH AND DEVELOPMENT

We continually review and evaluate technological changes affecting the
telecommunications market and invest in research and development to address
those changes. We are committed to an ongoing program of new product development
that combines internal development efforts and licensing arrangements for new
products and technologies from other sources.

We have focused our recent research and development expenditures on four
areas: application specific integrated circuit chip development for increased
bandwidth of our EtherLoop technology of up to 10 Mbps and above, advanced
Internet protocol switching techniques, high-speed access connectivity devices
and enhanced communications software.

Research and development expenses were $3.3 million in 1997, $8.2 million in
1998 and $7.4 million in 1999. We intend to increase our investment in research
and development in the future.

PROFESSIONAL SERVICES

Our professional services department supports our customers in the timely
deployment of our products at customer sites. The department outsources many
professional services to independent service

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<PAGE>
organizations, including GTE Communications and Tstaff, Inc. The department also
provides our customers with technical assistance on a twenty-four hours a day,
seven days a week basis, as needed.

CUSTOMERS

We target our sales efforts to various categories of service providers
operating in the market for high-speed access, both in the United States and
internationally. To date, customer installations have ranged from in-building
applications, including hotels, apartment buildings and university campuses, to
service providers' central office locations used to reach both business and
residential users. The following is a list of service providers who purchase our
products directly from us or through our distributors and resellers, Nortel
Networks, Westcon and Williams Communications:

<TABLE>
<CAPTION>
UNITED STATES BASED SERVICE PROVIDERS INTERNATIONAL BASED SERVICE PROVIDERS
--------------------------------------------- ---------------------------------------------
<S> <C>
BellSouth Communications Systems, LLC Beijing Keval On-Line Technology, Ltd.
CAIS Internet, Inc. Coventus Inc.
Citizens Communications Company New T & T Hong Kong Limited
Darwin Networks, Inc. Terra Networks, S.A.
Everest Broadband Networks, Inc.
Grand River Mutual Telephone Corporation
Oregon Trail Internet, Inc.
Prism Communications Services, Inc.
UniversalCom, Inc.
U.S. Online, Inc. member ISPs
</TABLE>

In 1999, sales to Darwin and Nortel Networks represented approximately 81%
of our revenues. Sales to Darwin accounted for 41% of our revenues and sales to
Nortel Networks, which included indirect sales to Westcon, accounted for 40% of
our revenues during that period. In March 2000, we entered into a distribution
arrangement with Westcon under which Westcon agreed to purchase our products
directly from us instead of through our distributors. In the first six months of
2000, sales to Darwin, Nortel Networks and Westcon accounted for 76% of our
revenues, with sales to Darwin accounting for 41% of our revenues, sales to
Nortel Networks accounting for 21% of our revenues and sales to Westcon
accounting for 14% of our revenues.

SALES AND MARKETING

We sell and market our products on a worldwide basis through both direct and
indirect channels. In the first six months of 2000, our revenues from
international sales were 15% of total revenues, and revenues from domestic sales
were 85% of total revenues. Direct sales accounted for 63% of our revenues and
indirect sales accounted for 37% of our revenues in the first six months of
2000.

DIRECT SALES. Our direct sales efforts are managed through directors and
managers who are responsible for specific customer accounts. Relationships we
establish at various levels in our customers' organizations are key to our sales
efforts. The sales management team for each customer maintains contact with key
customer representatives who have planning and policy responsibility within
their organizations. At the same time, our sales engineers work with customers
to sell our products at key levels through the customer's organization. We
currently have sales offices in Atlanta, Georgia and Hong Kong.

INDIRECT SALES. Our sales team works closely with our distribution partners
to identify customer prospects and fulfill market demand. These relationships
allow us to effectively sell to smaller service providers.

MARKETING. We structure our marketing efforts along product lines and
distribution channels. We employ product marketing specialists who perform the
following functions:

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<PAGE>
- communications and promotions;

- market research and competitive analysis, including pricing and
positioning;

- development of specific marketing strategies for each product line;

- coordination with our direct and indirect sales forces to develop key
account and market strategies;

- definition of product and service functions and features; and

- sales support.

Our marketing efforts are further augmented by our participation in the
Network Reliability and Interoperability Council V, an FCC implemented
commission that concentrates on spectral compatibility issues.

MANUFACTURING

Our manufacturing operations consist primarily of supporting prototype
development, materials planning and procurement, final assembly, testing and
quality control. We use independent suppliers to provide certain printed circuit
boards, chassis and subassemblies for our products. We currently outsource
substantially all of our final manufacturing and testing to Sanmina.

Although we generally use standard parts and components for our products,
our products contain several key components that are purchased from single
source suppliers: line driver chips from Texas Instruments, power supplies from
Astec America Inc. and system processor chips from Motorola Inc. We do not have
written agreements with our single source suppliers. We generally purchase
components on a purchase order basis, as opposed to entering into long-term
procurement agreements. To date, we have generally been able to obtain adequate
supplies in a timely manner from vendors or, when necessary, to meet production
needs from alternative vendors. We believe that, in most cases, alternative
parts and components suppliers can be identified if current vendors fail to
fulfill our requirements.

COMPETITION

We operate in the highly competitive telecommunications access industry. We
believe that competition may increase substantially with the introduction of new
technologies, deployment of new broadband communications networks and potential
changes in the regulatory environment which may create new opportunities for
established and emerging companies. Our current and prospective competitors
include many large companies that have substantially greater operating
histories, market presence, financial, technical, marketing and other resources
than we have. We currently compete directly or indirectly with various providers
of DSL technology, including Alcatel, Cisco Systems, Copper Mountain, Lucent
Technologies, Nokia, Nortel Networks and Tut Systems.

In addition, DSL technology competes with alternative access technologies,
such as integrated services digital network, or ISDN, T-1 digital transmission
technology, fiber optics and cable and wireless solutions. Each of these
technologies utilizes alternative transmission methods, and each has advantages
over, and disadvantages to, DSL technology. Depending on the technology
platform, the advantages can include higher speed transmission, a more extensive
network, a broader base of existing customers and easier installation. Providers
of such alternative technologies include AT&T and Time Warner, each of which has
made significant investments in technology and assets for broadband cable
Internet access. However, each of these alternative technologies also has
disadvantages to DSL, such as shared bandwidth, which results in security
issues, and decreasing transmission speeds and service reliability. These
disadvantages, in turn, result in higher installation and deployment costs. As
these alternative technologies continue to develop and grow, each will exert
increasing competitive pressure on us, which could slow our growth and reduce
our market share, revenues and profits.

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<PAGE>
The rapid technological developments within the telecommunications industry
have resulted in frequent changes in our group of competitors. The principal
competitive factors in our market include:

- system reliability and performance;

- key product features, such as bandwidth and distance;

- ease of installation and use;

- standards compliance;

- technical support and customer service; and

- price.

INTELLECTUAL PROPERTY

We rely on a combination of copyright, trademark, patent and trade secret
laws and contractual restrictions to establish and protect our technology and
proprietary rights. We require employees and consultants and, when possible,
suppliers and distributors, to sign confidentiality agreements. However, we
cannot assure you that our steps will be sufficient to prevent misappropriation
of our technology and proprietary rights and information, or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to ours. In addition, the laws of many foreign countries
do not protect our intellectual property to the same extent as the laws of the
United States. From time to time, we may desire or be required to renew or
obtain licenses from other parties in order to further develop and market
commercially viable products. There can be no assurance that any necessary
licenses will be available upon acceptable terms.

PATENTS AND PATENT LICENSES. We own U.S. patent number 5,912,895, titled
"Information Network Access Apparatus and Methods for Communicating Information
Packets via Telephone Lines," which generally covers the communication of
Ethernet data frames between modems by using a technology that transmits data in
small packets sent in intervals instead of as a continuous signal, and a
technology for avoiding signal interference within the transmission line. This
patent issued on June 15, 1999 and expires on May 1, 2016. Australia has also
granted us a patent on this technology and we have applied for patents in
Canada, Japan and the European Community. Our rights to this patent are subject
to certain licenses that Nortel Networks, as the original owner, granted to
other parties prior to May 12, 2002. Although we have granted Nortel Networks a
license to practice the patented technology, Nortel Networks has agreed not to
compete with us by practicing this technology prior to May 12, 2002. We have
also granted Nortel Networks a license to all improvements to this patented
technology that we may make or acquire. Nortel Networks does not have the right
to sublicense this technology except in limited circumstances such as when
Nortel Networks resells our products containing the technology.

We also have exclusive licenses from Nortel Networks to two patent pending
technologies and non-exclusive licenses to two patent pending technologies, to
two other patented technologies and to one technology for which no patent is
pending, all of which we use in our business. The exclusive licenses are subject
to certain licenses that Nortel Networks, as the original owner, granted to
other parties prior to May 12, 1999. In addition, we have granted Nortel
Networks a license, with a limited right to grant sublicenses, to the
technologies covered by all of these licenses and to any improvements to these
technologies that we may acquire or make. We have also granted Nortel Networks a
license to any patents that we own, acquire, or that result from our filing
applications or from our obtaining a license, during any period that Nortel
Networks owns more than 50% of our voting securities. Both of these licenses to
Nortel Networks are subject to their obligation not to compete with us with
respect to EtherLoop-based products prior to May 12, 2002. The exclusivity
provisions of the exclusive licenses granted to us by Nortel Networks expire
after May 12, 2004, after which time our licenses become non-exclusive. These
licenses expire on the dates the patents expire, unless the patents earlier
terminate, or upon termination of the

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<PAGE>

license arrangements. The license arrangements may be terminated by either party
upon a material breach, or by Nortel Networks if we become insolvent or
bankrupt.

We pay Nortel Networks royalties for our use of the licensed technologies;
however, our royalty obligations will end on the closing of this offering. For a
detailed discussion of our royalty obligations, please refer to "Related Party
Transactions."

TRADEMARKS. We have a United States trademark registration on the mark ELMo
and a Canadian trademark registration on the mark EtherLoop. We also have
pending United States and foreign trademark applications for our other marks. We
also claim common law protection for other marks we use in our business.

EMPLOYEES

As of July 31, 2000, we employed approximately 167 full time employees,
including 49 in sales and marketing, 10 in manufacturing, 56 in research and
development, 15 in finance and administration and 37 in professional services.
None of our employees is represented by a labor union, we have no collective
bargaining agreement and we believe our relations with our employees are good.

FACILITIES

We lease a 14,000 square foot facility in Alpharetta, Georgia, which serves
as our principal engineering and product development facility. The current lease
for this facility expires in May 2003. We also lease another 14,000 square foot
facility in Alpharetta, Georgia for executive offices and for administrative,
sales and marketing purposes. The lease for this facility expires in
August 2002, with an option to renew for a nine month term ending May 2003. We
lease an additional 25,000 square foot facility in Alpharetta, Georgia, which is
used primarily for our professional services team and for warehouse space. The
lease for this facility expires in November 2003.

LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, the positions held by them and their
ages as of June 30, 2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- -------- -----------
<S> <C> <C>
Guy D. Gill.................................. 47 President, Chief Executive Officer and Director
Michael S. VanPatten......................... 47 Senior Vice President, Business Development
Kevin D. Elop................................ 35 Chief Financial Officer, Secretary and Treasurer
Robert T. Gallagher.......................... 38 Vice President, Engineering
Thomas J. Gallo.............................. 42 Vice President, Worldwide Sales
Phillip L. Griffith.......................... 43 Vice President, Marketing
Larry R. Hurtado............................. 38 Vice President, Global Operations
Gary S. Palmer............................... 55 Vice President, Professional Services
Thomas M. Manley............................. 42 Director
Gerald A. Poch............................... 52 Director
Richard G. Reid (1).......................... 53 Director
</TABLE>

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

(1) Member of compensation committee.

(2) Member of audit committee.

GUY D. GILL, one of our co-founders, has served as our president and as a
director since September 1998. He became our chief executive officer in May
1999. From January 1999 until May 1999, Mr. Gill served as president of the
Elastic Networks group of Nortel Networks Inc., a global telecommunications
services company. From January 1998 through January 1999, Mr. Gill was president
and chief executive officer of Arris Interactive, L.L.C., a cable telephony
joint venture between Nortel Networks and ANTEC Corporation. From December 1995
to January 1998, Mr. Gill served as vice president and general manager of Nortel
Networks' access networks division. From January 1994 through December 1995, he
was vice president, customer network solutions, of Nortel Networks Inc.
Mr. Gill has 23 years of telecommunications experience with Nortel Networks in
positions in general management, sales, marketing and finance. He has served on
the board of directors of Arris Interactive and NetSpeed, Inc.

MICHAEL S. VANPATTEN has served as our senior vice president, business
development since January 2000. From October 1997 through January 2000 he was
senior vice president of ViaGate Technologies, Inc., which designs, develops and
distributes multimedia access products to telecommunication services companies.
From January 1997 to September 1997 he was vice president of marketing for DAGAZ
Technologies, Inc., which designs, develops and distributes multimedia access
products to telecommunication services companies. From 1994 to 1996,
Mr. VanPatten served as vice president of marketing and engineering for
Microdyne Corporation, a computer networking company.

KEVIN D. ELOP has served as our chief financial officer since June 2000 and
as treasurer and corporate secretary since May 1999. From June 1998 through
May 1999, he served as the director of finance and administration for the
Elastic Networks group of Nortel Networks. From January 1990 through June 1998,
Mr. Elop served in various capacities at Nortel Networks, including as senior
manager for corporate consolidations, senior manager for external reporting and
accounting research, manager of finance systems and manager of enterprise
networks finance.

ROBERT T. GALLAGHER has served as our vice president, engineering since
January 2000. Prior to that, he worked at ADC Telecommunications, Inc., a
telecommunications business, from August 1994, where he served as manager of
development engineering from August 1994 to August 1995, director of design
engineering from August 1995 through September 1997 and vice president of design
engineering from September 1997 through January 2000.

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<PAGE>
THOMAS J. GALLO has served as our vice president, worldwide sales since
June 1999. From July 1998 through June 1999, he served as North American
business director for business partners of Bay Networks, Inc., a networking
products manufacturer. From July 1997 through June 1998, Mr. Gallo served as
director, small/medium business VAR sales of Bay Networks, and from March 1996
through June 1997 he served as director, Internet CPE sales for Bay Networks.
From June 1995 to March 1996, he was vice president, sales for Performance
Technology, Inc., a local area network to Internet connectivity hardware and
software solutions company.

