COM21 INC, S-1/A, 1999-02-19

COM21 INC
S-1/A, 1999-02-19
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1999

REGISTRATION NO. 333-70945
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 4

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

COM21, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 7370 94-3201698
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (INTERNAL REVENUE SERVICE
CLASSIFICATION CODE NUMBER) EMPLOYER IDENTIFICATION NUMBER)
</TABLE>

750 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035
(408) 953-9100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

PETER D. FENNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COM21, INC.
750 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035
(408) 953-9100
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
THOMAS W. KELLERMAN, ESQ. JEFFREY D. SAPER, ESQ.
ARMANDO CASTRO, ESQ. ROBERT G. DAY, ESQ.
ELIZABETH A. R. YEE, ESQ. ANIL P. PATEL, ESQ.
PETER S. BUCKLAND, ESQ. WILSON SONSINI GOODRICH & ROSATI
BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION
TWO EMBARCADERO PLACE 650 PAGE MILL ROAD
2200 GENG ROAD PALO ALTO, CALIFORNIA 94304
PALO ALTO, CALIFORNIA 94303 (650) 493-9300
(650) 424-0160
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If 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"), other than securities offered only in
connection with dividend or interest reinvestment plans, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

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 THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 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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<PAGE> 2

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.

SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1999

3,000,000 Shares

COM21 LOGO

Common Stock

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

We are selling 2,480,000 shares of common stock and the selling
stockholders identified on page 61 are selling 520,000 shares of common stock.
We will not receive any of the proceeds from the shares of common stock sold by
the selling stockholders.

The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.

Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "CMTO." On February 18, 1999, the last reported sale price for
the common stock on The Nasdaq National Market was $22.00 per share.

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COM21 STOCKHOLDERS
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share............................................ $ $ $ $
Total................................................ $ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.

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.

CREDIT SUISSE FIRST BOSTON DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED

Prospectus dated , 1999.
<PAGE> 3

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TABLE OF CONTENTS

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<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY..................... 3
RISK FACTORS........................... 5
USE OF PROCEEDS........................ 17
DIVIDEND POLICY........................ 17
PRICE RANGE OF COMMON STOCK............ 17
CAPITALIZATION......................... 18
DILUTION............................... 19
SELECTED FINANCIAL DATA................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 21
BUSINESS............................... 29
MANAGEMENT............................. 49
</TABLE>

<TABLE>
<CAPTION>
Page
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<S> <C>
CERTAIN TRANSACTIONS................... 60
PRINCIPAL AND SELLING STOCKHOLDERS..... 62
DESCRIPTION OF CAPITAL STOCK........... 65
SHARES ELIGIBLE FOR FUTURE SALE........ 68
UNDERWRITING........................... 69
NOTICE TO CANADIAN RESIDENTS........... 70
LEGAL MATTERS.......................... 71
EXPERTS................................ 71
ADDITIONAL INFORMATION................. 71
GLOSSARY OF TECHNICAL TERMS............ 72
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT 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
ON THE DATE OF THIS DOCUMENT.

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<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and related notes thereto appearing
elsewhere in this prospectus. Because this is only a summary, you should read
the rest of the prospectus before you invest in our common stock. Read this
entire prospectus carefully, especially the risks described under "Risk
Factors."

COM21, INC.

We design, develop, market and sell value-added, high-speed communications
solutions for the broadband access market. Our ComUNITY Access system enables
cable operators to provide high-speed, cost-effective Internet access to
corporate telecommuter, small office/home office and residential end-users in
the U.S. and internationally. Our system also enables cable operators to address
the distinct price, performance, security and other needs of these different
end-user groups. Our products include headend equipment, subscriber cable
modems, network management software and noise containment technologies. A
headend is the central distribution point in a cable television system. A
subscriber cable modem is a device which allows a cable subscriber to transmit
and receive data over coaxial cable. Cable operators can use our ComUNITY Access
system to increase revenue opportunities by offering up to 16 different
operator-defined transmission rates at varying price points to address multiple
markets.

Our system is designed to be deployed on a limited capital budget and can
be upgraded and scaled as subscriber penetration grows. Our system enables cable
operators to lower their ongoing cost of ownership through cost-effective noise
management and remote cable modem upgrades. The ComUNITY Access system is also
designed to support future applications, such as cable telephony and virtual
private networks.

We are developing a cable modem for the North American cable market that
will comply with the emerging data-over-cable service interface specification,
commonly referred to as the DOCSIS standard, intended primarily to address the
basic requirements of residential end-users, who typically tolerate lower
performance and security than business users. We are working with Cisco Systems,
Inc. to enable interoperability of our DOCSIS-compliant cable modems with
Cisco's universal broadband router. A universal broadband router is a high speed
router intended to distribute different forms of data traffic over different
network architectures. We expect our first DOCSIS-compliant cable modem to be
commercially available in the first half of 1999.

In 1998, we shipped approximately 320 ComCONTROLLER headends and more than
77,000 ComPORT modems for use in 154 locations worldwide. In the North American
market, we sell directly to cable operators and have sold systems to cable
operators such as Charter Communications, Cox Communications, Prime Cable and
TCI, and to systems integrators such as HSAnet. Internationally, we sell to
systems integrators, including Philips and Siemens, which in turn sell to cable
operators.

We were incorporated in Delaware on June 29, 1992. Our principal executive
offices are located at 750 Tasman Drive, Milpitas, California 95035, and our
telephone number at that address is (408) 953-9100. Our address on the worldwide
web is http://www.Com21.com. The reference to our website does not constitute
incorporation by reference of the information contained at the site into this

prospectus.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered................... 3,000,000 shares (comprised of 2,480,000 shares offered by
Com21 and 520,000 shares offered by selling stockholders).
Common Stock Outstanding
after this Offering.................. 21,165,560 shares
Use of Proceeds........................ General corporate purposes including working capital, sales
and marketing, product development, capital expenditures and
potential acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol.......... CMTO
</TABLE>

The common stock outstanding after this offering excludes:

- 2,369,341 shares of common stock issuable upon exercise of stock options
outstanding under our 1998 Stock Incentive Plan at a weighted average
exercise price of $7.42 per share;

- 957,802 shares of common stock reserved for future issuance under our
1998 Stock Incentive Plan, which includes an automatic annual 5% increase
in the number of shares authorized for issuance under our 1998 Stock
Incentive Plan. The automatic share increase for 1999 was effective
January 4, 1999 in the amount of 934,278 shares, calculated based on the
number of outstanding shares on December 31, 1998, the last trading day
of the preceding calendar year;

- 209,597 shares of common stock reserved for future issuance under our
1998 Employee Stock Purchase Plan; and

- 46,286 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $7.76 per share.

See "Capitalization," "Management--Benefit Plans" and Notes 1 and 7 of Notes to
Financial Statements.
------------------

SUMMARY FINANCIAL DATA

The balance sheets data as of December 31, 1998 is set forth below (i) on
an actual basis and (ii) as adjusted to reflect the sale of 2,480,000 shares of
common stock offered by Com21 at an assumed offering price of $22.00 per share
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds" and "Capitalization."

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
----- ------- -------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues........................ $ -- $ -- $ 1,000 $ 15,649 $ 48,114
Gross profit.......................... -- -- 1,000 7,277 18,541
Total operating expenses.............. 894 6,922 15,913 20,540 34,080
Loss from operations.................. (894) (6,922) (14,913) (13,263) (15,539)
Net loss.............................. (837) (6,666) (14,471) (13,055) (13,363)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
ACTUAL AS ADJUSTED(2)
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term investments........... $65,744 $116,840
Working capital............................................. 68,084 119,180
Total assets................................................ 82,948 134,044
Long-term obligations....................................... 936 936
Total stockholders' equity.................................. 73,366 124,462
</TABLE>

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RISK FACTORS

You should carefully consider the risks described below before making a
decision to invest in Com21. You may lose all or part of your investment. The
risks and uncertainties described below are not the only ones facing our
company.

WE HAVE A SHORT OPERATING HISTORY, HAVE INCURRED NET LOSSES SINCE OUR INCEPTION
AND EXPECT FUTURE LOSSES.

We did not commence product shipments until April 1997. As a result, we
have only a limited operating history upon which you may evaluate us and our
prospects. We have incurred net losses since inception and expect to continue to
operate at a loss through at least fiscal 1999. As of December 31, 1998, we had
an accumulated deficit of approximately $48.7 million. To achieve profitable
operations on a continuing basis, we must successfully design, develop, test,
manufacture, introduce, market and distribute our products on a broad commercial
basis.

Our ability to generate future revenues will depend on a number of factors,
many of which are beyond our control. These factors include the following:

- the rate at which cable operators upgrade their cable plants;

- our ability and the ability of cable operators to coordinate timely and
effective marketing campaigns with the availability of upgrades;

- cable operators' success in marketing data-over-cable services and our
modems to subscribers;

- cable operators' success in setting prices for data transmission
installation service; and

- cable operators' success and timeliness in the installation of subscriber
site equipment.

Due to these factors, we cannot forecast with any degree of accuracy what
our revenues will be or how quickly cable operators will adopt our systems.
Therefore, we may not achieve, or be able to sustain, profitability.

OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS.

Our operating results are likely to fluctuate significantly in the future
on a quarterly and an annual basis due to a number of factors, many of which are
outside our control. Factors that could cause our revenues to fluctuate include
the following:

- variations in the timing of orders and shipments of our products;

- variations in the size of orders by our customers;

- new product introductions by us or by competitors;

- delays in introducing cable modems that comply with the new
data-over-cable service interface specification;

- the timing of upgrades of cable plants;

- variations in capital spending budgets of cable operators;

- delays in obtaining regulatory approval for commercial deployment of
cable modem systems; and

- general economic conditions and economic conditions specific to the cable
and electronic data transmission industries.

The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activities. Research and development expenses will vary as we develop new
products.

We have a limited backlog of orders, and total revenues for any future
quarter are difficult to predict. Supply, manufacturing or testing constraints
could result in delays in the delivery of our products. Any delay in the product
deployment schedule of one or more of our cable operator customers would likely
materially adversely affect our operating results for a particular period.

A variety of factors affect our gross margin, including the following:

- the sales mix between our headend equipment and cable modems;

- the volume of products manufactured;
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- the type of distribution channel through which we sell our products;

- the average selling prices of our products; and

- the effectiveness of our cost reduction efforts.

In the past we have experienced and we anticipate that we will continue to
experience decreases in the average selling price of our cable modems and our
other products. In addition, the sales mix between our headend equipment and
modems also affects our gross margin. Sales of our cable modems yield lower
gross margins than do sales of our headend equipment. In the future, we
anticipate that our sales mix will be increasingly weighted toward cable modems.
As a result, we expect to experience continued downward pressures on our gross
margin. If price declines are not offset by a decline in the costs of
manufacturing our cable modems, our gross margin will be adversely affected.

Because of these factors, our operating results in one or more future
periods are likely to fail to meet or exceed the expectations of securities
analysts or investors. In that event, the trading price of our common stock
would likely decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

WE DEPEND ON CABLE OPERATORS FOR SUBSTANTIALLY ALL OF OUR SALES.

We depend on cable operators to purchase our headend equipment and cable
modems and to market data transmission service to end-users. Cable operators may
not have enough programming channels over which they can offer these services.
Even if a cable operator chooses to provide data transmission services, it may
not choose our products to do so.

The future success of services providing data-over-cable transmission
depends upon the ability of cable systems to support two-way communications.
While many cable operators are in the process of upgrading, or have announced
their intention to upgrade, their cable plants to hybrid fiber coaxial cable,
commonly known as HFC in the telecommunications industry, many cable operators
have delayed these upgrades for financial or regulatory reasons. Cable operators
have limited experience with cable plant upgrades, and investments in upgrades
place a significant strain on their resources. Most cable operators are already
highly leveraged and may not have the capital required to upgrade their
infrastructure or to offer new services such as data-over-cable transmission.

Even after installation, we remain highly dependent on cable operators to
continue to maintain their cable plants so that our products will operate at a
consistently high performance level. Accordingly, the success and future growth
of our business will be subject to economic and other factors affecting the
cable television industry, particularly the industry's ability to continue to
finance the substantial capital expenditures necessary to use our products
effectively.

THE MARKET IN WHICH WE SELL OUR PRODUCTS IS CHARACTERIZED BY MANY COMPETING
TECHNOLOGIES, AND THE TECHNOLOGY ON WHICH OUR PRODUCT IS BASED MAY NOT COMPETE
EFFECTIVELY AGAINST OTHER TECHNOLOGIES.