PHILLIP L. GRIFFITH has served as our vice president, marketing since
May 1999. Prior to that, Mr. Griffith served in various positions at Nortel
Networks. From June 1998 through May 1999, he served as vice president, sales
and marketing for Elastic Networks group of Nortel Networks. From June 1997
through June 1998, he served as Nortel's regional vice president, wireless
networks. From June 1995 through June 1997, Mr. Griffith served as Nortel's vice
president of sales, wireless networks for the southeast United States.

LARRY R. HURTADO, one of our co-founders, has served as our vice president,
global operations since March 2000. From January 2000 to March 2000 he served as
our vice president, technology and operations and from May 1999 through
January 2000, he served as our vice president, engineering, technology and
operations. From October 1998 through May 1999, Mr. Hurtado served as vice
president, business line management for the Elastic Networks group of Nortel
Networks. From September 1997 through October 1998 he served as the director,
business line management of the Elastic Networks group. From September 1996
through September 1997, Mr. Hurtado founded and served as a principal of the
Lighthouse Group, a technology consulting company, and from July 1995 through
September 1996, he served as vice president and general manager of Medaphis
Corporation, a medical technology provider.

GARY S. PALMER has served as our vice president, professional services since
December 1999. From June 1999 through December 1999 he served as vice president
operations for the AT&T global account of Nortel Networks. Prior to June 1999,
Mr. Palmer served in various other capacities at Nortel Networks including as
vice president, North American installation, vice president of customer service,
BellSouth account, vice president of customer service, BellAtlantic account and
vice president of customer service, Teligent account.

THOMAS M. MANLEY has served as a director since May 1999. Mr. Manley has
served as vice president finance of Nortel Networks' service provider and
carrier group since October 1999. Prior to that, Mr. Manley served as vice
president finance of Nortel Networks' carrier packet solutions group since
September 1997. From September 1995 to September 1997 he served as a vice
president and general manager of Nortel Networks' advanced public access systems
division.

GERALD A. POCH has served as a director since May 1999. Mr. Poch has served
as managing director of Pequot Capital Management, Inc., a venture capital fund
management company, since January 2000. From August 1998 through January 2000,
he was a principal of Pequot Capital Management. From August 1996 to June 1998
he was the chairman, president and chief executive officer of GE Capital
Information Technology Solutions, Inc., a technology solutions provider. Prior
to that, he served as co-chairman and co-president of AmeriData Technologies,
Inc., a value added reseller and systems integrator of hardware and software
systems. Mr. Poch is co-chairman of MessageMedia, Inc. and a director of
FutureLink Corp. and BriteSmile, Inc.

RICHARD G. REID has served as a director since May 1999. Mr. Reid has a
30 year career with Nortel Networks. Currently, Mr. Reid is president of Nortel
Networks' emerging service provider market segment. Before that, Mr. Reid was
president of Nortel Networks' global carrier solutions CLECs/IXCs business unit.
Mr. Reid has also served as Nortel Networks' vice president and general manager,
DMS-100, vice president and managing director, private switching for Europe,
Middle East and Africa, and managing director and vice president in the United
Kingdom.

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<PAGE>
Prior to completion of this offering, we intend to elect three additional
members to our board of directors. These individuals will be independent
directors in accordance with the rules and regulations of the Nasdaq National
Market.

There are no family relationships among any of the directors or executive
officers of Elastic Networks.

SPECIAL TECHNOLOGY CONSULTANT

JOHN B. (JACK) TERRY invented EtherLoop technology while serving as an
assistant vice president of Nortel Networks. Mr. Terry was a co-founder of the
Elastic Networks group of Nortel Networks serving as its chief technical officer
from its creation in January 1997 until his retirement from Nortel Networks in
December 1998. We have retained him since February 1999 as our special
technology consultant for the further development of our technology and
products. He holds numerous patents in a variety of fields and has chaired and
presented papers at many key conferences during the past 30 years. Mr. Terry is
a Fellow of the IEEE, recipient of the IEEE 1995 Engineering Leadership Award, a
Senior Member of the SCTE and a member of Sigma Xi.

BOARD OF DIRECTORS

Immediately prior to the completion of this offering, our second amended and
restated certificate of incorporation will take effect and provide for a
classified board of directors consisting of three classes of directors, each
serving staggered three-year terms. As a result, a portion of our board of
directors will be elected each year. To implement the classified structure,
prior to the closing of this offering, of the members of the board of directors
will be elected to terms expiring at the first annual meeting of stockholders to
be held after the closing of this offering, will be elected to terms expiring at
the second annual meeting of stockholders to be held after the closing of this
offering, and will be elected to terms expiring at the third annual meeting of
stockholders to be held after the closing of this offering.
Messrs. , and have been designated class I
directors, whose terms will expire at the annual meeting of stockholders to be
held in 2001. Messrs. and have been designated class II
directors, whose terms will expire at the annual meeting of stockholders to be
held in 2002. Messrs. and have been designated class III
directors, whose terms will expire at the annual meeting of stockholders to be
held in 2003.

BOARD COMMITTEES

Our board of directors has two committees: an audit committee and a
compensation committee. The audit committee consists of Messrs. , and
, and our compensation committee consists of Messrs. Reid and
. The audit committee reviews the results and scope of our annual
audit and meets with our independent auditors to review our internal accounting
procedures and financial management practices. The compensation committee makes
recommendations concerning salaries, stock options, incentives and other forms
of compensation for our directors, officers and other employees, subject to
ratification by our full board of directors.

DIRECTOR COMPENSATION

Our directors are reimbursed for certain expenses in connection with
attendance at board and committee meetings. After the completion of this
offering, we intend to grant stock options to our independent directors in
connection with their service to us; however, as of this time, we have not
determined the level of the option grants.

EXECUTIVE COMPENSATION

The following table provides information concerning compensation awarded to,
earned by or accrued for services rendered to us in all capacities during the
year ended December 31, 1999 by (i) our chief

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<PAGE>
executive officer and (ii) our two other most highly compensated executive
officers whose salary and bonus totaled at least $100,000 for the fiscal year.
Together, they are referred to as the Named Executive Officers.

Cash payments for services prior to May 12, 1999, were made by Nortel
Networks. All bonus amounts were paid by Nortel Networks and related to the
period before May 12, 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ---------------------
------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#)
--------------------------- -------- -------- ---------------------
<S> <C> <C> <C>
Guy D. Gill......................................... $247,206 $46,070 1,319,192
President, Chief Executive
Officer and Director
Phillip L. Griffith................................. 185,147 37,446 271,838
Vice President, Marketing
Larry R. Hurtado (1)................................ 164,529 28,297 400,257
Vice President, Global Operations
</TABLE>

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

(1) In January 1999, Nortel Networks granted to Mr. Hurtado, for his services to
the Elastic Networks group, options to purchase 32,000 shares of Nortel
Networks Corporation common stock at an exercise price of $15.5325 per
share. Approximately 10,667 of these options have vested. These options will
cease to vest upon the completion of this offering.

OPTION GRANTS IN LAST FISCAL YEAR

The following table describes options granted in 1999 to the Named Executive
Officers. These options were granted with an exercise price equal to the fair
market value of our common stock on the date of grant as determined by our board
of directors. Options for Messrs. Gill, Griffith and Hurtado are incentive stock
options except for 1,042,647 of Mr. Gill's options, 172,930 of Mr. Hurtado's
options and 70,733 of Mr. Griffith's options which are non-qualified and vest
over four years. Ten percent of the stock options vested on the grant date, 15%
vested on the first anniversary of the grant date and the balance vest monthly
over the three-year period commencing on May 13, 2000. The options have a
ten-year term.

The potential realizable value is calculated by assuming that the price of
our common stock increases from the assumed initial public offering price of
$11.00 per share, the mid-point of the estimated offering price range, at
assumed rates of stock appreciation of 5% and 10%, compounded annually over the
10 year term of the option, and subtracting from that result the total option
exercise price.

The 5% and 10% assumed annual rates of compound stock price appreciation are
prescribed by the rules and regulations of the Securities and Exchange
Commission and do not represent our estimate or projection of the future trading
prices of our common stock. There can be no assurance that the actual stock
price appreciation over the ten-year option term will be the assumed 5% or 10%
levels or any other defined level. Actual gains, if any, on stock option
exercises are dependent on numerous factors, including our future performance,
overall market conditions and the option holder's continued employment with us
throughout the entire vesting period and option term, none of which are
reflected in this table.

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<PAGE>

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE THE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Guy D. Gill...................... 1,284,192 30.7% $2.07 05/13/09 $20,351,670 $33,981,219
Phillip L. Griffith.............. 256,838 6.1 2.07 05/13/09 4,070,328 6,796,233
15,000 0.4 2.07 12/15/09 237,718 396,918
Larry R. Hurtado................. 385,257 9.2 2.07 05/13/09 6,105,492 10,194,350
15,000 0.4 2.07 12/15/09 237,718 396,918
</TABLE>

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES

The following table provides information about stock options held at
December 31, 1999 by the Named Executive Officers. None of these options has
been exercised.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Guy D. Gill.................................... 128,419 1,155,773 $ -- $ --
Phillip L. Griffith............................ 25,684 246,154 -- --
Larry R. Hurtado............................... 38,525 361,732 -- --
</TABLE>

EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS

EMPLOYMENT AGREEMENTS AND INCENTIVE AND NONSTATUTORY STOCK OPTION AGREEMENTS
ENTERED INTO WITH OUR NAMED EXECUTIVE OFFICERS. On May 12, 1999, we entered
into four-year employment agreements with Guy Gill, Phillip Griffith and Larry
Hurtado. Under the agreements, Mr. Gill is entitled to receive a base salary of
$260,000 per year, Mr. Griffith is entitled to receive $180,300 per year, and
Mr. Hurtado is entitled to receive $150,500 per year. In addition, Mr. Gill is
entitled to reimbursement for up to $10,000 of expenses incurred in connection
with personal financial, estate planning and tax assistance services and
automobile operating expenses, and both Mr. Griffith and Mr. Hurtado are
entitled to reimbursement of up to $5,000 per year for similar expenses.
Mr. Gill is also entitled to reimbursement for country club membership expenses.

On May 13, 1999, we granted Mr. Gill incentive stock options to purchase
241,545 shares of our common stock and non-qualified stock options to purchase
1,042,647 shares of our common stock, Mr. Griffith incentive stock options to
purchase 197,361 shares and non-qualified stock options to purchase 59,477
shares, and Mr. Hurtado incentive stock options to purchase 223,583 shares and
non-qualified stock options to purchase 161,674 shares, each at an exercise
price of $2.07 per share. Ten percent of the stock options vested on the grant
date, 15% vested on the first anniversary of the grant date and the balance vest
monthly over the three-year period commencing on May 13, 2000. If we are
acquired by another company and the options are not assumed by the acquiring
company, then the options shall fully vest and be exercisable for 45 days after
that date.

If we terminate Mr. Gill's employment other than for cause, or if Mr. Gill
terminates his employment for good reason, we must pay Mr. Gill a lump severance
payment calculated over a severance period equal to the shorter of 18 months or
the time remaining in the term of the agreement, but not less than 12 months. If
we terminate Mr. Griffith's or Mr. Hurtado's employment other than for cause, or
if either terminates his employment for good reason, we must pay him a lump sum
severance payment calculated over a severance period equal to 12 months. The
payment will equal the sum of the base salary the terminated employee would have
received during the severance period, plus an amount to pay for health

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<PAGE>
and other insurance benefits during the severance period, plus a bonus amount
based on the terminated employee's meeting 100% of all performance requirements.

Effective May 12, 2000, we increased Mr. Gill's annual salary to $275,000,
Mr. Griffith's to $190,000 and Mr. Hurtado's to $185,000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Reid and one other non-employee director who resigned from our board of
directors in June 2000 served during the year ended December 31, 1999 as members
of the compensation committee of our board of directors. No executive officer of
Elastic Networks has served as a director or member of the compensation
committee, or other committee serving an equivalent function, of any other
entity, any of whose executive officers served as a director of or member of the
compensation committee of our board of directors.

1999 STOCK INCENTIVE PLAN

Our 1999 Stock Incentive Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
to our employees and nonstatutory stock options and stock based awards to our
employees, directors, consultants and advisors. A total of 6,661,766 shares of
common stock have been reserved for issuance under the plan. As of June 30,
2000, options to purchase an aggregate of 5,297,662 shares were outstanding,
4,507 shares of common stock had been purchased through exercises of stock
options and 1,359,597 shares were available for future grant.

The plan is administered by the board of directors, or a committee appointed
by the board of directors, which determines the terms of options granted,
including the exercise price and the number of shares subject to each option.
The board of directors also determines the vesting schedule. The maximum number
of shares with respect to which options may be granted per participant is
2,000,000 shares per calendar year. The term of options granted under the plan
is ten years. The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of grant. The
aggregate fair market value of the shares of common stock with respect to which
incentive stock options are exercisable for the first time by an optionee during
any calendar year (under all of our and our affiliates' plans) may not exceed
$100,000, or the portion of those options which exceed this limit shall be
treated as nonstatutory stock options.

Under the plan, shares subject to stock awards that have expired or
otherwise terminated without having been exercised in full again become
available for grant.

Except as the board of directors may otherwise provide, options are not
transferable by the optionee, and each option is exercisable during the lifetime
of the optionee only by the optionee. Options must be exercised within 60 days
after the end of optionee's status as an employee, director or consultant of
Elastic Networks, or within twelve months after his or her termination by
disability or death, to the extent that the option is vested on the date of
termination, but in no event later than the expiration of the option's term.

The plan provides that in the event we merge with or into another
corporation, or we sell all or substantially all of our assets, each outstanding
option shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted, the
options will become immediately exercisable and vested in full. The options
shall then be exercisable for at least 45 days. The board of directors may amend
or modify the plan at any time, except that without the consent of the
stockholders, no amendment or modification shall adversely affect rights and
obligations with respect to outstanding options. Unless sooner terminated by the
board of directors, the plan will terminate in May 2009.

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<PAGE>

ACCELERATED VESTING PLAN

We have adopted a plan that allows, upon our change in control, salaried
employees, service providers and independent contractors designated by our board
of directors to exercise 50% of their then unvested common stock options granted
under our 1999 stock incentive plan. Generally, a change in control includes:

- our complete liquidation;

- the sale of all or substantially all of our assets; or

- a merger or consolidation which results in our outstanding voting
securities immediately prior to such merger or consolidation representing
less than 50% of the voting power of the surviving entity after such
merger or consolidation.