The market for high-speed data transmission services has several competing
technologies which offer alternative solutions. Technologies which compete with
our solution are:

- telephone company-related wireline technologies such as:

- dial-up (analog modems);

- integrated services digital network, commonly known as ISDN in the
telecommunications industry; and

- digital subscriber line, commonly known as DSL in the
telecommunications industry.

- wireless technologies such as:

- local multipoint distribution service, commonly known as LMDS in the
telecommunications industry;

- multi-channel multipoint distribution service, commonly known as
MMDS in the telecommunications industry; and

- direct broadcast satellite, commonly known as DBS in the
telecommunications industry.

In particular, because of the widespread reach of telephone networks and
the financial resources of telephone companies, competition from telephone
company-related solutions is expected to be intense. Cable modem technology may
not be able to

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compete effectively against wireline or wireless technologies.

In addition, one of our competitors has developed a commercially available
alternative modulation technology. Significant market acceptance of alternative
solutions for high-speed data transmission could decrease the demand for our
products if these alternatives are viewed as providing faster access, greater
reliability, increased cost-effectiveness or other advantages.

OUR CURRENT PRODUCTS ARE NOT COMPATIBLE WITH PRODUCTS OFFERED BY OUR COMPETITORS
AND ARE SUBJECT TO EVOLVING INDUSTRY STANDARDS. IF OUR PRODUCTS DO NOT COMPLY
WITH ANY STANDARD THAT ACHIEVES MARKET ACCEPTANCE, CUSTOMERS MAY REFUSE TO
PURCHASE OUR PRODUCTS.

Our headend equipment and cable modem products do not interoperate with the
existing equipment of other cable modem suppliers. Therefore, potential
customers who wish to purchase broadband Internet access products from multiple
suppliers may be reluctant to purchase our products.

The emergence or evolution of industry standards, either through adoption
by official standards committees or widespread use by cable operators or
telephone companies, could require us to redesign our products. Our current
products are not in full compliance with the standards and developing
specifications as proposed by:

- data-over-cable service interface specification;

- Digital Audio Video Interactive Council and Digital and Video Broadcast
Organization;

- Institute of Electrical and Electronics Engineers;

- Internet Engineering Task Force; and

- other relevant standards bodies.

We expect the emerging data-over-cable service interface specification,
commonly referred to as the DOCSIS standard, to achieve substantial market
acceptance in North America, and we are currently developing DOCSIS-compliant
cable modems. The continuing evolution of the DOCSIS standard may cause us to
incur additional costs associated with making our cable modems compliant with
various versions of the standard. We cannot assure you that our DOCSIS-compliant
cable modems will be introduced on schedule, or that they will meet with market
acceptance.

There is currently no generally accepted standard for data-over-cable
internationally. If any standards achieve market acceptance and if our products
do not comply with them, customers may refuse to purchase our products.
Additionally, different implementations of the same specification could slow
deployment of our products if these differences cause our products not to be
interoperable with other companies' products. The widespread adoption of the
DOCSIS or other standards would likely cause aggressive price competition in the
cable modem market and result in lower sales of our headend products and lower
revenues from licensing of our network management software. Any of these events
would adversely affect our gross margin and our operating results.

The development of new competing technologies and standards increases the
risk that current or new competitors could develop products that would reduce
the competitiveness of our products. If any of these new technologies or
standards achieve widespread market acceptance, any failure by us to develop new
products or enhancements, or to address these new technologies or standards,
would harm our business.

BECAUSE OUR MARKET IS NEW AND EVOLVING, WE CANNOT ACCURATELY PREDICT ITS FUTURE
GROWTH RATE OR ITS ULTIMATE SIZE, AND WIDESPREAD ACCEPTANCE OF OUR PRODUCTS IS
UNCERTAIN.

Our success depends on the timely adoption of our products by cable
operators and their subscribers. The market for our products is rapidly
evolving. An increasing number of competitors have introduced or developed, or
are in the process of introducing or developing, cable modem systems that
compete with our own. Some of the critical issues concerning the use of cable
modems, including security, reliability, cost, ease of deployment and
administration, and quality of service, remain largely unresolved and may harm
our business. Because our market is new and evolving, we cannot accurately
predict its future growth rate or its ultimate size.

Prior to purchasing our products, some cable operators may require that
their internal technical personnel or their Internet service provider certify
our products to determine if they work with their systems. Certification of our
products may not

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occur in a timely manner, if at all. In some cases, in order for our products to
be certified we may have to make significant product modifications. Failure to
become certified could render us unable to deploy our products in a timely
manner with one or more cable operators. Any of these possibilities could harm
our business. The market for cable modems may never fully develop, and even if
it does, we may not be able to compete successfully in that market. If our
products do not achieve widespread acceptance in their markets, our business may
be adversely affected.

IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY SALES CYCLE OF OUR PRODUCTS, OUR OPERATING RESULTS FOR THAT
PERIOD WILL BE HARMED.

The sales cycle of our products is typically lengthy and involves:

- a significant technical evaluation;

- a commitment of capital and other resources by cable operators;

- delays associated with cable operators' internal procedures to approve
large capital expenditures;

- time required to engineer the deployment of new technologies within the
networks of cable operators; and

- testing and acceptance of new technologies that affect key operations.

For these and other reasons, our sales cycle generally lasts from six to 12
months. Furthermore, the announcement and projected product introduction of
DOCSIS-compliant cable modems have already affected sales cycles, as most
domestic cable operators have chosen to delay large scale deployment of cable
modems until DOCSIS-compliant cable modems are available.

THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND HAS MANY MORE
ESTABLISHED COMPETITORS.

The market for our products is intensely competitive, rapidly evolving and
subject to rapid technological change.

Many of our current and potential competitors have been operating longer,
have better name recognition, better established business relationships and
significantly greater financial, technical, marketing and distribution resources
than we do. These competitors may undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing new or enhanced products than we do. If we fail to develop
DOCSIS-compliant cable modems in a timely manner, our customers may choose
another supplier for DOCSIS-compliant cable modems, and our business, operating
results and financial condition could be materially adversely affected. See
"Business -- Competition."

WE MUST REDUCE THE COST OF OUR CABLE MODEMS TO REMAIN COMPETITIVE.

Certain of our competitors' cable modems are priced lower than our cable
modems. As headend equipment becomes more widely deployed, the price of cable
modems and related equipment will continue to decline. In particular, we believe
that the adoption of industry standards, such as the DOCSIS standard, will cause
increased price competition for cable modems.

We may not be able to continually reduce the costs of manufacturing our
cable modems sufficiently to enable us to lower our modem prices and compete
effectively with other cable modem suppliers. If we are unable to reduce the
manufacturing costs of our cable modems, our gross margin and operating results
would be harmed.

OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.

We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have five issued U.S. patents and several pending patent
applications. Our means of protecting our proprietary rights in the U.S. or
abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other

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information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
U.S. Issued patents may not preserve our proprietary position. Even if they do,
competitors or others may develop technologies similar to or superior to our
own. If we do not enforce and protect our intellectual property, our business
will be harmed.

From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the cable modem
market grows and the functionality of products overlaps.

The results of any litigation matter are inherently uncertain. In the event
of an adverse result in any litigation with third parties that could arise in
the future, we could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to halt the manufacture, use
and sale of infringing products, to expend significant resources to develop non-
infringing technology, or to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us, on commercially reasonable terms, or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail. For
example, in January 1998, Hybrid Networks filed an action against us, accusing
us of infringing certain of their patents. We settled this matter in January
1999 through a patent cross-license agreement that will not materially impact
our business or results of operations. However, there can be no assurance that
we would be able to successfully resolve similar incidents in the future.

OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US.

We have rapidly and significantly expanded our operations and anticipate
that further significant expansion will be required to address potential growth
in our customer base and market opportunities. To manage the anticipated growth
of our operations, we will be required to:

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

- hire, train and manage additional qualified personnel;

- expand and upgrade our core technologies; and

- effectively manage multiple relationships with our customers, suppliers
and other third parties.

We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.

In the future, we may experience difficulties meeting the demand for our
products and services. The installation and use of our products requires
training. If we are unable to provide training and support for our products, the
implementation process will be longer and customer satisfaction may be lower. In
addition, our management team may not be able to achieve the rapid execution
necessary to fully exploit the market for our products and services. We cannot
assure you that our systems, procedures or controls will be adequate to support
the anticipated growth in our operations. Any failure to manage growth
effectively could materially adversely affect our business, operating results
and financial condition.

COMPETITION FOR QUALIFIED PERSONNEL IN THE CABLE NETWORKING EQUIPMENT AND
TELECOMMUNICATIONS INDUSTRIES IS INTENSE, AND WE MAY NOT BE SUCCESSFUL IN
ATTRACTING AND RETAINING THESE PERSONNEL.

Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. Given
our early stage of development, we are dependent on our ability to retain and
motivate high caliber personnel, in addition to attracting new personnel.
Competition for qualified personnel in the cable networking equipment and
telecommunications industries is intense, and we may not be successful in
attracting and retaining such personnel. During

9
<PAGE> 11

1998, we hired 45 new employees, an increase of
approximately 34%, to our total work force at December 31, 1997. We expect to
add additional personnel in the near future, including direct sales and
marketing personnel. There may be only a limited number of people with the
requisite skills to serve in those positions and it may become increasingly
difficult to hire these people. We are actively searching for research and
development engineers, who are in short supply. Our business will suffer if we
encounter delays in hiring these additional engineers.

Competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our key
personnel. We do not maintain key person life insurance on our key personnel.
The loss of the services of any of our key personnel, the inability to attract
or retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers, could negatively affect our business.

WE DEPEND ON STRATEGIC RELATIONSHIPS.

Our business strategy relies to a significant extent on our strategic
relationships with other companies. These relationships include:

- software license arrangements for our network management system;

- marketing arrangements with Philips and Siemens; and

- DOCSIS-compliant cable modem development in conjunction with Cisco to
ensure the interoperability of our cable modem with Cisco's universal
broadband router.

These relationships may not be successful because we may not be able to
continue to maintain, develop or replace them in the event any of these
relationships are terminated. In addition, any failure to renew or extend any
licenses between us and any third party may adversely affect our business.

WE MAY NOT BE ABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
DEPEND ON THIRD-PARTY MANUFACTURERS AND HAVE LIMITED MANUFACTURING EXPERIENCE.

We contract for the manufacture of cable modems and integrated circuit
boards on a turnkey basis. CMC Industries and Sanmina build printed circuit
assemblies for our headend products and Celestica manufactures our cable modems.
Our future success will depend, in significant part, on our ability to have
others manufacture our products cost-effectively and in sufficient volumes.
There are a number of risks associated with our dependence on third-party
manufacturers including the following:

- reduced control over delivery schedules;

- quality assurance;

- manufacturing yields and costs;

- the potential lack of adequate capacity during periods of excess demand;

- limited warranties on products supplied to us; and

- increases in prices and the potential misappropriation of our
intellectual property.

Any manufacturing disruption could impair our ability to fulfill orders. We
have no long-term contracts or arrangements with any of our vendors that
guarantee product availability, the continuation of particular payment terms or
the extension of credit limits. We may experience manufacturing or supply
problems in the future. We are dependent on our manufacturers to secure
components at favorable prices, but we may not be able to obtain additional
volume purchase or manufacturing arrangements on terms that we consider
acceptable, if at all. If we enter into a high-volume or long-term supply
arrangement and subsequently decide that we cannot use the products or services
provided for in the agreement, our business will be harmed. Any such
difficulties could harm our relationships with customers. See "Business --
Manufacturing."

WE MAY NOT BE ABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
OBTAIN CERTAIN COMPONENTS FROM, AND DEPEND ON, CERTAIN KEY SOLE SUPPLIERS.

Certain parts, components and equipment used in our products are obtained
from sole sources of supply. For example, our headend equipment incorporates a
radio frequency modulation chip from one specific vendor, transmitter/receiver
components from another, and an Asynchronous Transfer Mode switch, commonly
known as an ATM in the telecommunications industry, from yet

10
<PAGE> 12

another. Additional sole-sourced components may be incorporated into our
equipment in the future.

We do not have any long term supply contracts to ensure sources of supply.
If we fail to obtain components in sufficient quantities when required, our
business could be harmed. Our suppliers may enter into exclusive arrangements
with our competitors, stop selling their products or components to us at
commercially reasonable prices or refuse to sell their products or components to
us at any price. Our inability to obtain sufficient quantities of sole-sourced
components, or to develop alternative sources for components and/or products
would materially adversely affect our business. We rely on several companies
including:

- Broadcom Corp. and Stanford Telecommunications, Inc., suppliers of
modulation and demodulation components;

- Atmel Corporation, the fabricator of our semiconductor devices;

- Virata Limited, formerly Advanced Telecommunications Modules Limited, a
supplier of ATM switches;

- Hewlett-Packard Company, the supplier of HP Openview software;

- Wind River Systems, Inc., a supplier of embedded software; and

- Objectivity, Inc., a supplier of object-oriented database software.

If any of these manufacturers delay or halt production of any of their
components, our business, operating results and financial condition could be
materially adversely affected.

OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR CUSTOMERS
COULD CAUSE OUR BUSINESS TO SUFFER.

A relatively small number of customers has accounted for a large part of
our revenues to date, and we expect that this trend will continue. During the
year ended December 31, 1998, revenues attributable to our top three customers,
TCI, Philips and Siemens, accounted for 24%, 15% and 14% of total revenues,
respectively. For the same period, our top five customers accounted for an
aggregate of 66% of total revenues. We expect that our largest customers in the
future could be different from our largest customers today due to a variety of
factors, including customers' deployment schedules and budget considerations.
Because a limited number of cable operators account for a majority of our
prospective customers, our future success will depend upon our ability to
establish and maintain relationships with these companies. We may not be able to
retain our current accounts or to obtain additional accounts. Both in the U.S.
and internationally, a substantial majority of households passed are controlled
by a relatively small number of cable operators. The loss of one or more of our
customers or our inability to successfully develop relationships with other
significant cable operators could cause our business to suffer.

OUR FUTURE SUCCESS WILL DEPEND IN PART UPON OUR ABILITY TO ENHANCE OUR EXISTING
PRODUCTS AND TO DEVELOP AND INTRODUCE, ON A TIMELY BASIS, NEW PRODUCTS AND
FEATURES THAT MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS.

The market for cable modem systems and products is characterized by rapidly
changing technologies and short product life cycles. Our future success will
depend in large part upon our ability to:

- identify and respond to emerging technological trends in the market;

- develop and maintain competitive products;

- enhance our products by adding innovative features that differentiate our
products from those of our competitors;

- bring products to market on a timely basis at competitive prices; and

- respond effectively to new technological changes or new product
announcements by others.

If our product development and enhancements take longer than planned, the
availability of products would be delayed. Our future success will depend in
part upon our ability to enhance our existing products and to develop and
introduce, on a timely basis, new products and features that meet changing
customer requirements and emerging industry standards, such as the DOCSIS
standard.

The technical innovations required for us to remain competitive are
inherently complex, require long development cycles and are dependent in some
cases on sole source suppliers. We will be required to continue to invest in
research and development in

11
<PAGE> 13

order to attempt to maintain and enhance our
existing technologies and products, but we may not have the funds available to
do so. Even if we have sufficient funds, these investments may not serve the
needs of customers or be compatible with changing technological requirements or
standards. Most of the expenses must be incurred before the technical
feasibility or commercial viability can be ascertained. Revenues from future
products or product enhancements may not be sufficient to recover the
development costs associated with the products or enhancements.

WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND NEED TO DEVELOP
ADDITIONAL DISTRIBUTION CHANNELS.

Today, cable operators and systems integrators purchase cable modems from
vendors through direct and indirect sales channels. In North America, if the
DOCSIS standard achieves widespread market acceptance, we anticipate that the
North American cable modem market will shift to a consumer purchase model. If
this occurs, we will sell more of our cable modems directly through consumer
sales channels. Consequently, we have begun to establish new distribution
channels for our cable modems. We may not have the capital required or the
necessary personnel to develop these distribution channels, which could
materially adversely affect our business, operating results and financial
condition. To the extent that large consumer electronics companies enter the
cable modem market, their well-established retail distribution capabilities
would provide them with a significant competitive advantage. See "Business --
Competition."

WE ARE SUBJECT TO RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS.

During the fiscal year ended December 31, 1998, revenues attributable to
international customers accounted for 52% of total revenues. We expect that a
significant portion of our sales will continue to be concentrated in
international markets for the foreseeable future. We intend to expand operations
in our existing international markets and to enter new international markets,
which will demand management attention and financial commitment. In addition, a
successful expansion of our international operations and sales in certain
markets will require us to develop relationships with international systems
integrators and distributors. We may not be able to identify, attract or retain
suitable international systems integrators or distributors. We may not be able
to successfully expand our international operations.

Furthermore, to increase revenues in international markets, we will need to
continue to establish foreign operations, to hire additional personnel to run
these operations and to maintain good relations with our foreign systems
integrators and distributors. To the extent that we are unable to successfully
do so, our growth in international sales will be limited and our operating
results could be adversely affected.

Our international sales to date have been denominated in U.S. dollars. We
do not currently engage in any foreign currency hedging transactions. A decrease
in the value of foreign currencies relative to the U.S. dollar could make our
products more expensive in international markets.

In addition to currency fluctuation risks, international operations involve
a number of risks not typically present in domestic operations, including:

- changes in regulatory requirements;

- costs and risks of deploying systems in foreign countries;

- licenses, tariffs and other trade barriers;

- political and economic instability;

- difficulties in staffing and managing foreign operations;

- potentially adverse tax consequences;

- difficulties in obtaining governmental approvals for products;

- the burden of complying with a wide variety of complex foreign laws and
treaties; and

- the possibility of difficult accounts receivable collections.

We are also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high technology
products. We cannot predict whether charges or restrictions upon the importation
or exportation of our products will be implemented by the U.S. or other
countries. Future international activity may result in sales dominated by
foreign currencies. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international

12
<PAGE> 14

operations may contribute to fluctuations in our operating results. Any of these
factors could materially and adversely affect our business, operating results
and financial condition.

WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS.

We continually evaluate strategic acquisitions of other businesses and
subscriber accounts. If we were to consummate an acquisition, we would be
subject to a number of risks, including:

- difficulty in assimilating the acquired operations and personnel;

- limits on our ability to retain the acquired subscribers;

- disruption of our ongoing business; and

- limits on our ability to successfully incorporate acquired technology and
rights into our service offerings and maintain uniform standards,
controls, procedures, and policies.

We may not be able to successfully overcome problems encountered in
connection with potential acquisitions. In addition, an acquisition could
materially adversely affect our operating results by diluting our stockholders'
equity, causing us to incur additional debt, or requiring us to amortize
acquisition expenses and acquired assets.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REGULATION OF INFORMATION SECURITY
PRODUCTS.

Our products make use of encryption, and are therefore subject to export
restrictions administered by the U.S. Department of Commerce, which permit the
export of encryption products only with the required level of export license. We
may therefore be at a disadvantage in competing for international sales compared
to companies located outside the U.S. that are not subject to these
restrictions. International customers may be unwilling to purchase our products
that are eligible for export due to perceptions that these products are inferior
to those marketed within the U.S., may contain undocumented features which
undermine the products' security architecture, or are required to incorporate
security features which are unacceptable to the customer. Although we have been
granted all currently required U.S. export licenses, we may not be able to
continue to secure any required licenses in a timely manner in the future. In
certain foreign countries, our distributors are required to secure licenses or
formal permission before products that incorporate encryption features can be
imported. Our distributors may not make the effort, or be successful in the
effort, to obtain the necessary licenses or permission to import our products
into certain countries. The uncertainty involved in the interpretation and
application of import and export regulations may unduly delay or prevent the
export of our products, which may lead to a loss of revenues and market
position.

Recent legislative proposals have indicated the possibility that our
products sold for use within the U.S. may be required to incorporate certain
features to assist law enforcement agencies in recovering suspect
communications. If these proposals are enacted into law, we may be obligated to
incur significant expense in complying with these regulations. In addition, the
market opportunities and customer acceptance of our products could be materially
adversely affected by our compliance with these laws, leading to a loss of
revenues and market share.

OUR FAILURE AND THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT WOULD NEGATIVELY IMPACT OUR BUSINESS.

The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have this date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.

We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. This includes, but is not limited to, our systems in
information, business, finance, operations, manufacturing and service. Any
failure or malfunctioning on the part of these or other systems could adversely
affect our business in ways that are not currently known, quantifiable or
otherwise anticipated by us.

We currently have only limited information on the Year 2000 compliance of
key suppliers and customers. The operations of our key suppliers and customers
could be adversely affected in the event

13
<PAGE> 15

they do not successfully and timely achieve
Year 2000 compliance. Our business and results of operations could experience
material adverse effects if our key suppliers were to experience Year 2000
issues that caused them to delay manufacturing or shipment of key components to
us. In addition, our results of operations could be materially adversely
affected if any of our key customers encounter Year 2000 issues that cause them
to delay or cancel substantial purchase orders or delivery of our products.

While we have developed a plan to address Year 2000 issues, we may be
unable to complete all phases of the plan in a timely manner or to upgrade any
or all of our major systems in accordance with our plan. Even if we make
upgrades, they may not effectively address the Year 2000 issue. If required
upgrades are not completed in a timely manner or are not successful, we may be
unable to conduct our business or manufacture our products. The systems of other
companies on which our systems rely may not be converted in a timely manner. The
failure to convert by another company, or the occurrence of a conversion that is
incompatible with our systems would have a material adverse effect on our
business. We intend to establish, but have not yet established a contingency
plan detailing actions that will be taken in the event that the assessment of
the Year 2000 issue is not successfully completed on a timely basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness."

WE MAY BE SUBJECT TO PRODUCT RETURNS AND PRODUCT LIABILITY CLAIMS DUE TO DEFECTS
IN OUR PRODUCTS.

Our products are complex and may contain undetected defects, errors or
failures. These errors have occurred in our products in the past and additional
errors may be expected to occur in our products in the future. The occurrence of
any defects, errors, or failures could result in delays in installation, product
returns and other losses to us or to our cable operators or end-users. Any of
these occurrences could also result in the loss of or delay in market acceptance
of our products, which could have a material adverse effect on our business,
operating results and financial condition. We would have limited experience with
the problems that could arise with any new products that we introduce.

Although we have not experienced any product liability claims to date, the
sale and support of our products entail the risk of these claims. A successful
product liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition.

OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATIONS, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS THAT NEGATIVELY IMPACT OUR PRODUCTS AND TECHNOLOGIES,
IN THE U.S. OR ELSEWHERE, COULD ADVERSELY AFFECT OUR BUSINESS.

Our products are subject to the regulations of the Federal Communications
Commission and other federal and state communications regulatory agencies.
Changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes that, directly or indirectly, affect
telecommunications costs, limit usage of subscriber-related information or
increase the likelihood or scope of competition from telecommunications
companies, could affect the prices at which cable operators sell their services
and thus indirectly impact our business. In addition, we cannot predict the
impact, if any, that future regulation or regulatory changes might have on our
business. Regulation of cable television rates may affect the speed at which the
cable operators upgrade their cable infrastructures to two-way HFC. Changes in
current or future laws or regulations that negatively impact our products and
technologies, in the U.S. or elsewhere, could adversely affect our business.

OUR SUCCESS IS DEPENDENT ON THE SUCCESSFUL DEPLOYMENT OF IP-BASED NETWORKS.

Our products will depend in part upon the increased use of the Internet and
other networks based on the Internet protocol by corporate telecommuters, small
offices/home offices and residential consumer users. Businesses are increasingly
using the Internet, intranets and extranets, not only for communication within
and outside the firm, but also to create cost-effective, secure data connections
known as virtual private networks, commonly referred to as VPNs, between
corporate sites or remote locations. Critical issues concerning the commercial
use of the Internet, such as ease of access, security, reliability, and cost and
quality of service, remain unresolved and may affect the growth of Internet use,
especially in the business and consumer markets that we target.
14
<PAGE> 16

Despite growing interest in commercial applications for the Internet and
other IP-based networks, many businesses have been deterred from adopting
IP-based data communications systems for a number of reasons, including:

- inconsistent quality of service;

- lack of availability of cost-effective, high-speed service;

- a limited number of local access points for corporate users;

- inability to integrate business applications on the Internet;

- the need to deal with multiple and frequently incompatible vendors;

- inadequate security; and

- lack of tools to simplify Internet access and use.