COMPENSATION CONTINUATION PLAN

We have adopted a plan that allows salaried employees designated by our
board of directors who are terminated for any reason other than cause,
disability or death within one year after a change in control of our company, to
be entitled to twelve months of continuing compensation, including:

- continued payment of their annual base salary;

- payment of incentive compensation assuming a 100% performance level; and

- medical, dental, retirement and other benefits.

EMPLOYEE STOCK PURCHASE PLAN

In August 2000, we will adopt, subject to the closing of this offering, an
employee stock purchase plan intended to qualify under Section 423 of the
Internal Revenue Code. This plan will permit participants to purchase common
stock through payroll deductions of up to 15% of the participant's compensation.
All payroll deductions will be credited to the participant's account under the
plan. The plan will contain successive six-month offering periods beginning on
January 1 and July 1 of each year. On the first day of each offering period, a
participant will receive options to purchase a certain number of shares of our
common stock with funds withheld from his or her compensation. The purchase
price of our common stock to plan participants will generally be 85% of the
lower of the fair market value of our common stock at the beginning or end of
each offering period.

A total of 500,000 shares of our common stock will be reserved for issuance
under this plan, subject to adjustment for certain changes in our
capitalization. Our employees will be eligible to participate if they have been
continuously employed by us or any participating subsidiary for at least 20
hours per week and for one year as of the first day of an offering period.
However, the following employees may not be granted options to purchase stock
under this plan:

- (i) employees who, immediately after grant would own stock possessing 5%
or more of the total combined voting power or value of all classes of our
capital stock; and

- (ii) employees whose rights to purchase stock under all of our employee
stock purchase plans accrue at a rate which exceeds $25,000 worth of stock
for each calendar year.

Participants will be allowed to withdraw all, but not less than all, of the
payroll deductions credited to their account for an offering period at any time
by delivering written notice to us at least ten days prior to the end of that
offering period. Participation will end automatically upon termination of
employment, retirement or death.

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<PAGE>
RELATED PARTY TRANSACTIONS

INITIAL FORMATION

On May 12, 1999, Elastic Networks Inc. began doing business as a separate
company as a result of a contribution agreement among Nortel Networks Inc.,
Nortel Networks Corporation and us. Nortel Networks Inc. is a wholly-owned
subsidiary of Nortel Networks Corporation. Under this agreement, we issued
Nortel Networks Inc. 15,384,614 shares of our common stock and assumed all of
Nortel Networks' obligations related to the Elastic Network's group, including
those described below. Prior to the closing of this offering, Nortel Networks
Inc. will transfer shares of our common stock to its parent, Nortel
Networks Limited, which is selling 1 million of those shares in this offering.

Because we were a division of Nortel Networks and all of our officers were
employees of Nortel Networks prior to the execution of the contribution
agreement, the value of the shares issued to Nortel Networks in exchange for the
assets of the Elastic Networks group was not arrived at by an arm's-length
negotiation between Nortel Networks and us. Rather, as part of the transfer of
assets, Nortel Networks determined that the value of shares to be paid for its
Elastic Networks business would be the net book value of the assets being
transferred, which we believe was the fair market value of the Elastic Networks
business at the time of transfer.

Under the contribution agreement, both Nortel Networks Corporation and
Nortel Networks Inc. agreed not to compete with us during the period commencing
on May 12, 1999 and ending on May 12, 2002, with respect to the design,
research, development, manufacture and/or sale of products or devices that
communicate or involve communicating by EtherLoop technology. Messrs. Manley and
Reid, members of our board of directors, are executives of Nortel Networks Inc.

INTELLECTUAL PROPERTY TRANSFER AND LICENSE AGREEMENT. Under this agreement,
Nortel Networks Corporation transferred to us the rights to software, technical
information and trademarks that we use in our business. Also, Nortel Networks
licensed us the rights to patents, patent applications and other trademarks,
software and technical information that we use in our business. In return, we
granted Nortel Networks a royalty-free, non-exclusive, perpetual, worldwide
license, with a limited right to grant sublicenses, to the licensed
technologies, patent applications, technical information and trademarks, and to
the transferred software, trademarks and technical information. The license
granted back to Nortel Networks also includes a license to any improvements that
we may acquire or make to the transferred and licensed technologies, software
and technical information. We also granted Nortel Networks a license to any
patents that are licensed to, or owned, acquired or issued pursuant to
applications filed by, us during any period that Nortel Networks owns more than
50% of our voting securities. The licenses granted back to Nortel Networks are
subject to its obligation not to compete with us with respect to EtherLoop-based
products prior to May 12, 2002. All of our rights to the intellectual property
licensed and transferred to us by Nortel Networks under this agreement are
subject to certain licenses granted by Nortel Networks to third parties prior to
May 12, 1999.

Under this agreement, we pay Nortel Networks Corporation three separate
royalties. First, we pay a two and one half percent royalty on the amounts we
receive, after the deduction of some trade losses, transportation charges, taxes
and other duties, from either:

- our sale or sublicense to third parties of some of our products; or

- our provision to third parties of engineering, installation, maintenance,
repair and other services relating to these products.

Second, we pay a two and one half percent royalty on the amounts we receive,
after the deduction of some trade losses, transportation charges, taxes and
other duties, from either:

- our sale or license to distributors of certain of our products; or

46
<PAGE>

- the provision by a distributor to an end user of engineering,
installation, maintenance, repair and other services relating to such
products.

Finally, we pay Nortel Networks Corporation a royalty of five percent on the
amounts we receive, after the deduction of some trade losses, transportation
charges, taxes and other duties, from our sale or license to a sublicensee of
the right either to:

- make, use, copy, modify and sell certain of our products; or

- to provide engineering, installation, maintenance, repair and other
services relating to those products.

Through June 30, 2000, we have incurred an expense of approximately
$322,000, of which we have paid approximately $112,000 to Nortel Networks under
this Agreement.

PATENT TRANSFER AND LICENSE AGREEMENT. Under this agreement, Nortel
Networks Inc. transferred to us all of its rights to U.S. patent number
5,912,895 titled "Information Network Apparatus and Methods Communicating
Information Packets via Telephone Lines," both within and outside the United
States. In exchange, we granted Nortel Networks, subject to its obligations not
to compete with us, an irrevocable, nonexclusive, worldwide license to the
patented technology and any improvements to the patented technology we may
acquire or make. Our license back to Nortel Networks includes a limited right to
grant sublicenses. All of our rights to the transferred patent are subject to
certain licenses granted by Nortel Networks to third parties prior to May 12,
1999.

DISTRIBUTION AGREEMENT. Effective September 1, 1998, we entered into a
distribution agreement with Nortel Networks for Nortel Networks to purchase
EtherLoop products from us for distribution to customers. The agreement
terminates on December 31, 2001, but it is renewable by us for an additional
three year period. Also, we pay a commission on some sales generated under the
agreement; however, we have incurred no payment obligations to date. Nortel
Networks has, from time to time, guaranteed the financing of direct purchases of
our equipment by one of our customers directly from us. In 1999, Nortel Networks
guaranteed about $3.4 million in purchases. For the first six months of 2000,
Nortel Networks guaranteed $4.9 million in purchases.

LEASE OBLIGATIONS. The property we occupy at 6120 Windward Parkway,
Alpharetta, Georgia, is subleased from Nortel Networks on the same terms as the
original lease to Nortel Networks. As a sub-lessor, Nortel Networks is
responsible for payments on the lease if we do not pay. We paid $260,000 under
this lease in 1999 and expect to pay a minimum of $268,000 annually until this
lease expires. Also, Nortel Networks guaranteed our lease of office equipment
and fixtures currently used in another office located in Alpharetta, Georgia.
Nortel Networks' guaranty was for $158,000 of the total lease amount and Nortel
Networks has not been called to make a payment under the guaranty.

TRANSITION SERVICES. Since May 12, 1999, we have been provided
administrative services from Nortel Networks in connection with our development
as a stand alone company. In 1999, we accrued $29,000 for the costs of these
services. This agreement is scheduled to terminate on November 12, 2000. In
addition, during 1999, we accrued $120,000 for the cost to reimburse Nortel
Networks for Nortel Networks employees who provided services to us.

COMPENSATION ARRANGEMENTS. In fulfillment of compensation arrangements
between Nortel Networks and some of our employees relating to their prior
employment with Nortel Networks, Nortel Networks has agreed to pay these
employees, if they are still working for Elastic Networks at the time of
payment, an aggregate of approximately $13.4 million in cash. Of this amount,
two-thirds will be paid at the time at which Nortel Networks' ownership of our
outstanding common stock falls below 50%, and the remaining one-third will be
paid upon the first anniversary of that date. Upon completion of this offering,
Nortel Networks will own approximately 46% of our outstanding common stock, and
will make a payment of

47
<PAGE>

approximately $9.0 million to these employees; on the first anniversary of that
date, Nortel Networks will make a payment of approximately $4.4 million.

In connection with such payments, the following of our executive officers
will receive approximately the following amounts: Mr. Guy Gill, one of our
directors and our president and chief executive officer--$8.8 million;
Mr. Thomas J. Gallo, our vice president of worldwide sales--$944,000; Mr. Larry
R. Hurtado, our vice president of global operations--$1.4 million; Mr. Phillip
L. Griffith, our vice president of marketing--$1.6 million; and Mr. Kevin D.
Elop, our chief financial officer, secretary and treasurer--$45,000.

SERIES A PREFERRED STOCK FINANCING. On May 12, 1999 we sold 3,876,923
shares of series A preferred stock at a purchase price of $3.25 per share. Upon
the closing of this offering, the series A preferred stock will automatically
convert into 5,162,450 shares of common stock. The following beneficial owners
of more than 5% of our common stock, assuming the conversion of all shares of
preferred stock into common stock, acquired beneficial ownership of series A
preferred stock pursuant to the series A redeemable convertible participating
preferred stock purchase agreement.

<TABLE>
<CAPTION>
NUMBER OF
COMMON STOCK
NAME NUMBER OF SHARES EQUIVALENTS PURCHASE PRICE
---- ---------------- -------------- --------------
<S> <C> <C> <C>
Pequot Private Equity Fund, L.P........... 2,075,660 2,763,916 $6,745,895
Pequot Venture Partners, L.P.............. 923,076 1,229,154 2,999,997
Pequot Offshore Private Equity Fund,
Inc..................................... 262,802 349,943 854,106
</TABLE>

Mr. Poch, a member of our board of directors, is a managing director of Pequot
Capital Management, Inc., an affiliate of the Pequot entities that own our
stock, and may have an indirect material interest in the transactions between us
and the Pequot entities.

INVESTMENT IN EVEREST BROADBAND NETWORKS, INC.

In the fourth quarter of 1999, we purchased 300,000 shares of series A
preferred stock of Everest Broadband Networks, Inc. for an aggregate price of
$102,000. The Pequot entities, combined, own more than 10% of the voting power
of Everest and more than 5% of our common stock. At the time of the investment,
Pequot's board of directors' designees, Mr. Poch and one other non-employee
director who resigned from the board of directors in June 2000 to become chief
executive officer of Everest, were involved in the decision to invest in
Everest.

SERIES B PREFERRED STOCK FINANCING

In February 2000, we sold 3,922,463 shares of series B preferred stock at a
purchase price of $5.329 per share. Upon the closing of this offering, the
series B preferred stock will automatically convert into common stock. The
following beneficial owners of more than 5% of our common stock, assuming the
conversion of all shares of preferred stock into common stock, acquired
beneficial ownership of series B preferred stock pursuant to the series B
redeemable convertible participating preferred stock purchase agreement. These
shares convert on a one-for-one basis into common stock on the closing of this
offering.

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PURCHASE PRICE
---- ---------------- --------------
<S> <C> <C>
Manufacturers Life Insurance Company (U.S.A.) ............ 1,407,394 $7,500,003
Pequot Private Equity Fund, L.P. ......................... 541,331 2,884,752
Pequot Offshore Private Equity Fund, Inc. ................ 68,539 365,244
</TABLE>

Mr. Poch, a member of our board of directors, is a managing director of Pequot
Capital Management, an affiliate of the Pequot entities that own our stock, and
may be deemed to have an indirect material interest in the transactions between
us and the Pequot entities.

48
<PAGE>
All of the securities referenced above were sold at prices equal to the fair
market value of the securities, as determined by our board of directors, on the
date of issuance.

BRIDGE LOAN FINANCING

On August 4, 2000, we issued to each of Nortel Networks Inc. and Pequot
Private Equity Fund II, L.P. a secured promissory note and a warrant to
purchase, at an exercise price of $7.32 per share, 51,230 shares of either:

- our series B preferred stock at any time prior to the closing of this
offering; or

- our common stock upon, or at any time following, the closing of this
offering.

Each of the notes is for an aggregate principal amount of up to $5 million. The
notes are secured by all of our assets, bear interest at the rate of 6% per
year, subject to certain adjustments in the event we default under them, and
mature on the earlier to occur of the closing of this offering or February 1,
2001. On August 4, 2000, we borrowed $2 million under each of the notes, for a
total of $4 million.

REGISTRATION RIGHTS

Nortel Networks Inc., Nortel Networks Limited, Pequot Private Equity
Fund II, L.P. and the holders of our series A and series B preferred stock,
which will automatically convert into common stock upon the closing of this
offering, have both incidental, or piggyback, and demand registration rights to
cause us to register their shares of common stock in a public offering after
this offering closes. These registration rights are described in detail in
"Description of Capital Stock-Registration Rights."

49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table contains information concerning:

- those persons whom we know own beneficially more than 5% of our
outstanding common stock, including Nortel Networks Limited, which will
acquire million shares of our common stock from its subsidiary, Nortel
Networks Inc. at an expected purchase price of $11.00 per share and will
be the selling stockholder in this offering;

- our directors;

- the Named Executive Officers; and

- all of our directors and executive officers as a group.

Unless otherwise indicated in the footnotes below, this information is
provided as of July 31, 2000. The number of shares owned by a person includes
shares of common stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of July 31, 2000. The
table assumes the conversion of all the outstanding shares of our series A and B
preferred stock into 9,084,913 shares of common stock. If the underwriters'
over-allotment option is exercised in full, 32,444,035 shares of common stock
will be outstanding after the completion of this offering.