These issues and concerns may not be resolved or alleviated. Failure of the
Internet community to address and resolve these issues, to develop or to develop
as rapidly as expected could materially adversely affect our business, operating
results and financial condition.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO SECURE
ADEQUATE FUNDS IN TERMS ACCEPTABLE TO US.

We currently anticipate that the proceeds of this offering, together with
our existing cash balances and available line of credit and cash flow expected
to be generated from future operations, will be sufficient to meet our liquidity
needs for at least the next twelve months. However, we may need to raise
additional funds if our estimates of revenues, working capital and/or capital
expenditure requirements change or prove inaccurate or in order for us to
respond to unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities.

In addition, we expect to review potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities.
While we have no current agreements or negotiations underway with respect to any
potential acquisition, any future transaction of this nature could require
potentially significant amounts of capital. Funds may not be available at the
time or times needed, or available on terms acceptable to us. If adequate funds
are not available, or are not available on acceptable terms, we may not be able
to take advantage of market opportunities, to develop new products or to
otherwise respond to competitive pressures. This inability could materially
adversely affect our business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

THERE ARE SUBSTANTIAL SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE; SUCH A
SALE MAY DEPRESS OUR STOCK PRICE.

If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our common stock could fall. Any of
these sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
21,165,560 shares of common stock (based upon shares outstanding as of December
31, 1998), assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options after December 31, 1998. Of these shares, the
3,000,000 shares sold in this offering, together with the 5,750,000 shares sold
in our initial public offering in May 1998 are freely tradable. The remaining
12,415,560 are eligible for sale in the public market as follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE ELIGIBLE FOR SALE
- ---------- ----------------------
<C> <S>
5,288,264 Immediately, pursuant to
Rules 144, 144(k) or
701.
7,127,296 91 days from the date of
this prospectus. Subject
to Rule 144.
</TABLE>

The table above excludes options to purchase 2,369,341 shares of common
stock that were outstanding at December 31, 1998.

NEW INVESTORS WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION.

Stock purchased in this offering will incur substantial and immediate
dilution in net tangible book value of $16.12 per share. To the extent that
currently outstanding options and warrants are

15
<PAGE> 17

exercised or converted, there will be further dilution in your shares.

OUR STOCK PRICE IS HIGHLY VOLATILE AND BROAD MARKET FLUCTUATIONS MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

The trading price of our common stock has fluctuated significantly since
our initial public offering in May 1998. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, changes in financial estimates by securities analysts and
other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of our common stock.

THE ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR OUR COMPANY.

In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). During 2002, all
EMU countries are expected to be operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally and, additionally, all of the rules and
regulations have not yet been defined and finalized by the European Commission
with regard to the Euro currency. We are currently assessing the effect the
introduction of the Euro will have on our internal accounting systems and the
sales of our products. We are not aware of any material operational issues or
costs associated with preparing our internal systems for the Euro. However, we
do utilize third party vendor equipment and software products that may or may
not be EMU-compliant. Although we are currently taking steps to address the
impact, if any, of EMU compliance for these third party products, the failure of
any critical components to operate properly post-Euro may have an adverse effect
on our business or results of operations or may require us to incur expenses to
remedy these problems.

THIS PROSPECTUS CONTAINS 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, ARE DIFFICULT TO
PREDICT AND COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED
OR FORECASTED IN THE FORWARD-LOOKING STATEMENTS.

This prospectus contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and assumptions. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of these words and
similar expressions are intended to identify 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,
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 include those described in "Risk Factors" and elsewhere
in this prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this prospectus. We undertake no obligation to update these statements
or publicly release the result of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date of
this prospectus or to reflect the occurrence of unanticipated events.

16
<PAGE> 18

USE OF PROCEEDS

The net proceeds to Com21 from the sale and issuance of 2,480,000 shares of
common stock are estimated to be approximately $51.1 million (approximately
$60.5 million if the underwriters' over-allotment option is exercised in full),
at an assumed offering price of $22.00 per share and after deducting the
estimated underwriting discounts and commissions and the estimated offering
expenses payable by Com21.

We intend to use the net proceeds for general corporate purposes including
working capital, sales and marketing, product development and capital
expenditures. We may use a portion, or all, of the net proceeds to acquire
complementary businesses, products or technologies. From time to time, we
evaluate potential acquisitions and anticipate continuing to make these
evaluations. In this regard, we are currently evaluating certain acquisition
opportunities; however, we cannot assure you that we will identify suitable
acquisition candidates or that we will, in fact, complete any acquisition.
Pending these uses, the net proceeds of this offering will be invested in
short-term, interest-bearing, investment grade securities. Com21 will not
receive any proceeds from the sale of the common stock sold by selling
stockholders. See "Principal and Selling Stockholders."

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, for
use in our business. Our line of credit arrangement prohibits the payment of
dividends by us without the lender's prior consent.

PRICE RANGE OF COMMON STOCK

Com21's common stock is traded on The Nasdaq National Market under the
symbol "CMTO." Public trading of the common stock commenced on May 22, 1998. The
following table shows, for the periods indicated, the high and low per share
sales prices of the common stock, as reported by The Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
Second Quarter (Beginning May 22, 1998).................. $23.75 $12.87
Third Quarter............................................ 24.87 8.37
Fourth Quarter........................................... 22.75 11.50
1999
First Quarter (Through February 18, 1999)................ 30.00 20.31
</TABLE>

On February 18, 1999, the last reported sale price of the common stock on
The Nasdaq National Market was $22.00 per share, and there were approximately
224 holders of record of the common stock.

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<PAGE> 19

CAPITALIZATION

The following table sets forth the capitalization of Com21 as of December
31, 1998 (i) on an actual basis, and (ii) as adjusted to reflect the receipt of
the estimated net proceeds from the sale of the 2,480,000 shares of common stock
offered at an assumed offering price of $22.00 per share and after deducting the
estimated underwriting discounts and commissions and the estimated offering
expenses:

<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Current portion of long-term obligations.................... $ 1,120 $ 1,120
-------- ----------
Long-term obligations....................................... $ 936 $ 936
-------- ----------
Stockholders' equity:
Preferred Stock, $0.001 par value per share; 5,000,000
shares authorized, actual and as adjusted; no shares
issued and outstanding, actual and as adjusted......... -- --
Common Stock, $0.001 par value per share; 40,000,000
shares authorized, actual and as adjusted; 18,685,560
shares issued and outstanding, actual; and 21,165,560
shares issued and outstanding, as adjusted(1).......... 19 21
Additional paid-in capital................................ 122,131 173,225
Deferred stock compensation............................... (82) (82)
Accumulated deficit....................................... (48,699) (48,699)
Accumulated other comprehensive loss...................... (3) (3)
-------- ----------
Total stockholders' equity............................. 73,366 124,462
-------- ----------
Total capitalization.............................. $ 75,422 $ 126,518
======== ==========
</TABLE>

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

(1) Based on the number of shares outstanding as of December 31, 1998 and
excludes:

- 2,369,341 shares of common stock issuable upon exercise of stock options
outstanding under our 1998 Stock Incentive Plan at a weighted average
exercise price of $7.42 per share;

- 209,597 shares of common stock reserved for future issuance under our
1998 Employee Stock Purchase Plan; and

- 46,286 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $7.76 per share. See
"Management -- Benefit Plans" and Notes 1 and 7 of Notes to Financial
Statements.

18
<PAGE> 20

DILUTION

Com21's net tangible book value as of December 31, 1998 was approximately
$73,366,000, or $3.93 per share of common stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock then outstanding.

After giving effect to the sale of 2,480,000 shares of common stock
offered, at an assumed offering price of $22.00 per share and after deducting
the estimated underwriting discounts and commissions and the estimated expenses
related to this offering, our net tangible book value on December 31, 1998 would
have been $124,462,000 or approximately $5.88 per share. This represents an
immediate increase in net tangible book value of $1.95 per share to existing
stockholders and an immediate dilution of $16.12 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $22.00
Net tangible book value per share as of December 31,
1998................................................... $3.93
Increase per share attributable to the offering........... 1.95
-----
Net tangible book value per share after the offering........ 5.88
------
Dilution per share to new investors......................... $16.12
======
</TABLE>

The foregoing computations are based on the number of shares of common
stock outstanding as of December 31, 1998, and exclude:

- 2,369,341 shares of common stock issuable upon exercise of stock options
outstanding under our 1998 Stock Incentive Plan at a weighted average
exercise price of $7.42 per share;

- 209,597 shares of common stock reserved for future issuance under our
1998 Employee Stock Purchase Plan; and

- 46,286 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $7.76 per share.

To the extent that any of these options or warrants are exercised, there could
be further dilution to new investors. See "Capitalization,"
"Management -- Benefit Plans," "Description of Capital Stock" and Note 7 of
Notes to Financial Statements.

19
<PAGE> 21

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and related notes to financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The statements of operations data for
each of the years in the three-year period ended December 31, 1998, and the
balance sheets data at December 31, 1997 and 1998, are derived from financial
statements which have been audited by Deloitte & Touche LLP, independent
auditors, and are included in this prospectus. The statements of operations data
for the years ended December 31, 1994 and 1995 and the balance sheets data at
December 31, 1994, 1995 and 1996 are derived from audited financial statements
not included in this prospectus. The historical results are not necessarily
indicative of the operating results to be expected in the future.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997 1998
------ ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues.............................................. $ -- $ -- $ 1,000 $ 15,649 $ 48,114
Cost of total revenues...................................... -- -- -- 8,372 29,573
------ ------- -------- -------- --------
Gross profit............................................ -- -- 1,000 7,277 18,541
------ ------- -------- -------- --------
Operating expenses:
Research and development.................................. 545 5,233 12,395 13,481 19,936
Sales and marketing....................................... -- 770 1,970 5,277 10,273
General and administrative................................ 349 919 1,548 1,782 3,871
------ ------- -------- -------- --------
Total operating expenses.................................... 894 6,922 15,913 20,540 34,080
Loss from operations........................................ (894) (6,922) (14,913) (13,263) (15,539)
Total other income, net..................................... 58 257 447 229 2,190
------ ------- -------- -------- --------
Loss before income taxes.................................... (836) (6,665) (14,466) (13,034) (13,349)
Income taxes................................................ 1 1 5 21 14
------ ------- -------- -------- --------
Net loss........................................... $ (837) $(6,666) $(14,471) $(13,055) $(13,363)
====== ======= ======== ======== ========
Net loss per share, basic and diluted(1).................... $(0.54) $ (3.53) $ (7.64) $ (6.15) $ (1.10)
====== ======= ======== ======== ========
Shares used in computation, basic and diluted(1)............ 1,562 1,887 1,894 2,124 12,150
====== ======= ======== ======== ========
Pro forma net loss per share, basic and diluted(2).......... $(0.31) $ (1.27) $ (1.84) $ (1.27) $ (.83)
====== ======= ======== ======== ========
Shares used in pro forma computation,
basic and diluted(2)...................................... 2,685 5,265 7,851 10,279 16,062
====== ======= ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997 1998
------ ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term investments........... $2,082 $ 3,273 $ 12,427 $ 17,950 $ 65,744
Working capital............................................. 2,023 2,328 9,097 19,523 68,084
Total assets................................................ 2,308 4,606 17,036 31,573 82,948
Long-term obligations....................................... -- 275 1,292 1,508 936
Total stockholders' equity.................................. 2,222 3,288 12,056 23,283 73,366
</TABLE>

- ---------------
(1) The diluted net loss per share computation excludes potential shares of
common stock (convertible preferred stock, warrants to purchase convertible
preferred stock, options and warrants to purchase common stock and common
stock subject to our repurchase rights), as their effect would be
antidilutive. See Notes 1 and 7 of Notes to Financial Statements for a
detailed explanation of the determination of the shares used in computing
basic and diluted net loss per share.

(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of convertible preferred stock upon the
effectiveness of the registration statement related to the initial public
offering in May 1998. See Note 1 of Notes to Financial Statements for a
detailed explanation of the determination of the shares used in computing
pro forma net loss per share. The diluted pro forma net loss per share
computation excludes potential shares of common stock (warrants to purchase
convertible preferred stock, options and warrants to purchase common stock
and common stock subject to our repurchase rights).

20
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Com21's
financial statements and notes to financial statements. The results described
below are not necessarily indicative of the results to be expected in any future
period. Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements, including those
described in "Risk Factors" and elsewhere in this prospectus.