The shares issuable under options or warrants exercisable within 60 days of
July 31, 2000 are treated as if outstanding for computing the percentage
ownership of the person holding these options or warrants but are not treated as
if outstanding for the purposes of computing the percentage ownership of any
other person.

Except as noted, the business address of the named beneficial owner is c/o
Elastic Networks Inc., 6120 Windward Parkway, Suite 100, Alpharetta, Georgia
30005. Except as noted, each beneficial owner has sole voting and investment
power over the shares shown.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING SHARES OFFERING
------------------------ BEING ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ------------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Guy D. Gill.......................... 428,064(1) 1.7% -- 428,064 1.3%
Phillip L. Griffith.................. 85,613(2) * -- 85,613 *
Larry R. Hurtado..................... 128,419(3) * -- 128,419 *
Thomas M. Manley..................... 15,435,845(4) 62.8 1,000,000 14,435,845 46.0
Gerald A. Poch....................... 5,004,113(5) 20.4 -- 5,004,113 15.9
Richard G. Reid...................... 15,435,845(6) 62.8 1,000,000 14,435,845 46.0
Nortel Networks entities............. 15,435,845(7) 62.8 1,000,000 14,435,845 46.0
Pequot Capital Management, Inc....... 5,004,113(8) 20.4 -- 5,004,113 15.9
Manufacturers Life Insurance Company
(9)................................ 1,407,394 5.7 -- 1,407,394 4.5
All directors and executive officers
as a group (11 persons)............ 21,254,874 83.7 -- 20,254,874 62.9
</TABLE>

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

* Represents beneficial ownership of less than 1% of our outstanding capital
stock.

(1) Consists of 428,064 shares subject to options that are exercisable within
60 days of July 31, 2000.

(2) Consists of 85,613 shares subject to options that are exercisable within
60 days of July 31, 2000.

(3) Consists of 128,419 shares subject to options that are exercisable within
60 days of July 31, 2000.

(4) Mr. Manley is the vice president, finance of Nortel Networks' service
provider and carrier division and may be deemed to beneficially own the
15,435,845 shares held by the Nortel Networks entities. Nortel Networks
Limited is selling 1,000,000 of its shares in this offering. Mr. Manley
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest.

50
<PAGE>

(5) Mr. Poch is a managing director of Pequot Capital Management, Inc. and may
be deemed to beneficially own the 5,004,113 shares held by the Pequot
entities. Mr. Poch disclaims beneficial ownership of these shares, except to
the extent of his pecuniary interest.

(6) Mr. Reid is president of Nortel Networks' global carrier solutions division,
and may be deemed to beneficially own the 15,435,845 shares held by the
Nortel Networks entities. Nortel Networks Limited is selling 1,000,000
shares in this offering. Mr. Reid disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest.

(7) Consists of 15,384,615 shares of our common stock currently held by Nortel
Networks Inc., of which will be transferred to its direct parent
company, Nortel Networks Limited, prior to the closing of this offering, and
51,230 shares issuable upon exercise of a warrant to acquire either our
series B preferred stock prior to the closing of this offering or our common
stock upon or after the closing of this offering. We operated as a division
of Nortel Networks Inc. from September 1997 until May 1999. As a result of a
contribution agreement among Nortel Networks Inc., its indirect parent
company Nortel Networks Corporation and us, we began doing business as a
separate entity on May 12, 1999. Mr. Thomas Manley and Mr. Richard Reid,
executives of Nortel Networks Inc. are members of our board of directors.
Nortel Networks Inc.'s business address is 2350 Lakeside Blvd., Mail Stop
07/J01/A30, Richardson, Texas 75082. Nortel Networks Limited's business
address is 8200 Dixie Road, Brampton, Ontario, Canada L6T 5P6.

(8) Represents 3,305,247 shares held by Pequot Private Equity Fund, L.P.,
418,482 shares held by Pequot Offshore Private Equity Fund, Inc., 1,229,154
shares held by Pequot Venture Partners, L.P. and 51,230 shares held by
Pequot Private Equity Fund II, L.P., issuable upon exercise of a warrant to
acquire either our series B preferred stock prior to the closing of this
offering or our common stock upon or after the closing of this offering. The
Pequot entities are managed by Pequot Capital Management, Inc. which has
voting and dispositive power over all shares held by the Pequot entities.
Pequot Capital Management, Inc.'s address is 500 Nyala Farm Road, Westport,
Connecticut 06880.

(9) Manufacturers Life Insurance Company's business address is c/o Stephen
Brackett, MF Private Capital, Inc., 45 Milk Street, Ste. 600, Boston,
Massachusetts 02109.

51
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock will consist
of:

- 100 million shares of common stock, $0.01 par value per share; and

- 25 million shares of preferred stock, $0.01 par value per share.

As of June 30, 2000, 24,474,035 shares of common stock were outstanding,
assuming conversion of all outstanding preferred stock into common stock, and we
had 24 stockholders of record. The following summary describes our capital stock
in all material respects.

COMMON STOCK

Under the Delaware General Corporation Law, referred to as the DGCL, and our
second amended and restated certificate of incorporation, holders of common
stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders, including the election of directors. The common stock carries
no preemptive rights and is not convertible, redeemable or assessable. The
holders of common stock are entitled to dividends in amounts and at times as may
be declared by the board of directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, the holders of our common stock
are entitled to ratably receive our net assets available after payment or
provision for payment of all debts and other liabilities and subject to prior
rights of holders of our preferred stock then outstanding, if any. All shares of
common stock outstanding immediately following this offering will be fully paid
and non-assessable.

PREFERRED STOCK

Upon the closing of this offering, our second amended and restated
certificate of incorporation will authorize our board of directors to issue up
to 25 million shares of blank check preferred stock. The board of directors will
also have the right to fix or alter the designations, preferences, rights and
any qualifications, limitations, or restrictions of any preferred stock issues,
including dividend rights and rates, conversion rights, voting rights, terms of
redemption, including sinking fund provisions, liquidation preferences and the
number of shares constituting any series or designations of that series.

REGISTRATION RIGHTS

Under the terms of our investor rights agreement with Nortel Networks Inc.,
Nortel Networks Limited, Pequot Private Equity Fund II, L.P. and the holders of
our series A and B preferred stock, which will be automatically converted to
common stock upon the closing of this offering, these parties holding an
aggregate of 24,571,988 shares of capital stock, which number includes 102,460
shares issuable upon exercise of warrants which will have registration rights
upon issuance, will be entitled to registration rights under the Securities Act.
Following the closing of this offering, Nortel or holders of at least 20% of the
shares entitled to registration rights may require us, on up to two occasions,
to register their shares of common stock for public resale. We initially will be
obligated to register this stock only if the aggregate public offering price
would be at least $5,000,000 and only after six months have passed since our
last public offering. Further, holders of registrable securities may require
that we register their shares for public resale on Form S-3 if the value of the
securities to be registered would be at least $2,000,000. In the event our board
of directors determines it advisable to do so, as limited by the terms of the
investor rights agreement, we may defer any registration for up to 90 days.

If, after the closing of this offering, we elect to register any of our
shares of common stock for the purpose of effecting any additional public
offerings, the holders of the registrable securities described above would be
entitled to include their shares of common stock in that registration. We may
reduce the number of shares requesting registration in view of adverse market
conditions. Although these registration rights do not apply to this offering, we
are registering for sale 1,000,000 shares owned by Nortel Networks. See
"Principal and Selling Stockholders." All registration rights will terminate
five years following the closing of this offering.

52
<PAGE>
WARRANTS

As of August 4, 2000 the following warrants were outstanding:

- one warrant to purchase 12,439 shares of our common stock at an exercise
price of $2.76 per share; and

- two warrants to purchase, at an exercise price of $7.32 per share, 102,460
shares of either (i) prior to the closing of this offering, our series B
preferred stock, or (ii) upon or following the closing of this offering,
our common stock.

BUSINESS COMBINATION PROVISIONS

We will be subject to the "business combination" statute of the DGCL. This
statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years from the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner,
such as the approval of a majority of disinterested members of the board. The
term "business combination" includes mergers and stock and asset sales. An
"interested stockholder" is a person who, together with his affiliates and
associates, owns, or within the prior three years owned, 15% or more of the
corporation's voting stock. The effect of this statute could, among other
things, make it more difficult for a third party to gain control of us,
discourage bids for our common stock at a premium or otherwise harm the market
price of our common stock.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION

Our second amended and restated certificate of incorporation and amended and
restated bylaws will include provisions that limit the personal liability of our
officers and directors for monetary damages for breach of their fiduciary duty,
except for liability that cannot be eliminated under the DGCL. Our second
amended and restated certificate of incorporation will provide that, to the
fullest extent provided by the DGCL, our directors will not be personally liable
for monetary damages for breach of their fiduciary duty as directors. The DGCL
does not permit a provision in a corporation's certificate of incorporation that
would eliminate such liability for any of the following reasons:

- any breach of a duty of loyalty to the corporation or its stockholders;

- any acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

- any unlawful payment of a dividend or unlawful stock repurchase or
redemption as provided in Section 174 of the DGCL; or

- any transaction from which the director derived an improper personal
benefit.

While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate this
duty. These provisions will have no effect on the availability of equitable
remedies such as an injunction or rescission based on a director's breach of his
or her duty of care. The provisions described above apply to an officer of a
corporation only if he or she is a director of that corporation and is acting in
his or her capacity as director, and do not apply to the officers of a
corporation who are not directors.

Our second amended and restated certificate of incorporation and amended and
restated bylaws will provide that, to the fullest extent permitted by the DGCL,
we may indemnify our directors and officers. In addition, we anticipate that
each director will enter into an indemnification agreement pursuant to which we
will agree to indemnify such director to the fullest extent permitted by the
DGCL. At present, there is no pending litigation or proceeding involving any of
our directors or officers in which indemnification is required or permitted, and
we are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company is our transfer agent and registrar.

53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect market prices prevailing
from time to time. Furthermore, sales of substantial amounts of common stock in
the public market after various resale restrictions lapse could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.

After this offering, 31,274,035 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 7,800,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates as that term is
defined in Rule 144 under the Securities Act. The remaining 23,474,035 shares of
common stock held by existing stockholders are restricted securities within the
meaning of Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which are
summarized below.

The following table indicates approximately when the 23,474,035 shares of
our common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:

<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED
SHARES FOR SALE IN THE
PUBLIC MARKET
-------------------------
<S> <C>
At effective date........................................ 0
90 days after the effective date......................... 20,551,572
180 days after the effective date........................ 23,474,035
</TABLE>

The above eligibility dates do not take into consideration any restricted
periods under the underwriters' lock-up agreements. Most of the restricted
shares that will become available for sale in the public market starting 90 days
and also 180 days after the effective date will be subject to volume and other
resale restrictions under Rule 144 because the holders are our affiliates.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including any affiliate of ours, is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 312,740 shares immediately after this offering; or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

RULE 144(K)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

RULE 701

In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with some of
the restrictions, including the holding period, contained in Rule 144.

54
<PAGE>
UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, through their representatives,
Chase Securities Inc., FleetBoston Robertson Stephens Inc. and UBS Warburg LLC,
have severally agreed to purchase from us the respective number of shares of
common stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
UBS Warburg LLC.............................................

---------
Total................................................... 7,800,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us and the selling stockholder, our counsel, counsel
to the selling stockholder and the independent auditors. The underwriters are
obligated to purchase all shares of common stock offered by us (other than those
shares covered by the over-allotment option described below) if they purchase
any shares.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us and the selling stockholder.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.

<TABLE>
<CAPTION>
PAID BY THE SELLING
PAID BY ELASTIC NETWORKS STOCKHOLDER
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total.................
</TABLE>

We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.3 million.

The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share to some other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters.

We and the selling stockholder have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 1,170,000 additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage as the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
by this prospectus. If the underwriters exercise the option, we and the selling
stockholder will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments, if any, made in connection
with the sale of shares of common stock offered by this prospectus.

The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

55
<PAGE>
We and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act and
to contribute to payments the underwriters may be required to make in respect of
these liabilities.

Some of our stockholders, who will own in the aggregate shares of common
stock after the offering, have agreed not to, without the prior written consent
of Chase Securities Inc. or its successors, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise transfer or dispose of any shares of common stock or any securities
convertible into or exchangeable or exercisable for shares of common stock for a
period of 180 days from the date of this prospectus, subject to some exceptions.
We have agreed that we will not, without the prior written consent of Chase
Securities Inc. or its successors, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities convertible into or exchangeable
or exercisable for shares of common stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof and may grant additional options under
our stock option plan. Without the prior written consent of Chase
Securities Inc. or its successors, none of these additional options shall be
exercisable during the 180 day period.

At our request, Chase Securities Inc. is administering a directed share
program for us in which 390,000 shares have been reserved. We will provide Chase
Securities Inc. with a list of names of persons that we would like to ask to
participate in the program. These reserved shares will be sold at the public
offering price that appears on the cover of this prospectus. The number of
shares available for sale to the general public in this offering will be reduced
to the extent reserved shares are purchased by these persons. After reviewing
the prospective list of participants, Chase Securities Inc. will distribute a
letter to the prospective participants asking if those persons would like to
submit indications of interest to participate in the program. These
communications will be accompanied or proceeded by a prospectus that meets the
requirements of Section 10 of the Securities Act. If there are indications of
interest by prospective participants to purchase, in the aggregate, more than
the number of shares allocated to the program, then we will determine who can
participate and to what extent. The 180-day "lock-up" agreements referred to
above will bind the directors, executive officers and stockholders that enter
into them with respect to the shares such persons purchase under the program.
The underwriters will offer to the general public, on the same terms as other
shares offered by this prospectus, any reserved shares that are not purchased by
these persons.

Before this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiation among us, the selling stockholder and the representatives of the
underwriters. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, our
revenues and operating results, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and our
prospects, and the present state of our business operations, management and
other factors deemed relevant.

The shares of common stock have been applied for quotation on the Nasdaq
National Market under the symbol ELAS.

Persons participating in this offering may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the common
stock at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering

56
<PAGE>
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market or otherwise. This stabilizing, if commenced, may
be discontinued at any time.

The underwriters may create a syndicate short position by making short sales
of the shares and may purchase the shares on the open market to cover syndicate
short positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
the offering. Short sales can be either covered or naked. Covered short sales
are sales made in an amount not greater than the underwriters' over-allotment
option to purchase additional shares from us in the offering. Naked short sales
are sales in excess of the over-allotment option. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. If the
underwriters create a syndicate short position, they may choose to reduce or
cover this position by either exercising the over-allotment option or by
engaging in syndicate covering transactions. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. The underwriters must close out any naked
short position by purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option.