OVERVIEW

Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. Com21's system enables
cable operators to provide high-speed, cost-effective Internet access to
corporate telecommuter, small office/home office and residential end-users in
the U.S. and internationally. Com21's system also enables cable operators to
address the distinct price, performance, security and other needs of these
different end-users. Our product family includes cable modems, headend
equipment, network management software and noise containment technologies.

Com21 was incorporated in June 1992. From inception through April 1997, our
operating activities related primarily to establishing a research and
development organization, testing prototype designs, building
application-specific integrated circuit design infrastructure, commonly known as
an ASIC, commencing the staffing of marketing, sales and field service and
technical support organizations and establishing manufacturing relationships. We
shipped our first product in April 1997. Since then, Com21 has expanded its
sales and marketing and customer support activities. These activities include
commencing trials with our cable operator customers, expanding our customer
base, developing customer relationships, marketing the Com21 brand, hiring field
service and customer support personnel, building distribution channels,
developing new products and technologies and enhancing existing products.

Com21's revenues consist primarily of sales of cable modems, headend
equipment and, to a lesser extent, the licensing of network management software.
We recognize revenue upon commercial shipment of our products. As the cable
operators that purchase our products make data-over-cable services broadly
available to their customers, we expect our product mix to continue to shift
more heavily toward sales of cable modems. Pursuant to a Technology License and
Reseller Agreement with 3Com (the "3Com Agreement"), 3Com agreed to pay
royalties as 3Com shipped products that incorporated our licensed technology and
agreed to prepay royalties of $1,000,000 in 1997. 3Com provided us with royalty
reports in 1997 showing the shipment of royalty-bearing products and,
accordingly, $7,000 was recognized as license fee revenue in 1997. In addition,
we received an additional $500,000 in license fee revenue in 1997 from 3Com by
meeting certain conditions in the 3Com Agreement. Because the 3Com Agreement
expired as of December 31, 1998, the remaining $993,000 was recognized in 1998
as royalty revenue. Through December 31, 1998, a total of approximately $2.5
million of technology licensing fees and royalties was included in our revenues.

To date, gross margin on sales of headend and related equipment and
software licenses has been higher than gross margin on sales of cable modems. In
1999, we expect the average selling prices of our cable modems to decrease due
to greater competition, particularly as cable modems which meet the DOCSIS
standard become widely available from multiple vendors. The DOCSIS standard
should enable interoperability between different manufacturers' cable modems and
headend equipment. Interoperability of cable networking equipment will lead to
greater competition as the market for interoperable cable modems is opened to
multiple vendors and greater price competition.

Com21 tests and assembles headend equipment in our facility in Milpitas,
California. We outsource turnkey manufacturing of our cable modems to Celestica,
a contract manufacturer located in Toronto, Canada. We have taken, and continue
to take, steps to reduce the manufacturing costs of our cable modem products by
consolidating functionality and component parts into ASICs, making them easier
to manufacture, using
21
<PAGE> 23

parts we believe will be sold in high volume by a number of vendors. We are also
working with Celestica to facilitate more efficient manufacturing of cable
modems and to move certain of our manufacturing operations to a lower cost
Celestica facility, which will enable us to benefit from Celestica's volume
purchasing capability. We cannot assure you that such cost-reduction efforts
will be successful.

Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees, prototype expenses and development
contracts related to the design, development, testing and enhancement of headend
equipment, cable modems and network management software. As of December 31,
1998, Com21 expensed all research and development costs as incurred. We believe
that continued investment in research and development is critical to attaining
our strategic product and cost reduction objectives and, as a result, expect
these expenses to increase in absolute dollars.

Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct and indirect selling, marketing and field service
support functions. These expenses also include trade show and promotional
expenditures. We intend to pursue sales and marketing campaigns aggressively,
and therefore expect these expenses to increase in absolute dollars. In
addition, we intend to develop an electronic commerce web site and retail sales
channels, which is expected to increase sales and marketing expenses.

General and administrative expenses consist primarily of salaries and
related expenses for executive, accounting and administrative personnel,
recruiting expenses, professional fees 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 operation as a public company. In addition, we compete in a very competitive
labor market. Therefore, it is necessary for us to periodically make salary and
other compensation adjustments to hire and retain employees.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Total Revenues. Total revenues increased from $1.0 million in 1996 to $15.6
million in 1997 and to $48.1 million in 1998. Total revenues in 1996 consisted
entirely of technology licensing fees from the 3Com Agreement. Total revenues in
1997 consisted of a technology licensing fee and a royalty fee, totalling
$507,000 pursuant to the 3Com Agreement and $15.1 million from the sale of
products that commenced in April 1997. A majority of revenues attributable to
product sales during 1997 resulted from sales of headend and related equipment,
cable modems and network management software fees. Revenues attributable to
international customers were 64% of total revenues in 1997. Total revenues in
1998 consisted of $47.1 million from product sales and $1.0 million from the
one-time recognition of deferred revenue resulting from the expiration of the
3Com Agreement on December 31, 1998. Revenues attributable to product sales
during 1998 consisted of sales of cable modems, headend and related equipment
and network management software fees. Revenues attributable to international
customers were 52% of total revenues in 1998. We expect to continue to derive a
significant portion of our revenues from international markets for the
foreseeable future. We intend to expand operations in the international markets
that we currently serve and to enter new international markets, which will
demand significant management attention and financial commitment. To date,
revenues attributable to international customers have been denominated in U.S.
dollars. We do not currently engage in any foreign currency hedging
transactions. A decrease in the value of foreign currencies relative to the U.S.
dollar could make our products more expensive in international markets. See
"Risk Factors -- We are subject to risks associated with operating in
international markets."

Cost of Product Revenues. Cost of product revenues was $8.4 million in
1997. Cost of product revenues was $29.6 million in 1998. Com21 commenced
product shipments in April 1997 and therefore did not incur any costs associated
with the sale of products in 1996. Cost of product revenues in 1997 consisted
primarily of materials cost and software technology license fees paid to third
parties. In 1997, our gross margin was 46.5%, and in 1998, our gross margin was
38.5%. The decrease in gross margin in 1998 was primarily attributable to an
increase in sales of cable modems as a percentage of total product sales, offset
in part by the one-time recognition of $1.0 million of deferred revenue
resulting from the expiration of the 3Com Agreement on December 31, 1998. We
expect that our gross margin will continue to decline through at least the first
half of 1999 primarily as a result of decreasing average selling prices of cable
modems due to

22
<PAGE> 24

competitive market factors and, to a lesser extent, product mix because we
expect revenues from cable modem sales to continue to increase as a percentage
of total product revenues.

Research and Development. Research and development expenses increased from
$12.4 million in 1996 to $13.5 million in 1997 and to $19.9 million in 1998. The
increases in 1997 and 1998 were primarily the result of increased personnel in
our research and development organization associated with product development.

Sales and Marketing. Sales and marketing expenses increased from $2.0
million in 1996 to $5.3 million in 1997 and to $10.3 million in 1998. The
increases in 1997 and 1998 were primarily due to higher costs associated with
increased personnel in sales and marketing organizations. The increases in 1997
and 1998 also reflected the significant costs associated with the increased
selling efforts resulting from the commencement of the commercial shipment of
our products in April 1997. These costs include travel expenses, trade shows,
print advertising, public relations and other promotional costs. We expect sales
and marketing expenses to increase in both absolute dollars and as a percentage
of sales in 1999 as we develop more consumer-oriented channels for our future
DOCSIS-compliant cable modems. In addition, we also compete in a very
competitive labor market and accordingly periodically make salary and other
compensation adjustments to hire and retain employees.

General and Administrative. General and administrative expenses increased
from $1.5 million in 1996 to $1.8 million in 1997 and to $3.9 million in 1998.
The increases in 1997 and 1998 were primarily attributable to increased
personnel in Com21's finance and administrative organization, as well as, in
1998, increased legal fees associated with our patent litigation, which was
settled in January 1999, and increased professional fees associated with
operation as a public company.

Total Other Income. Total other income decreased from $447,000 in 1996 to
$229,000 in 1997 and increased to $2.2 million in 1998. The decrease in 1997 was
primarily attributable to interest expense associated with capital leases as
well as a charge for the issuance of warrants in connection with establishing a
line of credit, offset in part by higher earnings on increased average cash
balances. The increase in 1998 was primarily attributable to interest earned on
higher average balances of cash, cash equivalents and short-term investments.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited statements of operations
data in dollars and as a percentage of total revenues for our five most recent
quarters. In management's opinion, this unaudited information has been prepared
on the same basis as the annual financial statements and includes all
adjustments necessary (consisting only of normal recurring adjustments) to
present fairly the unaudited quarterly results. This information should be read
in conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.

23
<PAGE> 25

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1998 1998 1998 1998
------------ --------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues......................... $ 6,694 $ 7,020 $ 8,711 $13,686 $18,697
Cost of total revenues................. 3,866 4,676 5,778 8,486 10,633
------- ------- ------- ------- -------
Gross profit........................... 2,828 2,344 2,933 5,200 8,064
------- ------- ------- ------- -------
Operating expenses:
Research and development............. 4,003 4,278 4,392 4,692 6,574
Sales and marketing.................. 1,899 1,803 2,304 2,615 3,551
General and administrative........... 578 580 815 1,286 1,190
------- ------- ------- ------- -------
Total operating expenses..... 6,480 6,661 7,511 8,593 11,315
------- ------- ------- ------- -------
Loss from operations................... (3,652) (4,317) (4,578) (3,393) (3,251)
Total other income, net................ 176 94 379 915 802
------- ------- ------- ------- -------
Loss before income taxes............... (3,476) (4,223) (4,199) (2,478) (2,449)
Income taxes........................... 7 9 -- 5 --
------- ------- ------- ------- -------
Net loss............................... $(3,483) $(4,232) $(4,199) $(2,483) $(2,449)
======= ======= ======= ======= =======
Net loss per share, basic and
diluted(1)........................... $ (1.44) $ (1.69) $ (0.45) $ (0.14) $ (0.13)
======= ======= ======= ======= =======
Shares used in computation, basic and
diluted(1)........................... 2,413 2,497 9,299 18,338 18,467
======= ======= ======= ======= =======
Pro forma net loss per share, basic and
diluted(2)........................... $ (0.28) $ (0.34) $ (0.28) $ (0.14) $ (0.13)
======= ======= ======= ======= =======
Shares used in pro forma computation,
basic and diluted(2)................. 12,317 12,455 14,989 18,338 18,467
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of total revenues................. 57.8 66.6 66.3 62.0 56.9
------- ------- ------- ------- -------
Gross margin........................... 42.2 33.4 33.7 38.0 43.1
------- ------- ------- ------- -------
Operating expenses:
Research and development............. 59.8 60.9 50.4 34.3 35.2
Sales and marketing.................. 28.4 25.7 26.5 19.1 19.0
General and administrative........... 8.6 8.3 9.4 9.4 6.3
------- ------- ------- ------- -------
Total operating expenses..... 96.8 94.9 86.3 62.8 60.5
------- ------- ------- ------- -------
Loss from operations................... (54.6) (61.5) (52.6) (24.8) (17.4)
Total other income, net................ 2.7 1.3 4.4 6.7 4.3
------- ------- ------- ------- -------
Loss before income taxes............... (51.9) (60.2) (48.2) (18.1) (13.1)
Income taxes........................... 0.1 0.1 -- -- --
------- ------- ------- ------- -------
Net loss............................... (52.0)% (60.3)% (48.2)% (18.1)% (13.1)%
======= ======= ======= ======= =======
</TABLE>

- ---------------
(1) The diluted net loss per share computation excludes potential shares of
common stock (convertible preferred stock, warrants to purchase convertible
preferred stock, options and warrants to purchase common stock and common
stock subject to repurchase rights held by Com21), as their effect would be
antidilutive. See Notes 1 and 7 of Notes to Financial Statements for a
detailed explanation of the determination of the shares used in computing
basic and diluted net loss per share.

Recorded total revenues for the quarters ended December 31, 1997, March 31,
1998, June 30, 1998, September 30, 1998, and December 31, 1998 were $6.7
million, $7.0 million, $8.7 million, $13.7 million and $18.7 million,
respectively. Cost of total revenues increased sequentially for each quarter
presented on an absolute dollar basis as a result of increased revenues in each
period. Cost of total revenues has decreased sequentially as a percentage of
total revenues over the last four quarters due to Com21's realizing economies of
scale in the increasing number of total products sold.

Over the past five quarters, total operating expenses increased in dollar
amount. Research and development expenses increased in dollar amount over the
past five quarters due to the development efforts related to new products and
the enhancement of existing products. Sales and marketing expenses decreased in
dollar amount during the first quarter of 1998 as a result of higher trade show
expenses incurred in the fourth quarter of 1997 and increased in dollar amount
in the subsequent three quarters as a result of increased personnel spending,
trade show expenses, print advertising, public relations and other promotional
expenditures used to build brand awareness. General and administrative expenses
increased in dollar amount in the first four quarters presented as a result of
increased salaries, recruiting costs associated with the hiring of additional
personnel and increased professional fees. The reduction in general and
administrative expenses in the fourth quarter of 1998 was primarily due to
reduced legal expenses as settlement negotiations were initiated between Com21
and Hybrid Networks.

Com21's operating results are likely to fluctuate significantly in the
future on a quarterly and annual basis due to a number of factors, many of which
are beyond our control. See "Risk Factors -- Our operating results in one or
more future periods are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors.

Com21 has a limited backlog of orders, and total revenues for any future
quarter are difficult to predict. Supply, manufacturing or testing constraints
could result in delays in the delivery of our products. Any delay in the product
deployment schedule of one or more of our cable operator customers would likely
materially adversely affect our operating results for a particular period.

Because of these and other factors, our operating results in one or more
future periods are likely to fail to meet or exceed the expectations of
securities analysts or investors. In that event, the trading price of our common
stock would likely decline. See "Risk Factors -- Our operating results in one or
more future periods are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through private
sales of preferred stock and common stock and an initial public offering of
common stock in May 1998 which, through December 31, 1998, provided net cash
proceeds to us of approximately $121.9 million. Net cash used in operating
activities in 1996 was $11.6 million and was primarily attributable to a net
loss of $14.5 million, partially offset by $1.0 million in deferred revenue from
the 3Com Agreement, an increase in accounts payable, accrued expenses, and
depreciation and amortization expenses. Cash used in investing activities in
1996 consisted of $2.3 million in capital expenditures related primarily to the
support of Com21's engineering activities. Cash flows from financing activities
were $23.1 million in 1996 and consisted primarily of $23.2 million of net
proceeds from the issuance of Series F Preferred Stock partially offset by the
net repayment on borrowing arrangements.

Net cash used in operating activities in 1997 was $16.1 million and
resulted primarily from a net loss of $13.1 million and the increase of $5.0
million and $2.6 million in total accounts receivable and inventories,
respectively, offset in part by a total increase of $2.4 million in accounts
payable, accrued expenses and other current liabilities and $2.2 million in
depreciation and amortization expenses. Cash used in investing activities

25
<PAGE> 27

in 1997 consisted of $2.1 million in capital expenditures primarily to support
product development and manufacturing activities. Cash flows from financing
activities in 1997 consisted primarily of net proceeds of $23.7 million from the
issuance of Series E Preferred Stock and Series G Preferred Stock and $530,000
from the sale of common stock upon exercise of stock options.

Net cash used in operating activities in 1998 was $11.1 million and
resulted primarily from a net loss of $13.4 million and the increase of $2.6
million in inventories, offset in part by a total increase of $2.7 million in
accounts payable, accrued expenses and other current liabilities and $3.5
million in depreciation and amortization expenses. Cash used in investing
activities in 1998 of $61.6 million consisted of $3.7 million in capital
expenditures primarily to support product development and manufacturing
activities and net purchases of investments of $57.9 million. Cash flows from
financing activities in 1998 consisted primarily of net proceeds of $62.8
million from the issuance of common stock in our initial public offering and
$624,000 from the sale of common stock under our 1998 Employee Stock Purchase
Plan and upon exercise of stock options.

In future periods, Com21 anticipates significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product sales resulting in higher levels of inventory. We contract for the
manufacture of cable modems and integrated circuit boards on a turnkey basis. We
have a manufacturing agreement with Celestica for the manufacture of certain of
our products. Unless terminated by the parties, the agreement will extend for
one year periods on December 31 of each year. We have no long-term contracts or
arrangements with any of our manufacturers that guarantee the availability of
product, the continuation of particular payment terms or the extension of credit
limits. Our future success will depend, in significant part, on our ability to
manufacture, or have others manufacture, our products successfully, cost-
effectively and in volumes sufficient to meet customer demand. Our dependence
upon third party manufacturers involves a number of risks. See "Risk
Factors -- We may not be able to produce sufficient quantities of our products
because we depend on third-party manufacturers and have limited manufacturing
experience" and Note 6 of Notes to Financial Statements.

At December 31, 1998, we had $65.7 million of cash, cash equivalents and
short-term investments. In addition, we had $5.0 million line of credit subject
to borrowing base requirements. To date, we have not drawn upon our line of
credit. Other than capital lease commitments, we have no material commitments
for capital expenditures. However, we anticipate that we will increase our
capital expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel. We may establish sales offices and
lease additional space, which will require us to commit to additional lease
obligations, purchase equipment and install leasehold improvements.

Com21 believes that the net proceeds from this offering, together with our
current cash, cash equivalents and short-term investments, will be sufficient to
meet its anticipated cash requirements for at least twelve months, although we
may seek to raise additional capital during that time period. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. See "Risk
Factors -- We may need additional capital in the future and may not be able to
secure adequate funds on terms acceptable to us."

YEAR 2000 READINESS

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates to avoid system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements.

26
<PAGE> 28

Our Year 2000 plan which is currently in progress will determine whether
our products, internal systems, computers and software, and the products and
systems of our critical vendors and suppliers are Year 2000 compliant. This plan
is being implemented in the following four consecutive phases:

I. Inventory and Data Gathering Phase: cataloguing of products and systems
and the products and systems of our critical vendors and suppliers;

II. Testing Phase: determining whether cataloged products and systems are
Year 2000 compliant;

III. Replacement Phase: upgrading and replacement of non-compliant products
and systems; and

IV. Monitoring Phase: ongoing testing of our products and systems for Year
2000 compliance.

Our Year 2000 plan has been implemented but not completed. To date, results
of our Year 2000 plan are the following:

- Products. We have developed internal tests to ascertain whether our
products are Year 2000 compliant. Based on these tests, we believe our
current products are Year 2000 compliant and, to the extent necessary,
all previously shipped products can be upgraded to become Year 2000
compliant with currently available software upgrades.

- Vendors. We are currently in the process of ascertaining whether or not
our vendors and suppliers are Year 2000 compliant.

- Manufacturing. Completion of our review of our assembly and test
equipment for Year 2000 compliance is expected to occur by mid-1999.

- IT Systems. We conducted a preliminary survey of our information
technology hardware and software and anticipate that any Year 2000
non-compliant hardware and software will be upgraded or replaced prior to
2000.

- Non-IT Systems and Infrastructure. Machinery and equipment used in our
operations have been inventoried and are currently being assessed for
Year 2000 compliance.

Although we believe that our Year 2000 plan will identify all of our
material Year 2000 issues, we cannot assure you that we will be able to
identify, evaluate and resolve all these issues.

Costs. We do not currently expect that costs associated with Year 2000
compliance will materially affect our operations or financial position. However,
if we discover Year 2000 problems in the future, we may not be able to develop,
implement, or test remediation or contingency plans in a timely or
cost-effective manner.

Risks. We believe that the risks of noncompliance could accelerate or delay
purchases or replacement of our products and services. Failure of third party
products, such as a breakdown in telephone, electric service or other utilities,
e-mail, voicemail or the World Wide Web could cause a disruption in cable
operators' service to customers. Disruptions in the services provided by banks,
telephone companies and the U.S. Postal Service could a negatively impact our
business. Although our products are undergoing Year 2000 specific testing
procedures, they may not contain the date codes necessary to operate in the year
2000. Any failure of these products to perform could result in the delay or
cancellation of product orders and the diversion of managerial and technical
resources from product development and other business activities to attend to
Year 2000 issues. These events could have a material adverse effect on our
business, operating results and financial condition.

Contingency Plans. Until the completion of the Year 2000 compliance
evaluation of our suppliers, and the completion of internal IT and non-IT
systems reviews, we do not believe that it is practical to develop comprehensive
contingency plans. Even if these plans are completed and implemented in a timely
manner they may be insufficient to address any third party failures. We cannot
assure you that undetected internal and external Year 2000 issues will not
materially impact our business, financial condition, results of operations and
cash flows. See "Risk Factors -- Our failure and the failure of our key
suppliers and customers to be year 2000 compliant could negatively impact our
business."
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity. Com21 maintains a short-term investment
portfolio consisting mainly of government and corporate bonds purchased with an
average maturity of less than one year. These available-for-sale securities are
subject to interest rate risk and will fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 percent from levels at December 31, 1998, the fair value of the portfolio
would decline by an immaterial amount. We generally have the ability to hold our
fixed income investments until maturity and therefore we would not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on our securities portfolio.

Com21 has fixed rate long-term debt of approximately $1.0 million as of
December 31, 1998, and a hypothetical 10 percent decrease in interest rates
would not have a material impact on the fair market value of this debt. We do
not hedge any interest rate exposures.

RECENTLY ISSUED ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Statement of Financial Accounting Standards No. 133 will
be effective for Com21's fiscal year ending December 31, 2000. Management
believes that this statement will not have a significant impact on our financial
position, results of operations or cash flows.

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BUSINESS

Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. Com21's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office and
residential end-users in the U.S. and internationally. Com21's system also
enables cable operators to address the distinct price, performance, security and
other needs of these different end-user groups. Com21's products include headend
equipment, subscriber cable modems, network management software and noise
containment technologies. Cable operators can use Com21's ComUNITY Access system
to increase revenue opportunities by offering up to 16 different
operator-defined transmission rates at varying price points to address multiple
markets. Com21's system is designed to be deployed on a limited capital budget
and can be upgraded and scaled as subscriber penetration grows. Our system
enables cable operators to lower their ongoing cost of ownership through
cost-effective noise management and remote cable modem upgrades. The ComUNITY
Access system is also designed to support future applications, such as cable
telephony and virtual private networks, which are public data networks that
transport private data and are generally referred to as VPNs. Com21 is
developing a DOCSIS-compliant cable modem for the North American cable market,
which is intended primarily to address the basic requirements of the residential
end-users, who typically tolerate lower performance and security than business
users. Com21 is working with Cisco Systems, Inc. to enable interoperability of
its DOCSIS-compliant cable modems with Cisco's universal broadband router, which
is a high speed router intended to distribute different forms of data traffic
over different network architectures. Com21 expects its first DOCSIS-compliant
cable modem to be commercially available in the first half of 1999. In 1998, we
shipped approximately 320 ComCONTROLLER headends and more than 77,000 ComPORT
modems for use in 154 locations worldwide. In the North American market, we sell
directly to cable operators such as Charter Communications, Cox Communications,
Prime Cable and TCI, and to system integrators such as HSAnet. Internationally,
we sell to systems integrators, including Philips and Siemens, which in turn
sell to cable operators.

INDUSTRY BACKGROUND

The volume of data traffic across communications networks has increased
significantly over the last several years due to the proliferation of
network-based communications and electronic commerce. Businesses, ranging from
large corporate enterprises to small offices/home offices, are increasingly
using the Internet, intranets and extranets, not only for communication within
and outside the enterprise, but also to create cost-effective secure data
connections known as virtual private networks, between corporate sites or remote
locations. VPNs extend corporate network access to remote employees and external
organizations, including business partners, suppliers and customers. Consumers
are increasingly accessing data networks, primarily the Internet, to
communicate, collect and publish information and to purchase retail goods.
Because of its global reach, accessibility, use of open standards and ability to
enable real-time interaction, the Internet has become a valuable communications
medium for both businesses and consumers.

The Internet and the devices used to provide access to it are expected to
continue their rapid growth. International Data Corporation estimates that
between 1995 and 1998 the number of devices that had access to the Internet grew
from approximately 14 million to 120 million and anticipates that the number of
these devices will grow to more than 515 million by 2002. Similarly, the
available content and number of users on the Internet is rapidly increasing. IDC
estimates that the number of World Wide Web pages grew from approximately 18
million in 1995 to 829 million in 1998 and is expected to increase to 7.7
billion by 2002. The number of Web users in the U.S. is expected to increase
from approximately 39 million in 1997 to 136 million in 2002. A substantial
percentage of worldwide growth is expected to come from Western Europe and Asia,
which is projected to grow from approximately 21 million users in 1997 to 119
million users in 2002. In addition to the substantial increase in the number of
users in recent years, demand has increased among business and consumer users
for high-speed Internet access to multimedia and other bandwidth-intensive
information, consisting of data, voice and video in the form of value-added
services and applications. This has resulted in a growing need for improved
transmission performance throughout the Internet. With the increasing dependence
on communications networks and the growing demand for

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bandwidth-intensive information, existing transmission speeds have become less
tolerable and can negatively affect business productivity.