In connection with this offering, certain underwriters, and selling group
members, if any, who are qualified market makers on the Nasdaq National Market,
may engage in passive market making transactions in the common stock on the
Nasdaq national market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security. If all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.

One or more members of the underwriting selling group may make copies of the
preliminary prospectus available over the Internet to customers through its or
their Websites. The representatives expect that they may allocate a limited
number of shares to such member or members of the selling group for sale to
brokerage account holders.

There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.

Each underwriter has agreed that it has;

- complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares of common stock in, from or otherwise involving the United Kingdom;

- only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the offer or sale
of the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or is a person to
whom such document may otherwise lawfully be issued or passed on; and

- not offered or sold and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or otherwise
in compliance with all applicable provisions of such regulations.

57
<PAGE>
LEGAL MATTERS

Hunton & Williams, Atlanta, Georgia, will pass upon the validity of the
shares of common stock offered hereby. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Jones, Day, Reavis &
Pogue, Atlanta, Georgia.

EXPERTS

The financial statements as of December 31, 1998 and 1999, and for each of
the three years in the period ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.

ADDITIONAL INFORMATION

We have filed a registration statement on Form S-1 under the Securities Act
with the SEC, with respect to the common stock offered hereby. As permitted by
the rules and regulations of the SEC, this prospectus, which is a part of the
registration statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
pertaining to us and the common stock we are offering by this prospectus, please
refer to the registration statement and its exhibits and schedules. Statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to herein are complete in all material respects. In each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement. A copy of the registration
statement may be inspected without charge at the public reference facilities of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. You may obtain copies of all or any part of the
registration statement from any of these offices upon the payment of the fees
prescribed by the SEC. You may obtain information on the operations of the
public reference room by calling the SEC at 1-800-SEC-0330. In addition,
registration statements and certain other filings made with the SEC through its
Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system are
publicly available through the Commission's web site at http://www.sec.gov.

58
<PAGE>
ELASTIC NETWORKS INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2

Balance Sheets.............................................. F-3

Statements of Operations.................................... F-4

Statement of Stockholders' Equity (Deficit)................. F-5

Statements of Cash Flows.................................... F-6

Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Elastic Networks Inc.:

We have audited the accompanying balance sheets of Elastic Networks Inc.
(the "Company") as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
June 16, 2000
(August 4, 2000 as to Note 15)

F-2
<PAGE>
ELASTIC NETWORKS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, 2000
DECEMBER 31, DECEMBER 31, JUNE 30, PRO FORMA
1998 1999 2000 STOCKHOLDERS' EQUITY
------------- ------------- ----------- --------------------
(UNAUDITED) (UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ -- $ 3,863 $ 3,647
Short-term investments............................. 1,750 871
Accounts receivable, net of allowance for doubtful
accounts of $0, $250, and $250................... 40 361 4,441
Accounts receivable from Nortel Networks........... 1,209 2,059
Inventories........................................ 528 759 6,222
Other.............................................. 473 456
-------- -------- --------

Total current assets........................... 568 8,415 17,696
Property and equipment, net.......................... 1,167 1,352 2,778
Other................................................ 102 102
-------- -------- --------
Total assets................................... $ 1,735 $ 9,869 $ 20,576
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 1,468 $ 6,869 $ 7,246
Payable to Nortel Networks......................... 149 149
Royalties payable Nortel Networks.................. 129 210
Accrued liabilities................................ 1,405 1,888 1,792
Deferred software license revenue, current......... 650 591 571
Capital lease obligation, current.................. 45 161
-------- -------- --------
Total current liabilities........................ 3,523 9,671 10,129

Capital lease obligation long term................... 100 304
Deferred software license revenue, net of current
portion............................................ 1,733 1,142 857

Commitments and contingencies........................

Redeemable convertible participating preferred stock
Series A, $0.01 par value, 3,876,923 shares
authorized and outstanding, at cost (redemption
value $12,600) less note receivable of $1,828 and
$0................................................. 7,965 10,059 $ --

Redeemable convertible participating preferred stock
Series B, $0.01 par value, 3,922,463 shares
authorized and outstanding, at cost (redemption
value $20,903)..................................... 20,903

Stockholders' equity (deficit):
Common stock, par value $0.01; 35,000,000 shares
authorized; 1 share issued and outstanding at
December 31, 1998; 15,385,946 shares issued and
outstanding as of December 31, 1999; 15,389,122
shares issued and outstanding as of June 30, 2000
(unaudited) and 24,474,035 shares issued and
outstanding pro forma at June 30, 2000........... 154 154 245
Additional paid-in capital......................... 3,270 5,904 36,775
Deferred stock compensation........................ (2,004) (2,004)
Accumulated deficit................................ (3,521) (12,433) (25,730) (25,730)
-------- -------- -------- --------
Total stockholders' equity (deficit)........... (3,521) (9,009) (21,676) $ 9,286
-------- -------- -------- ========
Total liabilities and stockholders' equity
(deficit).................................... $ 1,735 $ 9,869 $ 20,576
======== ======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS

F-3
<PAGE>
ELASTIC NETWORKS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.................... $ -- $ 36 $ 4,298 $ 1,070 $ 11,327
Product revenues from Nortel
Networks.......................... 80 3,267 1,205 3,061
License revenue..................... 117 650 325 305
------- -------- -------- ------- --------
Total revenues................ -- 233 8,215 2,600 14,693
Cost of revenues
Cost of product revenues............ 740 8,118 2,606 11,137
Cost of product revenues Nortel
Networks.......................... 1,406 6,172 2,903 2,994
------- -------- -------- ------- --------
Total cost of revenues........ -- 2,146 14,290 5,509 14,131
Gross profit (loss)................... -- (1,913) (6,075) (2,909) 562
Operating expenses:
Sales and marketing................. 644 3,431 5,169 1,834 6,082
Research and development............ 3,335 8,191 7,386 3,316 4,758
General and administrative.......... 524 1,695 2,276 710 2,299
Stock compensation.................. 39 39 723
------- -------- -------- ------- --------
Total operating expenses...... 4,503 13,317 14,870 5,899 13,862
------- -------- -------- ------- --------
Operating loss.............. (4,503) (15,230) (20,945) (8,808) (13,300)
Other income (expense), net........... 90 19 3
------- -------- -------- ------- --------
Net loss...................... (4,503) (15,230) (20,855) (8,789) (13,297)
Accretion of Series A preferred
stock............................... (333) (67) (266)
------- -------- -------- ------- --------
Net loss attributable to common
stockholders...................... $(4,503) $(15,230) $(21,188) $(8,856) $(13,563)
======= ======== ======== ======= ========
Basic and diluted net loss per common
share............................... $ (0.27) $ (0.93) $ (1.29) $ (0.54) $ (0.83)
======= ======== ======== ======= ========
Weighted average shares used in
computing basic and diluted net loss
per common share.................... 16,385 16,385 16,386 16,385 16,389
======= ======== ======== ======= ========
Pro forma basic and diluted net loss
per common share (unaudited)........ $ (1.05) $ (0.56)
======== ========
Weighted average shares used in
computing unaudited pro forma basic
and diluted net loss per share
amounts (unaudited)................. 20,263 24,188
======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-4
<PAGE>
ELASTIC NETWORKS INC.

STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL PAID-IN DEFERRED STOCK INCOME TOTAL STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) EQUITY (DEFICIT)
---------- -------- ------------------ --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997...................... -- $ -- $ -- $ -- $ -- $ --

Net loss.................... (4,503) (4,503)
Change in shareholder's net
investment................ 3,045 3,045
---------- ---- ------ -------- -------- --------
BALANCE AT DECEMBER 31,
1997...................... -- -- -- -- (1,458) (1,458)

Net loss.................... (15,230) (15,230)
Subscription for zero par
value common stock by
Nortel Networks........... 1 -- --
Change in shareholder's net
investment................ 13,167 13,167
---------- ---- ------ -------- -------- --------
BALANCE AT DECEMBER 31,
1998...................... 1 -- -- -- (3,521) (3,521)

Net loss.................... (20,855) (20,855)
Issuance of common stock to
Nortel Networks........... 15,384,614 154 154
Additional paid in capital
from Series A preferred
shares issuance (less note
receivable of $166)....... 2,974 2,974
Change in shareholder's net
investment................ 11,943 11,943
Employee stock options
exercised................. 1,331 -- 4 4
Stock options for 615,385
shares.................... 573 573
Compensation related to non-
employee stock options.... 39 39
Issuance of 12,439 stock
warrants for consulting
services.................. 13 13
Accretion to redemption
value on Series A
preferred stock........... (333) (333)
---------- ---- ------ -------- -------- --------
BALANCE AT DECEMBER 31,
1999...................... 15,385,946 154 3,270 -- (12,433) (9,009)

Net loss (unaudited)........ (13,297) (13,297)
Accretion to redemption
value on Series A
preferred stock
(unaudited)............... (266) (266)
Employee stock options
exercised (unaudited)..... 3,176 -- 7 7
Compensation related to non-
employee stock options
(unaudited)............... 683 683
Payment of note receivable
attributable to Series A
preferred shares issuance
(unaudited)............... 166 166
Deferred stock compensation
(unaudited)............... 2,044 (2,044) --
Amortization of deferred
stock compensation
(unaudited)............... 40 40
---------- ---- ------ -------- -------- --------
BALANCE AT JUNE 30, 2000
(UNAUDITED)............... 15,389,122 $154 $5,904 $ (2,004) $(25,730) $(21,676)
========== ==== ====== ======== ======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-5
<PAGE>
ELASTIC NETWORKS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,503) $(15,230) $(20,855) $ (8,789) $(13,297)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 6 114 353 153 314
Amortization of deferred stock compensation............... 40
Issuance of common stock options and warrants............. 52 39 683
Issuance of common stock options.......................... 114 81
Changes in assets and liabilities:
Decrease (increase) in accounts receivables............. (40) (321) (2,285) (4,080)
Decrease (increase) in accounts receivable from Nortel
Networks.............................................. (1,209) (886) (850)
Decrease (increase) in inventories...................... (528) (231) (211) (5,463)
Decrease (increase) in other............................ (14) 28 (64)
Increase (decrease) in accounts payable................. 1,100 368 5,401 660 377
Increase (decrease) in payable to Nortel Networks....... 149 130
Increase (decrease) in royalties payable--Nortel
Networks.............................................. 129 81
Increase (decrease) in accrued liabilities.............. 380 1,025 483 (150) (96)
Increase (decrease) in deferred software license
revenues.............................................. 2,383 (650) (325) (305)
Increase (decrease) in capital lease obligations........ 158 376
------- -------- -------- -------- --------
Net cash used in operating activities............... (3,017) (11,908) (16,441) (11,636) (22,203)
------- -------- -------- -------- --------
Cash flows from investing activities:
Expenditures for plant and equipment...................... (28) (1,259) (538) (334) (1,740)
Other..................................................... (102)
Sales of short-term investments........................... 81,626 36,589 57,544
Purchases of short-term investments....................... (83,376) (46,855) (56,665)
------- -------- -------- -------- --------
Net cash used in investing activities............... (28) (1,259) (2,390) (10,600) (861)
------- -------- -------- -------- --------
Cash flows from financing activities:
Cash proceeds from issuance of common and preferred
stock................................................... 10,760 10,760 20,903
Proceeds from issuance of common stock upon exercise of
options................................................. 4 7
Transfers from shareholder................................ 3,045 13,167 11,943 11,943
Payment of note receivable attributable to Series A
preferred shares issuance............................... 1,994
Payments of capital lease obligations..................... (13) (56)
------- -------- -------- -------- --------
Net cash provided by financing activities........... 3,045 13,167 22,694 22,703 22,848
------- -------- -------- -------- --------
Cash and cash equivalents at beginning of period.......... -- -- -- -- 3,863
Net increase (decrease) in cash and cash equivalents...... -- -- 3,863 467 (216)
------- -------- -------- -------- --------
Cash and cash equivalents at end of period.......... $ -- $ -- $ 3,863 $ 467 $ 3,647
======= ======== ======== ======== ========
Supplemental schedule of investing and financing activities:
Cash paid during the period for interest.................. $ -- $ -- $ 2 $ -- $ 10
======= ======== ======== ======== ========
Issuance of stock options and warrants for consulting
services................................................ $ 52 $ 39 $ 683
======== ======== ========
Capital lease additions................................... $ 158 $ 376
======== ========
Redeemable convertible participating preferred stock
issued for notes receivable............................. $ 1,994
========
Issuance of stock options for shares...................... $ 573
========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-6
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

On January 1, 1997, Nortel Networks Corporation, and its subsidiary Nortel
Networks Inc., (collectively "Nortel Networks") established the Elastic Networks
group (the "Division") to develop technology and products to provide high speed
access over copper wire infrastructure.

Nortel Networks created a separate company, Elastic Networks Inc. (the
"Company") that was incorporated on September 22, 1998 and operated as a wholly
owned subsidiary of Nortel Networks. At the close of business on May 12, 1999,
Nortel Networks transferred to the Company certain of the assets and
liabilities, intellectual property rights, licenses and contracts of the
Division of Nortel Networks (the "Separation"). The Division's assets and
liabilities, intellectual property rights, licenses and contracts were
transferred to the Company at their historical cost, which was the carrying
value on the books of Nortel Networks. In exchange, Nortel Networks received
15,384,614 shares of the Company's common stock. At the close of business on
May 12, 1999, the Company sold 3,876,923 shares of its Series A preferred stock
in a private placement for proceeds totaling $12,600,000 (the "Series A Private
Placement").

BASIS OF PRESENTATION

These consolidated financial statements have been prepared for the purpose
of presenting the balance sheets of the Company as of December 31, 1998 and
1999, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999, and for
the six months ended June 30, 1999 and 2000 (unaudited). Prior to May 12, 1999,
the historical results of operations represent the operations of the Division
transferred to the Company from Nortel Networks in the Separation. These
historical results of the Division present the financial position of the
Division as a separate reporting entity independent of Nortel Networks and its
subsidiaries, as if the Division was a separate entity prior to May 12, 1999.