Typically, the limiting factor in overall data transmission performance is
the "last mile" of the communications infrastructure. This infrastructure
consists primarily of copper twisted-pair wire or coaxial cable and was
originally designed for analog transmission, such as analog voice or one-way
analog video signals, rather than high-speed two-way broadband digital
transmission. Today, there are multiple technologies that attempt to address the
need for high-speed last mile connections, including:

- wireline telephone infrastructure technologies, such as:

- 56 kilobits per second, dial-up modem technologies;

- integrated services digital network, commonly known as ISDN in the
telecommunications industry;

- asymmetric digital subscriber line, commonly known as ADSL in the
telecommunications industry; and

- other digital subscriber line, commonly known as XDSL in the
telecommunications industry technologies;

- wireless infrastructure technologies, such as:

- direct broadcast satellite, commonly known as DBS in the
telecommunications industry;

- multichannel multipoint distribution service, commonly known as MMDS
in the telecommunications industry; and

- local multipoint distribution service, commonly known as LMDS in the
telecommunications industry;

- hybrid fiber-coaxial, cable infrastructure technologies, commonly known
as HFC in the telecommunications industry such as:

- cable modems.

While each of these technologies has certain advantages, the cable
infrastructure currently provides the highest available transmission speed, with
peak data transmission speeds of 30 megabits per second and "always-on"
availability providing instant access. In addition, cable infrastructure is
widely deployed. Paul Kagan Associates, Inc. estimates that at the end of 1997,
cable infrastructure passed approximately 95 million U.S. homes and more than
185 million homes in Western Europe and Asia. Recognizing the opportunity to
capture additional revenues by offering data-over-cable services, cable
operators have begun to address the burgeoning market for cable modem Internet
access. Industry sources estimate that there are currently in excess of 450
commercial deployments of cable modem systems worldwide, including sites in the
U.S., Argentina, Australia, Brazil, Canada, France, Japan, The Netherlands and
Switzerland.

To fully realize the benefits of two-way data-over-cable communications,
cable operators must activate a data transmission return path that travels from
subscriber sites upstream to the cable operator through the cable plant.
Previously, cable operators had not been required to activate an upstream return
path because television broadcast only requires downstream transmission. A
critical factor related to two-way cable modem service involves the reduction,
containment and management of "noise" in the upstream return path. Noise
accumulates from subscriber sites on the upstream channel and interferes with
transmission throughout the entire cable plant. Excessive noise impairs the
quality of upstream transmissions and, in certain cases, results in significant
performance degradation. Cable plant noise consists of ambient background noise
in the cable plant itself and specific ingress noise introduced through
subscriber sites as a result of loose fittings and connectors, cracks in coaxial
cable shielding and other physical plant imperfections. Common sources of
ingress noise at subscriber sites include electronic motors in appliances,
consumer electronics devices and office equipment. One approach to dealing with
excessive noise involves signal encoding or modulation techniques that
compensate for higher noise levels. These techniques, however, typically result
in decreased data transmission rates. Other approaches for identifying and
containing ingress noise, such as the installation

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of high pass filters at subscriber sites, are expensive and inefficient because
they block upstream transmission entirely and must be physically removed prior
to enabling two-way cable modem service. Once the high pass filter is removed,
ingress noise can re-enter the system from that site. As a result, reducing
noise to the low tolerance level required by most two-way cable modem systems
involves significant cost and time for the cable operator, often delaying the
commencement of service and the consequent generation of revenue from
subscribers.

Cable operators have been upgrading their plants to an HFC cable
infrastructure that enables them to offer more channels, to add greater services
and consequently to compete better with DBS television providers' digital video
offerings. HFC cable infrastructure also facilitates reliable upstream data
transmission and contains noise by isolating portions of the network into
smaller distinct nodes. Each node typically serves 500 to 2,000 homes and has a
separate return path to the headend. In order to enable data service over HFC,
cable operators must install return path receivers at the headend based on the
number of nodes to be activated rather than on the number of potential cable
modem subscribers. To reduce the number of return path receivers that cable
operators would otherwise have to purchase, cable operators can recombine
separate return paths. However, the number of return paths that can be combined
is limited by the accumulated noise from each path. As a result, early
deployment costs can be significant compared to the revenues generated by
initial cable modem subscribers.

In order to accelerate time-to-market and revenue generation, and to reduce
initial deployment costs, some cable modem Internet access systems offer one-way
"telephone return" service, with cable transmission downstream and slower
dial-up modem transmission upstream. This approach enables earlier deployment of
cable modem systems by postponing the need to address upstream noise issues and
enables cost-effective determination of which markets are most likely to be
economically feasible for larger-scale, two-way installations. However, with
most currently available cable modems, the eventual upgrade from one-way to
two-way service requires the purchase of a new two-way modem and generally
requires a field service visit to replace and install the dedicated one-way
modem with a two-way modem.

Cable operators are seeking to accelerate the acceptance of cable modem
service by their subscribers. Many major domestic cable operators have
established or invested in value-added data-over-cable services such as @Home
Network and Time Warner Cable's and US West Media Group's joint Roadrunner
service. In addition, several domestic cable operators and other interested
parties have collaborated through the Multimedia Cable Network Systems, or MCNS,
industry group to develop the data-over-cable service interface specification,
DOCSIS, as a standard for multi-vendor interoperable cable modems. Compliance
with the DOCSIS standard should enable interoperability between different
manufacturers' cable modems and headend equipment. The DOCSIS standard is
expected to be widely adopted for the North American cable market. A number of
suppliers are developing DOCSIS-compliant two-way cable modems, and some have
recently become commercially available in select markets.

Beyond the challenges of deploying cable modem Internet services, most
cable modem systems enable operators to offer one level of service at a flat
monthly rate and do not enable customized features that meet the special
requirements of distinct market segments. Moreover, single service offerings
curtail the pricing flexibility of cable operators, thus preventing cable
operators from maximizing revenue opportunities. For example, a residential
subscriber with only limited access and speed requirements such as sending and
receiving e-mail, may elect not to subscribe to a 256 kilobits per second
service at $50 per month. In contrast, a business subscriber would pay
significantly more for enhanced service. The lost revenue opportunity is
particularly acute in business markets, where telecommuting and small
office/home office users are generally willing to pay more for the additional
speed, security and VPN features they require.

In addition to data-over-cable service, telephony-over-cable service has
recently been made possible for cable operators due to regulatory changes both
in the U.S. and internationally. Such deregulation has allowed cable operators
to compete in the local telephone market.

Com21 believes that there is a significant opportunity for a provider of a
cable modem system solution that would reduce the total cost of deployment and
ownership of a cable modem system and enable different tiers of data
transmission service and other value-added features for distinct market
segments. To reduce the
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total cost of deployment and ownership, there is a need for a cable modem system
that provides reliable two-way data service on noisy cable plants without
significantly reducing data transmission rates, and one that enables cable
operators to remotely identify sources of ingress noise and manages system noise
in a manner that permits equipment purchases to be more closely scaled with
subscriber penetration. In order to accelerate time-to-market, such a system
would also provide for cost-effective remote software-based migration of cable
modems from one-way to two-way service. By enabling higher noise tolerance with
a software-based migration path from one-way to two-way service, cable operators
could more rapidly deploy data service and observe penetration patterns in order
to identify prime markets for the service. In addition, the ability to offer
different tiers of service and value-added features such as VPNs and enhanced
security for distinct business and consumer market segments would enable cable
operators to more fully exploit the cable modem opportunity. Com21 believes that
such a system solution would be attractive to cable operators because it would
allow cable operators to increase revenues and profitability, while lowering
deployment cost and risk and accelerating time-to-market.

THE COM21 SOLUTION

Com21 designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. Com21's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office and
residential users in the U.S. and internationally. Com21's system also enables
cable operators to address the distinct price, performance, security and other
needs of these different end-user groups. Com21's products include headend
equipment, subscriber cable modems, network management software and noise
containment technologies. Com21's cable modem systems provide the following key
benefits:

Increased Service Revenues. Com21's ComUNITY Access system enables cable
operators to increase revenues by offering up to 16 different cable
operator-defined transmission rates at varying price points to multiple markets.
In a typical flat-rate cable modem system, all subscribers are charged the same
price, regardless of individual bandwidth service and pricing requirements (see
Figure 1). This results in lost revenue opportunities for cable operators. In
addition, the ComUNITY Access system enables cable operators to provide
value-added services, such as multiple VPNs and enhanced security, targeted to
business users. To accommodate future value-added broadband applications, our
underlying ATM-based technology can also enable integrated services such as
toll-quality cable telephony and desktop video.

FIGURE 1.

LOGO

Reduced Deployment Costs. The ComUNITY Access system was designed to lower
deployment costs by providing a flexible solution to address the needs of cable
operators and their subscribers at each step of cable modem system deployment.
Com21 believes its radio frequency technology tolerates higher levels of
background and ingress noise than do other commercially available radio
frequency technologies, thereby avoiding the costs otherwise necessary to limit
noise before deploying two-way cable modem service. Com21's Return Path
Multiplexer reduces the number of return path receivers required in a cable
operator's

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headend equipment, which allows cable operators to purchase less headend
equipment initially and then cost-effectively scale the system over time as
subscriber penetration grows.

Accelerated Time-to-Market. The ComUNITY Access system provides a
comprehensive solution that enables cable operators to bring broadband services
to market quickly. In the initial stage of deployment, the ComUNITY Access
system can be implemented as a one-way telephone return system. Upon
implementation of a two-way service, a cable operator can upgrade to a two-way
system with a simple software download to the end-user's existing ComPORT cable
modem. Com21 is also developing the capability to enable future DOCSIS-compliant
cable modems to communicate with PCs through a universal serial bus interface,
which will reduce the time and resources needed to connect modems at
subscribers' locations.

Reduced Deployment Risk. The ComUNITY Access system's comprehensive
solution mitigates deployment risk by enabling cable operators to rapidly
implement data-over-cable service using telephone return service and observe
service penetration patterns. Cable operators can then deploy the capital
necessary to upgrade the plant and build a larger-scale two-way cable modem
system only in those markets where they observe sufficient penetration to
warrant such investment.

Reduced Long-Term Cost of Ownership. The ComUNITY Access system reduces the
long-term cost of ownership for cable operators. Because a cable modem system's
operational and maintenance expenses typically exceed the costs of the capital
equipment over the expected life of the system, a system that requires less
plant maintenance will reduce the long-term cost of ownership for cable
operators. Com21's Network Management Provisioning System lowers ongoing
operating costs by enabling cable operators to remotely detect, diagnose and
manage network problems from a single workstation. In addition, ComPORT cable
modems can be remotely upgraded with software downloads. The ComUNITY Access
system can be deployed with lower operational overhead because the cable
operator can use Com21's Ingress Noise Blocker as an intelligent filter to
prevent ingress noise from contaminating the upstream return path. The INB opens
only to allow data to be transmitted upstream, and is closed otherwise,
preventing aggregation of noise in the upstream return path. The INB also
enables a cable operator to more quickly identify ingress noise sources. This
reduces maintenance costs because a cable operator need not devote substantial
amounts of personnel and resources to the identification of the source and site
of intermittent ingress noise.

Differentiated Services to End-Users. In addition to high-speed, always-on
and cost advantages, the ComUNITY Access system enables cable operators to offer
differentiated services with significant benefits to their subscribers. In
addition to value-added services such as VPNs and enhanced security, each
ComPORT cable modem can support up to eight PCs. The ComUNITY Access system
supports multiple protocols, including IP, IPX, AppleTalk and NETBEUI. ComPORT
modems have an expansion slot to accommodate application interface modules which
can support future applications such as cable telephony and VPNs.