The 1997, 1998 and 1999 financial statements have been prepared using the
historical basis of the assets and liabilities and the historical results of
operations related to the Company's business. Changes in stockholders' net
investment in 1997, 1998, and 1999 represent Nortel Networks' contribution of
its net investment after giving effect to the net loss of the Division and net
cash transfers to or from the Division.

The financial statements, presented here for comparative purposes, include
certain Nortel Networks corporate costs that were allocated to the Division
using procedures deemed appropriate for the nature of the expenses involved. The
procedures utilized various allocation bases such as invested net assets, number
of employees and related payroll costs, and direct effort expended. The
allocated Nortel Networks corporate costs included centralized legal,
accounting, treasury, real estate, information technology, distribution,
customer service, sales, marketing, engineering, and other Nortel Networks
corporate services costs. Such costs were $205,700, $132,800, and $305,000 for
1997, 1998, and the period from January 1, 1999 through May 12, 1999,
respectively. Since the Separation, Nortel Networks has continued to provide
certain corporate services to the Company. From May 12, 1999 to December 31,
1999, fees of $149,002 were charged for such services and were based on Nortel
Networks' internal usage-based fee structures where applicable or Nortel
Networks' direct cost of services, including total compensation and
out-of-pocket expenses. Management believes that the allocations were made on a
reasonable basis, however, the allocations are not necessarily indicative of the
level of expense that would have been incurred had the Company contracted with
outside parties. Management did not make a study or any

F-7
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)

attempt to obtain quotations from third parties to determine what the costs of
obtaining such services from third parties would have been.

CASH BALANCES

Prior to May 12, 1999, the Company, as a division of Nortel Networks,
participated in the Nortel Networks cash management system and, accordingly, did
not maintain cash balances.

2. SIGNIFICANT ACCOUNTING POLICIES

MANAGEMENT ESTIMATES AND ASSUMPTIONS

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

UNAUDITED INTERIM FINANCIAL INFORMATION

The financial statements as of and for the six months ended June 30, 1999
and 2000 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation of its financial position, operating results and cash flows. The
results of operations for the six months ended June 30, 2000 are not necessarily
indicative of results to be expected for the full calendar year 2000 or for any
future period.

UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT)

If the offering contemplated by this prospectus is consummated, all of the
redeemable convertible participating preferred stock outstanding as of the
closing date will automatically be converted into an aggregate of 7,799,386
shares of common stock based on the shares of preferred stock outstanding at
June 30, 2000, and the Series A preferred stockholders will receive in the
aggregate an additional 1,285,527 shares of common stock (see Note 9). Unaudited
pro forma stockholders' equity (deficit) at June 30, 2000, as adjusted for the
conversion of the preferred stock and the issuance of the additional common
shares, is disclosed on the balance sheet.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents consist of cash, money market funds and other
highly liquid investments with an original maturity from date of purchase of
three months or less. The carrying value of these instruments approximates fair
value. The Company generally invests its excess cash in various investment-
grade commercial paper, money market accounts and debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any losses on its cash

F-8
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and cash equivalents. Cash, cash equivalents and short-term investments
consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash equivalents:
Corporate and other non-government debt
securities.................................... $-- $ 483 $ 504
Money market funds.............................. 3,380 3,143
------ ------ -------
-- 3,863 3,647
Short-term investments:
Corporate and other non-government debt
securities.................................... 1,750 871
------ ------ -------
$-- $5,613 $ 4,518
====== ====== =======
</TABLE>

Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Marketable debt securities are classified as available-for-sale, and are
carried at their fair value, with the unrealized gains and losses, when
material, reported net-of-tax as a component of other comprehensive income. As
of December 31, 1999 and June 30, 2000, there were no unrealized gains and
losses. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income. The cost of securities
sold is based on specific identification.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to market and
credit risk consist principally of cash and cash equivalents, short-term
investments, notes receivable and accounts receivable. The estimated fair value
of these instruments as of December 31, 1998 and 1999 and June 30, 2000
(unaudited), approximated the carrying amount. The Company has investment
policies that limit the amount of credit exposure to any one issuer and restrict
placement of these investments to issuers evaluated as credit worthy. The
Company maintains its cash and cash equivalents, and short-term investments,
with high quality financial institutions and investment managers. The Company
performs periodic reviews of the credit standing of its investments and the
financial institutions managing those investments.

The Company performs ongoing credit evaluations of its customers, and
generally does not require collateral from its customers to support accounts
receivable. Requests to extend significant credit to customers are reviewed and
approved by senior management. The Company maintains an allowance for potential
losses due to credit risk, but has not experienced significant write-offs.
Management believes that

F-9
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the reserves for losses are adequate. The following table summarizes the changes
in the allowance for doubtful accounts (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------ -----------
1997 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts, beginning
of period................................ $-- $-- $ -- $250
Additional provision....................... 250 --
------ ------ ---- ----
Allowance for doubtful accounts, end of
period................................... $-- $-- $250 $250
====== ====== ==== ====
</TABLE>

The Company had significant accounts receivable balances due from certain
customers as a percentage of total accounts receivable as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
CUSTOMER 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Company A........................................ 50.0%
Company B........................................ 40.0 2.3%
Company C........................................ 77.0 33.2%
Company D........................................ 39.1
Company G........................................ 17.3
</TABLE>

The following individual customers accounted for 10% or more of total
revenues (amounts in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
CUSTOMER 1998 1999 1999 2000
-------- ------------------- ------------------- ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company C............ $ 80 34.3% $3,267 39.8% $1,252 48.3% $3,158 21.5%
Company D............ 3,394 41.3 665 25.7 6,013 40.9
Company E............ 2,016 13.7
Company F............ 117 50.2 650 7.9 325 12.5 305 2.1
</TABLE>

Currently, the Company relies on a contract manufacturer and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturer or suppliers not produce or deliver
inventory for the Company to sell on a timely basis, operating results could be
adversely impacted.

INVENTORY

Inventory is stated at the lower of cost (which approximates first-in,
first-out cost) or market.

F-10
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets. The
expected useful lives of the furniture and fixtures, computer and telecom
equipment and software are three to five years, as are the terms of the facility
lease for leasehold improvements. Maintenance and repairs are charged to
operations as incurred. Expenditures, which substantially increase an asset's
useful life, are capitalized.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss based on fair value of
the asset is recognized when the sum of the expected future undiscounted net
cash flows is less than the carrying amount of the asset. The Company has
identified no such impairment losses.

WARRANTY RESERVES

The Company provides limited warranties on certain of its products for
periods of up to one year. The Company recognizes warranty reserves when
products are shipped based upon an estimate of total warranty costs, and such
reserves are included in current liabilities.

REVENUE RECOGNITION

Revenues are recognized when earned in accordance with applicable accounting
standards, including American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION, as
amended. The Company generally recognizes revenues from product sales upon
shipment depending on contract terms and conditions if collectibility is
reasonably assured, product pricing is fixed and determinable and product
returns are reasonably estimated. No revenues are recognized on products shipped
on a trial basis until products are fully accepted by the customer. Estimated
sales returns, based on historical experience by product, are recorded at the
time the product revenues are recognized. Technology license revenues are
recognized ratably over the term of the related agreement.

Consulting services, principally installation and training revenues, are
recognized as the services are completed. These services are typically performed
under separate service agreements and are usually performed on a time and
material basis. Such services primarily consist of implementation services
related to the installation and deployment of the Company's products and do not
include significant customization or development of the underlying software
code.

RESEARCH AND DEVELOPMENT COSTS

Costs incurred for hardware research and development are expensed as
incurred. Costs for the development of new software and substantial enhancements
to existing software are expensed as incurred until technological feasibility
has been established, at which time any additional development costs would be
capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED.
The Company believes its current process for

F-11
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
developing software is essentially completed concurrently with the establishment
of technological feasibility; accordingly, no costs have been capitalized to
date.

STOCK BASED COMPENSATION

The Company accounts for employee stock plans under the intrinsic value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

INCOME TAXES

The Company uses the asset and liability method to account for income taxes.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities for accounting purposes, and their respective
tax bases. Deferred income tax assets and liabilities are measured using
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in statutory tax rates
is recognized in net income in the year of change. A valuation allowance is
recorded for those deferred income tax assets whose recoverability is not
reasonably possible.

NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, EARNINGS PER SHARE, for all periods presented. Basic and diluted
net loss per common share are computed by dividing the net loss for the period
by the 15,384,615 common shares issued to Nortel; the shares attributable to
employee stock options exercised; and the 1,285,527 additional shares assumed
issued to the Series A preferred stockholders, for all periods presented.
Weighted average shares subject to repurchase have been deducted from such
amounts. Unaudited pro forma basic and diluted net loss per common share are
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the Series A and Series B redeemable
convertible participating preferred stock.

Net income per share has been calculated as follows (in thousands):

F-12
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Dilutive securities include options, contingent stock related to Series A
redeemable convertible participating preferred stock, and Series A and B
redeemable convertible participating preferred stock. Potentially dilutive
securities totaling 11,751,027 for the year ended December 31, 1999, and
16,563,184 for the six month period ended June 30, 2000 (unaudited), were
excluded from historical basic and diluted earnings per share because of their
anti-dilutive effect.

RECENT PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION (AN INTERPRETATION OF THE ACCOUNTING PRINCIPLES BOARD OPINION
NO. 25) (the "Interpretation"). Among other issues, this Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation
became effective July 1, 2000, but certain conclusions in the Interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that this Interpretation covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying this Interpretation are recognized
on a prospective basis from July 1, 2000. The Company is in the process of
evaluating the effects of this new statement.

In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which established accounting and reporting
standards for derivative instruments and hedging activities. It requires an
entity to measure all derivatives at fair value and to recognize them in the
balance sheet as an asset or liability, depending on the entity's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which
defers the effective date of SFAS No. 133 until fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES, which amends the accounting and reporting standards of SFAS No. 133
for certain derivative instruments and certain hedging activities. The Company
is in the process of evaluating the effects of these new statements.

In 1999, Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, was issued. The SAB provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. Although SAB No. 101 does not change any of the accounting profession's
existing rules on revenue recognition, it draws upon existing rules and explains
how the SEC staff applies those rules, by analogy, to other transactions that
existing rules do not specifically address. SAB No. 101, as amended by SAB
No. 101B, becomes effective for the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. We are in the process of assessing the impact
of SAB No. 101 on our financial statements. However, we do not expect that the
adoption of SAB No. 101 will have a material impact on our financial statements.

F-13
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $390 $146 $ 97
Finished goods................................. 138 613 6,125
---- ---- ------
Total...................................... $528 $759 $6,222
==== ==== ======
</TABLE>

4. PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements........................... $ 57 $ 57 $ 107
Furniture and fixtures........................... 254 254 302
Computers........................................ 258 788 1,750
Other............................................ 86
Test equipment................................... 718 726 1,320
------ ------ ------
1,287 1,825 3,565
Less accumulated depreciation.................... (120) (473) (787)
------ ------ ------
Total property and equipment, net............ $1,167 $1,352 $2,778
====== ====== ======
</TABLE>

Depreciation and amortization expense on property and equipment was $5,668,
$113,871 and $352,852 for the years ended December 31, 1997, 1998, and 1999,
respectively and $153,490 and $314,851 for the six month periods ending
June 30, 1999 and 2000 (unaudited), respectively.

5. CAPITAL LEASES

The Company is obligated for equipment under various capital leases that
expire at various dates through 2002. The related equipment secures these
leases. At December 31, 1998 and 1999, and June 30, 2000 (unaudited), the gross
amount of the equipment acquired under capital leases was $0, $157,879, and
$531,280, respectively, and the related accumulated amortization was $0, $12,402
and $64,695, respectively. Amortization of assets held under capital leases is
included with depreciation and amortization expense in the accompanying
financial statements.

F-14
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

5. CAPITAL LEASES (CONTINUED)
Future minimum capital lease payments as of December 31, 1999 are as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 62
2001........................................................ 62
2002........................................................ 44
----
Total minimum lease payments................................ 168
Less amount representing interest........................... 23
----
Present value of net minimum capital lease payments..... 145
Less current installments of obligations under capital
leases................................................ 45
----
Obligations under capital leases, net of current
installments.......................................... $100
====
</TABLE>

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued expenses................................. $ 888 $ 151 $ 554
Accrued employee benefits........................ 126 318
Warranty hardware................................ 357 466
Incentive bonus accrual.......................... 290
Accrued payroll.................................. 227 222 280
Known product defects............................ 972 174
Other............................................ 60
------ ------ ------
$1,405 $1,888 $1,792
====== ====== ======
</TABLE>

7. COMMITMENTS

The Company leases administrative and sales offices and certain property and
equipment under noncancellable operating leases expiring through 2004. The
Company subleases some of its administrative and sales office space from Nortel
Networks. The leases contain renewal options and are subject to cost increases.
Total rent expense under such leases for the years ended December 31, 1997, 1998
and 1999 were $0, $111,100 and $343,033, respectively, and for the six month
periods ended June 30, 1999 and 2000 (unaudited) were $171,516 and $328,286,
respectively.

F-15
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

7. COMMITMENTS (CONTINUED)
At December 31, 1999, the future minimum lease payments under operating
leases were as follows (in thousands):

<TABLE>
<CAPTION>
RELATED PARTY OTHER
LEASE LEASES TOTAL
------------- -------- --------
<S> <C> <C> <C>
2000........................................... $ 268 $ 488 $ 756
2001........................................... 276 558 834
2002........................................... 284 478 762
2003........................................... 218 283 501
2004........................................... 52 52
------ ------ ------
Total future minimum lease payments........ $1,046 $1,859 $2,905
====== ====== ======
</TABLE>

8. INCOME TAXES

Prior to May 12, 1999, the Company, as a division of Nortel Networks, did
not file separate income tax returns. If the Company had filed separate tax
returns, on a pro forma basis, due to the Company's historical losses, the
Company would not have recorded any tax benefit provisions in its statements of
operations since the future use of such losses is uncertain. In addition, all
net deferred assets and liabilities, principally net operating losses, would be
fully reserved by a valuation allowance. Since the Separation, significant
components of the Company's recorded net deferred tax assets and liability as of
December 31, 1999 and June 30, 2000 (unaudited) are shown below (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Deferred software license revenue................ $ 658 $ 542
Net operating loss carryforwards................. 4,150 4,744
Inventory........................................ 727 442
Accrued liabilities.............................. 289 377
Other............................................ 389 369
------- -------
Total deferred tax assets........................ 6,213 6,474
Valuation allowance................................ (6,110) (6,452)
------- -------
Net deferred tax assets.......................... 103 22
Deferred tax liability:
Property and equipment........................... (103) (22)
------- -------
Total.......................................... $ -- $ --
======= =======
</TABLE>

A valuation allowance equal to 100% of the net deferred tax assets has been
established because of the uncertainty of realization of the deferred tax assets
due to the Company's lack of earnings history. The valuation allowance increased
$6,110,415 and $342,168 for the period from May 12, 1999 to December 31, 1999,
and the six months ended June 30, 2000 (unaudited), respectively. The Company
had federal income

F-16
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

8. INCOME TAXES (CONTINUED)
tax net operating loss carryforwards at December 31, 1999 of $10,932,242. The
federal income tax loss carryforwards will begin to expire 2020, unless
previously utilized.

9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK

PREFERRED STOCK

The Company is authorized to issue up to, and has issued, 7,799,386 shares
of preferred stock in one or more series. Each such series of preferred stock
has such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights and liquidation preferences, as set
forth in the Company's certificate of incorporation.

SERIES A REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK

On May 12, 1999, the Company issued 3,876,923 shares of its Series A
redeemable convertible participating preferred stock for net cash proceeds of
$10,606,153 plus notes receivable of $1,993,848. The value of the Series A
redeemable convertible participating preferred stock reflected in the Company's
balance sheet at December 31, 1999 is net of $1,828,000 in notes receivable as
consideration for such shares. As discussed below, the additional paid-in
capital is net of the remaining $166,000 in notes receivable. The notes were
subsequently repaid in June 2000.

DIVIDENDS

The Company shall not declare or pay any cash dividends or other
distributions on shares of common stock until the holders of the Series A
preferred stock then outstanding shall have first received, or simultaneously
receive, a cash dividend on each outstanding share of Series A preferred stock
in an amount at least equal to dividends declared, paid, or set aside for common
stock.

CONVERSION AND RIGHTS

Each share of Series A preferred stock may be voluntarily converted into
common stock at the option of the stockholder. The Series A preferred stock
automatically converts to common stock upon the closing of the public offering
of shares of the Company's common stock at a price not less than $6.50 per share
and proceeds to the Company of not less than $30,000,000. The Series A preferred
stock has the same voting rights as the common stock. Generally, the Company
cannot issue stock with preferences greater than the current preferred stock or
issue a preferred or common stock dividend without the consent of the holders of
two-thirds of the outstanding shares of the Series A preferred stock.

Upon a public offering (or immediately prior to any voluntary or involuntary
liquidation, dissolution or winding up of the Company, or the closing or
consummation of any merger or consolidation of the Company into or with another
corporation) the Series A preferred stockholders will receive in the aggregate
an additional 1,285,527 shares of common stock. The Company has considered that
the 1,285,527 common shares were in substance issued at May 12, 1999 because a
portion of the proceeds from the Series A private placement were for these
additional shares, and because of the absolute certainty that the Series A
preferred stockholders will receive these shares. Accordingly, at December 31,
1999, the Series A preferred stock has been valued at $2.44 per share, the
assumed fair market value, and the $3,140,000 difference between the $3.25 price
paid for the preferred shares and the $2.44 per share assumed fair

F-17
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK (CONTINUED)

market value, less notes receivable of $166,000, as consideration for the
1,285,527 common shares, has been credited to additional paid-in capital. The
notes were subsequently repaid in June 2000.

If the Company has not consummated a public offering as of December 31,
2000, and for the year ending December 31, 2000, revenues do not equal or exceed
$40,000,000, Series A preferred stockholders shall be entitled to receive in the
aggregate an additional 3,453,697 shares of common stock over and above the
1,285,527 common shares.

The Company has considered the additional 3,453,697 shares of common stock
to be a beneficial conversion feature of the Series A preferred stock. The value
of such shares is $2.44 per share or $8,427,021 and it will be recorded if and
when the above revenue and public offering contingencies are resolved.

LIQUIDATION

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or the closing or consummation of any merger or
consolidation of the Company into or with another corporation, the holders of
Series A preferred stock are entitled to receive out of the assets of the
Company available for distribution to its stockholders, an amount equal to at
least their initial investment plus any declared but unpaid dividends, including
all cumulative dividends.

REDEMPTION

On May 12, 2004 and on each of the first and second anniversaries thereof,
the Company may redeem, at the request of each holder of shares of Series A
preferred stock then outstanding up to one-third of the originally issued shares
per year. The redemption price shall be at a price equal to the initial
investment of $12,600,000, plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting these shares. The
Company is accreting the $3,140,000 difference between cost and redemption value
over the period from issuance to the redemption periods.

SERIES B REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK

On February 14, 2000, the Company issued 3,922,463 shares of Series B
redeemable convertible participating preferred stock for net cash proceeds of
$20,902,805.

DIVIDENDS

The Company shall not declare or pay any cash dividends or other
distributions on shares of common stock until the holders of the Series B
preferred stock then outstanding shall have first received, or simultaneously
receive, a cash dividend on each outstanding share of Series B preferred stock
in an amount at least equal to dividends declared, paid, or set aside for common
stock.

CONVERSION AND RIGHTS

Each share of Series B preferred stock may be converted into common stock on
a one-to-one basis at the option of the stockholder. The Series B preferred
stock automatically converts to common stock upon

F-18
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

9. REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK (CONTINUED)
the closing of the public offering of shares of the Company's common stock at a
price not less than $8.00 per share and net proceeds to the Company of not less
than $30,000,000. The Series B preferred stock has the same voting rights as the
common stock. Generally, the Company cannot issue stock with preferences greater
than the current preferred stock or issue a preferred or common stock dividend
without the consent of the holders of two-thirds of the outstanding shares of
Series B preferred stock.

LIQUIDATION

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, or the closing or consummation of any merger or
consolidation of the Company into or with another corporation, the holders of
Series B preferred stock are entitled to receive out of the assets of the
Company available for distribution to its stockholders, an amount equal to at
least $5.329 per share plus any declared but unpaid dividends, including all
cumulative dividends.

REDEMPTION

On May 12, 2004 and on each of the first and second anniversaries thereof,
the Company will redeem, at the request of each holder of shares of Series B
preferred stock then outstanding up to one-third of the originally issued shares
per year. The redemption price shall be at a price equal to the initial
investment of $20,902,805 plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting these shares.

10. STOCKHOLDERS' EQUITY

COMMON STOCK

The Company is authorized to issue 35,000,000 shares of Common Stock $0.01
par value. The holders of common stock are entitled to one vote per share and
are entitled to dividends when and if declared by the Board of Directors of the
Company.

On May 12, 1999, the Company issued 15,384,614 common shares. During 1999,
two employees exercised options to purchase a total of 1,331 shares. During the
first six months of 2000, two employees exercised options to purchase a total of
3,176 shares. As of December 31, 1999 and June 30, 2000 (unaudited), there were
15,385,946 and 15,389,122 shares, respectively of common stock outstanding.

F-19
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At June 30, 2000, common shares reserved for future issuance consisted of
the following (unaudited):

<TABLE>
<S> <C>
Conversion of convertible preferred stock................... 7,799,386
Shares deemed issued upon sale of Series A preferred
stock..................................................... 1,285,527
Stock warrants.............................................. 12,439
Shares reserved for future option exercises................. 5,707,259
Shares reserved for potential issuance under provisions of
Series A convertible preferred stock agreement............ 3,453,697
----------
Total................................................. 18,258,308
==========
</TABLE>

LIQUIDATION

Upon the dissolution or liquidation of the Company, whether voluntary or
involuntary, holders of common stock will be entitled to receive all assets of
the Company available for distribution to its stockholders, subject to any
preferential and participation rights of any then outstanding preferred stock.

WARRANTS

In November 1999, the Company entered into an agreement with a corporate
partner in consideration of the consulting services which the partner has
rendered to the Company in the past and which the partner will continue to
render to the Company in the future. In addition, the Company issued a warrant
to such corporate partner to purchase 12,439 shares of the common stock at a
price of $2.76 per share. One third of the warrant shares vested on the November
1999 effective date of the agreement; one third of the warrant shares vest in
November 2000; and the remaining one third of the warrant shares vest in
November 2001. The warrant is exercisable for five years following the date of
issuance. The estimated fair value of the warrant shares at the time of issuance
was $1.07 per share or $13,345 and was determined using the Black-Scholes
Valuation Model with the following assumptions: no dividend yield; volatility of
62%; risk-free interest rate of 6.3%; an expected life of 5 years; and a fair
value of common stock of $2.07. The warrant is non-forfeitable and was issued
for consulting services received and, if requested, to be received in the
future. The Company will record additional expense as the warrant vests, based
on the related fair value of the underlying stock.

11. STOCK OPTIONS

On May 12, 1999, the Company introduced the Elastic Networks 1999 Stock
Incentive Plan (the "Plan"), under which options to purchase common shares of
the Company may be granted to employees, officers, and directors of, and
consultants and advisors to, the Company. Options granted may be either
incentive stock options or non-statutory stock options and are exercisable
within the times determined by the Board of Directors as specified in each
option agreement. Options vest over a period of time as

F-20
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

11. STOCK OPTIONS (CONTINUED)
determined by the Board of Directors, generally four years. The Company is
authorized to issue 5,711,766 shares under the Plan. A summary of the activity
under the Plan is set forth below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance at December 31, 1998
Granted.............................................. 4,640,877 $2.07
Exercised............................................ (1,331) 2.07
Cancelled............................................ (231,578) 2.07
---------
Balance at December 31, 1999........................... 4,407,968 2.07
Granted (unaudited).................................. 1,188,903 3.32
Exercised (unaudited)................................ (3,176) 2.07
Cancelled (unaudited)................................ (296,033) 2.18
---------
Balance at June 30, 2000 (unaudited)................... 5,297,662 2.59
=========
</TABLE>

As of December 31, 1999 there were 358,650 options exercisable at an
exercise price of $2.07. As of June 30, 2000 (unaudited), there were 994,522
options exercisable at an exercise price of $2.07.

The following table summarizes all employee options outstanding and
exercisable by price and range as of December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.07 3,946,920 9.5 $2.07 326,566 $2.07
</TABLE>

The following table summarizes all employee options outstanding and
exercisable by price as of June 30, 2000 (unaudited):

During the six months ended June 30, 2000, the Company recognized $2,044,000
(unaudited) in deferred stock compensation relating to options granted with an
exercise price that was less than the estimated fair market value of the
Company's stock at the grant date.

F-21
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

11. STOCK OPTIONS (CONTINUED)
STOCK BASED COMPENSATION

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation expense as of December 31, 1999 has been recognized for its
stock-based compensation plans because the exercise price of each option equals
or exceeds the fair value of the underlying stock as of the grant date for each
stock option. Had compensation costs for the Company's stock-based compensation
plans been determined based on the fair value at the grant date for awards under
the Plan, consistent with the methodology prescribed under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's results would have been
as follows for the year ended December 31, 1999 (in thousands except per share
amounts):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net loss.................................................... $(21,516)
Net loss attributable to common stockholders................ (21,849)
Net loss per common share--basic and diluted................ (1.33)
</TABLE>

The weighted average fair value of all options granted during fiscal 1999
was estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Expected option life, in years.............................. 5
Risk-free interest rate..................................... 6.3%
Volatility.................................................. 62.0%
Dividend yield.............................................. 0.0%
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the vesting period. The estimated fair value of
employee stock options granted during 1999 was $1.22 per share.

NONEMPLOYEE STOCK OPTIONS

During 1999 and 2000, the Company issued options to purchase 471,048 shares
under the Plan in exchange for services received or to be received. The options
have an exercise price of $2.07 and a fair value of $1.22 per option on the
grant date. The weighted average fair value was determined using the
Black-Scholes Valuation Model with the following assumptions: no dividend yield;
volatility of 62%; risk-free interest rate of 6.3%; and an expected life of
5 years. The majority of these options will be fully vested by December 31,
2001. In conjunction with the issuance of these options, the Company recognized
expense of $39,020 in 1999 and $682,516 in the six months ended June 30, 2000
(unaudited) based on the fair value of the options, which have fully or
partially vested. Additional expense will be recorded in subsequent periods
based on additional vesting and the related fair value of the underlying stock.

F-22
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

12. SOFTWARE LICENSE AGREEMENT

In September 1998, Nortel Networks and a non-affiliate investor (the
"Licensee") signed a Cooperative Development and License Agreement. The
agreement was subsequently assigned by Nortel Networks to the Company. Under the
terms of the agreement, the Licensee agreed to pay $4,500,000 for a license of
certain of the Company's technology and for development of some additional
agreed-upon technology. The payment terms provided for $1,000,000 to be paid
within 30 days of the signing of the agreement and for additional payments to be
made within 30 days of the completion by the Company of certain technology. The
Company received $1,000,000 in October 1998 and $1,500,000 in December 1998 from
the Licensee as payments under this agreement. Such amounts have been reflected
as deferred software license revenue on the Company's December 31, 1998 balance
sheet and will be amortized on a straight-line basis over the remaining term of
the agreement.

In May 1999, the agreement was amended to provide for the termination of the
original agreement in the event that the Company and the Licensee could not
agree to the final terms and completion dates of the additional technology to be
developed under the term of the original agreement.

As described in Note 9, in May 1999 the Company issued 615,385 shares of
Series A redeemable convertible participating preferred stock to the Licensee
for cash of $6,154 plus notes of $1,993,848. Repayment of the notes is required
if the certain technology is completed or upon a liquidation or qualified
initial public offering by the Company. If the technology is not completed, the
Licensee has the option of paying the notes in full and keeping the shares or
canceling the notes and returning the shares.

The Cooperative Development and License Agreement was amended, effective
April 5, 2000, to provide for the granting of a license by the Company to the
Licensee for certain technology that was developed under the terms of the
agreement. Accordingly, the Licensee has agreed to pay the notes and on
June 16, 2000, the Company received cash of $1,993,848 in full payment of the
notes.

13. SEGMENT INFORMATION

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

GEOGRAPHIC INFORMATION

The Company's headquarters and its operations are located in the United
States. The Company's research and development activities are conducted in the
United States. The Company conducts its sales, marketing and customer service
activities throughout the world. Geographic long-lived assets information is
based on the physical location of the assets at the end of each period.
Geographic revenue information is based on the location of the end customer.

Identifiable long-lived assets (principally property and equipment) by
geographic areas (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-lived assets--United States......................... $1,167 $1,352 $2,778
</TABLE>

F-23
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

13. SEGMENT INFORMATION (CONTINUED)
Revenues by geographic region are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
United States............................. $ -- $233 $7,267 $ 2,438 $12,468
Canada.................................... 126 76 747
Asia...................................... 799 83 1,467
Other..................................... 23 3 11
------ ---- ------ ------- -------
Total revenues........................ $ -- $233 $8,215 $ 2,600 $14,693
====== ==== ====== ======= =======
</TABLE>

14. ROYALTY OBLIGATIONS

On May 12, 1999, the Company obtained ownership rights in certain
intellectual property belonging to Nortel Networks. Nortel Networks gave the
Company several exclusive and non-exclusive, worldwide licenses under the
Intellectual Property Transfer and License Agreement (the "Agreement") for the
purpose of designing, developing, using, manufacturing, and distributing
licensed technical information, patents, products, technology, trademarks,
software and third party software. Such license also includes the right to have
licensed products and software made by another manufacturer for the use, lease
or sale by the Company. The patent license granted to the Company also includes
the right to grant sublicenses to third parties within the scope of the license
granted.

The provisions of the Agreement also provide for the Company to pay to
Nortel Networks: (a) a royalty of 2.5% of net end user revenues for the term of
the Agreement; (b) a royalty of 2.5% of net distributor revenues for the term of
the Agreement; (c) 5.0% of net sublicensing revenues for the term of the
Agreement. The royalty payments are due 30 days after each quarter-end. The
royalty and reporting obligations set out in the Agreement shall be payable by
the Company until such time as securities of the Company are first offered for
sale and sold to the public in a public offering or on a sale of the Company at
a value greater than or equal to $30,000,000; after such time, provided the
Company has paid all outstanding royalties owing and is not in default under any
of the terms of the Agreement, the licenses granted to the Company shall be
considered to be fully paid-up and royalty free. For 1999, royalties owed were
$129,216.

15. SUBSEQUENT EVENTS

In August 2000, the Company signed agreements to borrow up to $5 million
from Nortel Networks and up to $5 million from an affiliate of one of its
preferred stockholders. Any amounts borrowed under such agreements, if not
repaid sooner, are due February 2001. Borrowings are secured by all of the
Company's assets, bear interest at 6% annually and are mandatorily payable in
the event of the closing of a public offering of shares of the Company's common
stock with net proceeds to the Company of not less than $35 million ("qualified
IPO") or a sale, merger or reorganization of the Company. Any borrowings

F-24
<PAGE>
ELASTIC NETWORKS INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)

15. SUBSEQUENT EVENTS (CONTINUED)

repaid or prepaid may not be reborrowed. The Company has borrowed $2 million
under each of the above borrowing agreements.

Warrants that expire in three years were also issued in connection with the
financing. The warrants may be exercised to acquire 102,460 shares of Series B
preferred stock prior to a qualified IPO or 102,460 shares of common stock
following a qualified IPO, at an exercised price of $7.32 per share. These
warrants, which were fully vested when granted, are valued at approximately
$657,000 using the Black-Scholes Valuation Model with the following assumptions:
no dividend yield; volatility of 62%; risk-free interest rate of 6.3%; and an
expected life of 3 years. The calculated fair value of the warrants will be
amortized to interest expense using the effective interest method.

16. COMPENSATION ARRANGEMENTS (UNAUDITED)

In fulfillment of compensation arrangements between Nortel Networks and some
of the Company's employees relating to their prior employment with Nortel
Networks, Nortel Networks has agreed to pay these employees, if they are still
working for the Company at the time of payment, an aggregate of approximately
$13.4 million in cash. Of this amount, two-thirds will be paid at the time at
which Nortel Networks' ownership of the Company's outstanding common stock falls
below 50% and the remaining one-third will be paid on the first anniversary of
that date. Upon the completion of the Company's anticipated initial public
offering (the "Offering") Nortel Networks will own approximately 46% of the
Company's outstanding common stock. As such, Nortel Networks will make a payment
of approximately $9.0 million to these employees, and will make a payment of
approximately $4.4 million on the first anniversary of that date.

The Company will record compensation expense of approximately $9.0 million
on the completion of the Offering and approximately $4.4 million over the
following twelve months, and will record capital contributions from Nortel
Networks in equivalent amounts.

F-25
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

7,800,000 Shares

[LOGO]

Common Stock

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

PROSPECTUS
-----------------

CHASE H&Q ROBERTSON STEPHENS
UBS WARBURG LLC
------------

, 2000

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

You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
as of the date of this document.

Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to their unsold allotments or subscriptions.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the estimated expenses, other than underwriting discounts
and commissions, to be paid by us in connection with the issuance and
distribution of the common stock being registered:

<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 28,417
NASD filing fee............................................. 11,264
Nasdaq National Market listing fee.......................... 123,000
Blue Sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 300,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 300,000
Transfer Agent and Registrar fee............................ 25,000
Miscellaneous............................................... 232,319
----------
Total....................................................... $1,325,000
----------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the General Corporation Law of the State of Delaware,
as amended, we have the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his or her being a director or officer if it is determined that he acted in
accordance with the applicable standard of conduct set forth in such statutory
provision.

Our amended and restated bylaws generally will permit indemnification of
directors and officers to the fullest extent authorized by the General
Corporation Law of the State of Delaware.

Our directors and officers are presently covered under Nortel's directors'
and officers' liability insurance policies. We intend to purchase our own
directors' and officers' liability insurance prior to this offering.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since our inception in May 1999, we have issued and sold unregistered
securities in the transactions described below. See Notes 9 and 10 to Notes to
Financial Statements.

1. On September 22, 1998, we issued 1 share of our common stock to Nortel
Networks Inc. in connection with our incorporation.

2. On May 12, 1999, we issued 15,384,614 shares of our common stock to Nortel
Networks Inc. in connection with our formation and in exchange for
contributed assets.

3. On May 12, 1999 we sold 3,876,923 shares of our series A redeemable
convertible participating preferred stock to four stockholders at a price of
$3.25 per share for an aggregate price of $12.6 million.

4. On November 18, 1999, we granted to a vendor a warrant to purchase 12,439
shares of our common stock at an exercise price of $2.76 per share.

5. On February 14, 2000 we sold 3,922,463 shares of our series B redeemable
convertible participating preferred stock to 18 stockholders at a price of
$5.329 per share for an aggregate price of $20.9 million.

II-1
<PAGE>

6. On August 4, 2000, we granted to each of two secured promissory noteholders,
a warrant to purchase, at an exercise price of $7.32 per share, 51,230
shares of either:

- our series B preferred stock at any time prior to the closing of this
offering; or

- our common stock upon or following the closing of this offering.

7. Since we were formed we have granted options to purchase an aggregate of
5,953,780 shares of our common stock.

All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 or Section 3(b) of the Securities Act of 1933 or Rule 701 thereunder. The
Company believes that all of the securities were acquired by the investors for
investment and with no view toward the resale or distribution thereof. In each
instance, the investor was either an employee of the Company or a sophisticated
investor, the offers and sales were made without any public solicitation and the
stock certificates bear restrictive legends. No underwriter was involved in the
transactions and no commissions were paid.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement *
3.1 Form of Second Amended and Restated Certificate of
Incorporation **
3.2 Form of Amended and Restated Bylaws **
4.1 Specimen stock certificate *
5.1 Opinion of Hunton & Williams *
10.1 Contribution Agreement among the Company, Nortel Networks
Corporation and Nortel Networks Inc., dated May 12, 1999
10.2 Patent Transfer and License Agreement between the Company
and Nortel Networks Inc., dated May 12, 1999
10.3 Intellectual Property Transfer and License Agreement between
the Company and Nortel Networks Corporation, dated May 12,
1999
10.4 Reseller Agreement between the Company and Darwin
Networks, Inc., dated June 17, 1999
10.5 Distribution Agreement between the Company and Northern
Telecom, Inc., dated September 1, 1998
10.6a Agreement for Electronic Manufacturing Services between the
Company and Sanmina Corporation, dated February 19, 1999 **
10.6b Modification Number 1 to Agreement for Manufacturing
Services between the Company and Sanmina Corporation, dated
February 20, 2000 **
10.7 1999 Stock Incentive Plan
10.8 Form of Compensation Continuation Plan **
10.9 Form of Accelerated Vesting Plan **
10.10 Form of Employee Stock Purchase Plan **
10.11a Investor Rights Agreement between the Company and certain
holders of the Company's equity securities, dated May 12,
1999 **
10.11b Amendment to Investor Rights Agreement between the Company
and certain holders of the Company's equity securities,
dated February 14, 2000 **
10.11c Amendment Number 2 to Investor Rights Agreement between the
Company and certain holders of the Company's securities,
dated August 4, 2000 **
10.12 Lease Agreement between the Company and Ted and Mary
Flipowicz, dated February 18, 2000 **
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13a Office Lease Agreement between Backman, L.C. and Northern
Telecom Inc., dated April 16, 1998 **
10.13b Agreement of Sublease between the Company and Northern
Telecom Inc., dated April 28, 1999 **
10.14 Commercial Space Lease Agreement between the Company and J&N
Realty Company, Inc., dated August 6, 1999 **
10.15 Employment Agreement between the Company and Guy D. Gill,
dated May 12, 1999 **
10.16 Employment Agreement between the Company and Phillip L.
Griffith, dated May 12, 1999 **
10.17 Employment Agreement between the Company and Larry R.
Hurtado, dated May 12, 1999 **
10.18 Amended and Restated Cooperative Development and License
Agreement between the Company and Texas Instruments
Incorporated, dated April 5, 2000 **
10.19 OEM Reseller Agreement between the Company and Teledex
Corp., dated August 25, 1999 **
10.20 Purchase Warrant issued in favor of Nortel Networks Inc.,
dated August 4, 2000 **
10.21 Purchase Warrant issued in favor of Pequot Private Equity
Fund II, L.P., dated August 4, 2000 **
23.1 Consent of Deloitte & Touche LLP **
23.2 Consent of Hunton & Williams (set forth in Exhibit 5.1) *
27 Financial Data Schedule **
</TABLE>

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

* To be filed by Amendment

** Filed herewith

(B) FINANCIAL STATEMENT SCHEDULES:

The required Financial Statement Schedules have been omitted because they
are either not required, not applicable or the required information is included
in the financial statements and notes thereto.

ITEM 17. UNDERTAKINGS

The Company hereby undertakes to provide the Underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each Purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers and controlling persons of the
Company, pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of a prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 15th day of August, 2000.

<TABLE>
<S> <C> <C>
ELASTIC NETWORKS INC.

By: /s/ GUY D. GILL
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the dates indicated below.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ GUY D. GILL President, Chief Executive
------------------------------------------- Officer and Director
Guy D. Gill (principal executive officer) August 15, 2000

Chief Financial Officer,
/s/ KEVIN D. ELOP Secretary and Treasurer
------------------------------------------- (principal financial and
Kevin D. Elop accounting officer) August 15, 2000

*
-------------------------------------------
Thomas M. Manley Director August 15, 2000

*
-------------------------------------------
Gerald A. Poch Director August 15, 2000

*
-------------------------------------------
Richard G. Reid Director August 15, 2000
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ GUY D. GILL
--------------------------------------
Guy D. Gill
ATTORNEY-IN-FACT
</TABLE>

II-4
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement *

3.1 Form of Second Amended and Restated Certificate of
Incorporation **

3.2 Form of Amended and Restated Bylaws **

4.1 Specimen stock certificate *

5.1 Opinion of Hunton & Williams *

10.1 Contribution Agreement among the Company, Nortel Networks
Corporation and Nortel Networks Inc., dated May 12, 1999

10.2 Patent Transfer and License Agreement between the Company
and Nortel Networks Inc., dated May 12, 1999

10.3 Intellectual Property Transfer and License Agreement between
the Company and Nortel Networks Corporation, dated May 12,
1999

10.4 Reseller Agreement between the Company and Darwin
Networks, Inc., dated June 17, 1999

10.5 Distribution Agreement between the Company and Northern
Telecom, Inc., dated September 1, 1998

10.6a Agreement for Electronic Manufacturing Services between the
Company and Sanmina Corporation, dated February 19, 1999 **

10.6b Modification Number 1 to Agreement for Manufacturing
Services between the Company and Sanmina Corporation, dated
February 20, 2000 **

10.7 1999 Stock Incentive Plan

10.8 Form of Compensation Continuation Plan **

10.9 Form of Accelerated Vesting Plan **

10.10 Form of Employee Stock Purchase Plan **

10.11a Investor Rights Agreement between the Company and certain
holders of the Company's equity securities, dated May 12,
1999 **

10.11b Amendment to Investor Rights Agreement between the Company
and certain holders of the Company's equity securities,
dated February 14, 2000 **

10.11c Amendment Number 2 to Investor Rights Agreement between the
Company and certain holders of the Company's securities,
dated August 4, 2000 **

10.12 Lease Agreement between the Company and Ted and Mary
Flipowicz, dated February 18, 2000 **

10.13a Office Lease Agreement between Backman, L.C. and Northern
Telecom Inc., dated April 16, 1998 **

10.13b Agreement of Sublease between the Company and Northern
Telecom Inc., dated April 28, 1999 **

10.14 Commercial Space Lease Agreement between the Company and J&N
Realty Company, Inc., dated August 6, 1999 **

10.15 Employment Agreement between the Company and Guy D. Gill,
dated May 12, 1999 **

10.16 Employment Agreement between the Company and Phillip L.
Griffith, dated May 12, 1999 **

10.17 Employment Agreement between the Company and Larry R.
Hurtado, dated May 12, 1999 **

10.18 Amended and Restated Cooperative Development and License
Agreement between the Company and Texas Instruments
Incorporated, dated April 5, 2000 **

10.19 OEM Reseller Agreement between the Company and Teledex
Corp., dated August 25, 1999 **

10.20 Purchase Warrant issued in favor of Nortel Networks Inc.,
dated August 4, 2000 **
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.21 Purchase Warrant issued in favor of Pequot Private Equity
Fund II, L.P., dated August 4, 2000 **

23.1 Consent of Deloitte & Touche LLP **

23.2 Consent of Hunton & Williams (set forth in Exhibit 5.1) *

27 Financial Data Schedule **
</TABLE>

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

* To be filed by Amendment

** Filed herewith