THE COM21 STRATEGY

As part of its business strategy, Com21's objectives are to:

Enhance Value to Cable Operators. Com21's principal strategy is to provide
products that enhance the value of cable operators' cable modem deployments over
the life of the investment. Cable operators assess the viability, and ultimately
the success, of an investment in a cable modem system by considering the cost of
initial investment in cable modem equipment, service reliability, overall
operating and maintenance expenses and the service revenues that can be
generated. Com21's ComUNITY Access system is designed to be deployed on a
limited capital budget and can be upgraded and scaled as subscriber penetration
grows. Com21's system enables cable operators to lower their ongoing cost of
ownership through cost-effective noise management and remote cable modem
upgrades. Cable operators can use Com21's system to increase revenues by
offering multiple tiers of service at varying prices to multiple market
segments. As a result of the value provided by its products, the Company
believes it will continue to be able to successfully differentiate and sell its
products based upon tangible benefits delivered to the cable operator.

Leverage Technology Leadership. Com21's ATM-based architecture is the
foundation upon which Com21 has built an end-to-end Ethernet broadband
communications system with networking advantages.

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Technological developments in multi-service scheduling optimization, protocol
simulation and application specific integrated circuit (commonly referred to as
an ASIC) integration enable us to offer a scalable system to deliver tiered
service levels, VPNs and low-latency voice and video applications. Moreover, the
Com21's internal development of a network management system, high performance,
cost-effective radio frequency transmitters/receivers and fast radio frequency
switching systems lowers the cost to cable operators of deploying and operating
Com21's equipment. Com21 focuses on the development of value-added features for
its products, such as its recently announced enterprise cable telephony module
for the ComPORT, which is designed to enable cable operators to offer
toll-quality voice services to their business customers.

Capitalize on Emerging DOCSIS Standard. Com21 believes the DOCSIS standard
will accelerate the rate of adoption of cable modem technology by providing
multi-vendor interoperability. Com21 intends to continue to play an integral
role in the development of the DOCSIS standard. In this regard, we have
participated in the evolution of the DOCSIS standard as a core reviewer and
content reviewer to DOCSIS 1.0 and 1.1, and by contributing our protocol
expertise to the development of DOCSIS 1.2. We intend to leverage our technology
leadership, particularly in the areas of high performance ASIC hardware, radio
frequency modulation and noise reduction to differentiate its DOCSIS-compliant
cable modems from the competition. We are currently developing a family of
DOCSIS-compliant products, the first of which we anticipate will be commercially
available in the first half of 1999. Com21 is in the process of establishing a
consumer-oriented sales channel, focusing on both electronic commerce and
traditional approaches to distribute its DOCSIS-compliant cable modems.

Aggressively Penetrate Global Markets. Com21 believes the market for cable
modem systems is global and has developed strategies to sell its products in
regions where cable is widely available, such as the U.S., Canada, Europe and
Japan, and in regions where cable is being aggressively deployed, such as China
and Latin America. In 1998, Com21 shipped approximately 320 ComCONTROLLER
headends and more than 77,000 ComPORT modems, as compared to approximately 170
ComCONTROLLER headends and more than 12,000 ComPORT modems in 1997. Com21 has
shipped its systems for use in 67 locations in North America and 87 locations
internationally. In North America, we sell directly to cable operators such as
Charter Communications, Cox Communications, Prime Cable and TCI and to systems
integrators such as HSAnet. To facilitate market penetration, Com21's ComUNITY
Access system has been certified for use in @Home service areas.
Internationally, we sell primarily to systems integrators, including Philips and
Siemens, which in turn sell to cable operators.

Integrate Toll-Quality Voice. Com21 intends to integrate toll-quality voice
capability into its ComUNITY Access system and its future DOCSIS product line.
We are an active participant and have been selected as a vendor author in
CableLabs' PacketCable cable telephony initiative. Com21's existing products
have been designed with quality of service capability to support toll-quality
voice transmission over a cable plant. Com21 believes that the opportunity for
cable telephony will be accelerated by AT&T's acquisition of TCI and has
recently demonstrated its enterprise cable telephony module at the Western Cable
Show in December 1998.

Increase Cost Efficiencies. While we intend to continue to seek premium
prices for our products, it anticipate that the cable modem market will be
characterized by declining prices. As a result, we seek to reduce product costs,
particularly with respect to its end-user cable modems. In 1998, we improved our
tuner design to reduce manufacturing costs, integrated its cable modem design
into one printed circuit board and increased the proportion of standard
components used in the manufacture of our products. Com21 intends to realize
future cost reductions from economies of scale and relocation of manufacturing.
We are working to achieve a higher level of ASIC integration and to improve the
design of its products in order to increase manufacturing efficiencies. In
addition, we are developing plans to monitor continuous improvement of our
internal engineering and manufacturing management procedures. Com21 received ISO
9001 certification in December 1998.

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PRODUCTS

The Company's current product offering is the ComUNITY Access system, which
is depicted below.

ComUNITY Access(R) System

LOGO

The ComUNITY Access System

The ComUNITY Access system consists of three primary parts:

- the ComCONTROLLER, a channel switch located at the cable operator's
headend;

- the ComPORT, a cable modem located at the subscriber's site; and

- Network Management Provisioning System, an integrated network
management software package.

Com21's ComUNITY Access system has been certified for use in @Home service
areas. Additionally, Com21 offers the Return Path Multiplexer and the Ingress
Noise Blocker, devices used in the containment of noise in the upstream channel.
We have shipped approximately 490 ComCONTROLLERs and more than 89,000 ComPORTs
since commercial shipments began in April 1997.

ComCONTROLLER Headend Switch. The ComCONTROLLER controls the flow of data
communications between the ComPORT modems located at a subscriber's site and an
external network, such as the Internet or a corporate network. The ComCONTROLLER
is designed with multiple expansion slots that can accommodate multiple Ethernet
or Fast Ethernet interfaces. The ComCONTROLLER transmits data downstream at 30
megabits per second (using 64 quadrature amplitude modulation). The expansion
slots enable the addition of up to twelve 2.56 megabits per second (using
quadrature phase shift keying) upstream channel modules, scaling the upstream
path to an aggregate throughput of 30 megabits per second. The upstream channels
can be added on an incremental, hot-insertion basis, enabling a cable operator
to respond rapidly to system faults. A single ComCONTROLLER is designed to
support up to 2,000 ComPORT modems.

ComPORT Cable Modem. The ComPORT cable modem is deployed within a
subscriber's home or office. In addition to its cable connection, the ComPORT is
designed with a 10BaseT Ethernet port for direct connection to the subscriber's
PC Ethernet card or an Ethernet hub for interconnecting up to eight PCs. Each
ComPORT can be used either on a one-way or two-way cable plant and can be
remotely configured for either plant by our Network Management Provisioning
System software. Com21 has developed a FastPacket engine ASIC which filters and
forwards data packets at Ethernet wire speed. The ComPORT features an expansion
port for the insertion of future modules that will support applications such as
cable telephony and VPNs.

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Network Management and Provisioning System. Network Management Provisioning
System is a network management software package that facilitates subscriber
provisioning, fault isolation, network configuration, field inventory,
auto-discovery and performance for the ComUNITY Access system. Network
Management Provisioning System enables the cable operator to remotely monitor
and manage the ComUNITY Access system through a graphical user interface and to
remotely upgrade ComPORT cable modems. Network Management Provisioning System is
a simple network management protocol manager running on a UNIX workstation
connected to the ComCONTROLLER via a separate out-of-band 10BaseT Ethernet
channel. Com21 believes that Network Management Provisioning Systems' ability to
manage the network elements of the ComUNITY Access system from a remote site
will further reduce cable operators' long-term cost of ownership by reducing the
number of visits cable operator technicians will need to make to headend and
subscriber sites. A standard PC Web browser can be used to monitor and manage
cable modems via an Internet server application on the Network Management
Provisioning System station. A single Network Management Provisioning System
station is designed to manage up to 50 ComCONTROLLERs and 100,000 ComPORTs.

Return Path Multiplexer. Com21's Return Path Multiplexer is a high-speed,
multiport analog switching device which allows up to eight upstream return paths
to be connected to a single ComCONTROLLER radio frequency receiver without
electrically combining the accumulated noise from the return paths. The Return
Path Multiplexer is designed to solve the problem of accumulated noise inherent
in HFC cable installations configured with large numbers of return paths from
distributed fiber nodes. The Return Path Multiplexer utilizes a high-speed radio
frequency switching technology that enables it to pass one upstream return path
at a time to the ComCONTROLLER. This technology prevents the noise accumulation
that would otherwise occur if multiple upstream returns were combined at the
ComCONTROLLER. Since the Return Path Multiplexer allows eight upstream
connections, Com21 believes that the installation of Return Path Multiplexers on
a cable operator's network will reduce the number of return path receivers
required in the cable operator's headend equipment and therefore reduce the
capital costs for a large-scale HFC cable modem deployment. Com21 has been
shipping the Return Path Multiplexer since the third quarter of 1998.

Mini ComCONTROLLER. Com21 has a smaller version of the ComCONTROLLER which
has three expansion slots for upstream receiver and Ethernet modules. Com21
believes that this smaller headend product addresses the requirements of smaller
cable operators and specialized applications (such as cable systems within a
hotel) that cannot justify the additional expense of the larger ComCONTROLLER.
Com21 has been shipping the Mini ComCONTROLLER since the second quarter of 1998
and, in addition to being installed by several cable operators, it has been
deployed in certain locations within the Marriott hotel chain.

The Ingress Noise Blocker. The Ingress Noise Blocker is an external noise
filter designed to meet the needs of cable operators whose cable networks have
excessive ingress noise and who want to deploy two-way data service prior to
solving costly overall system noise issues. The Ingress Noise Blocker works with
both two-way HFC and coaxial-only cable plants and attaches to the cable tap
outside the subscriber's site. The Ingress Noise Blocker, which is remotely
controlled by the ComPORT, opens to allow upstream transmission of traffic and
closes at all other times, which limits the ability of noise to enter the
system. Because noise passes through the Ingress Noise Blocker only when data is
being transmitted from a subscriber's site, the Ingress Noise Blocker allows
Network Management Provisioning Systems to rapidly detect and isolate sources of
noise. Although it is currently necessary for the subscriber to have a ComPORT
modem to control the Ingress Noise Blocker, Com21 plans to license the Ingress
Noise Blocker control circuitry to other cable equipment vendors.

The ComUNITY Access system incorporates the following features:

- Multiple Service Levels. The ATM-based architecture provides up to 16
levels of service that can be configured by the cable operator, each with
specified upstream and downstream data rates. This feature enables the
cable operator to tailor data-over-cable service and pricing to different
end-user demands, which increases the ability to capture additional
subscriber revenues by matching supply with demand.

- Robust, High-Speed Architecture. The ComUNITY Access system transmits
downstream traffic at a rate of up to 30 megabits in one 6 megahertz
channel. Each 1.8 megahertz channel of the upstream spectrum can transmit
traffic at a rate of 2.56 megabits per second, and the system enables the
cable
36
<PAGE> 38

operator to aggregate up to twelve upstream channels, permitting total
upstream throughput of 30 megabits per second.

- One-Way and Two-Way Transmission Capability. The ComUNITY Access system
can be configured to support both one-way and two-way cable plants. The
ComPORT modem works with the subscriber's personal computer and a dial-up
Internet access service operated either by the cable operator or an
Internet service provider, commonly known as an ISP, to enable a one-way
system. The ComPORT can be reconfigured remotely from one-way mode to
two-way mode through a software download without replacing a subscriber's
modem.

- Superior Noise Containment Technology. Com21 has developed noise
containment technology which allows the system to tolerate higher levels
of noise, thereby enabling cable operators to install the system on noisy
cable plants that could not otherwise be used for two-way data
transmission.

- Multiple Protocols. The ComUNITY Access system supports multiple
protocols including IP, IPX, AppleTalk and NETBEUI.

- Privacy from Other Subscribers. The ComPORT can be configured by the
cable operator to block all non-IP protocols, preventing subscribers on
the same cable network from accidentally gaining access to others' files.

- Data Security. Data encryption standard encryption and public key
management enable secure upstream and downstream data communications
between the ComCONTROLLER and the ComPORT.

- High-Value Business Networking. Com21's ComUNITY Access system enables
cable operators to establish private, secure sub-networks within a
ComCONTROLLER while providing dedicated bandwidth. These sub-networks are
known as virtual local area networks. Using Network Management
Provisioning System, the cable operator can configure secure VPNs for the
business connectivity markets by partitioning the transmission channels
into several virtual local area network, then assigning cable modems to
each virtual local area network.

- Early Fault Detection. Network Management Provisioning System offers high
network visibility and control via a suite of configurable alarms,
diagnostic tools and performance monitoring features.

Products Under Development

Secure IP Module. Com21 is developing a hardware-based secure IP module to
be inserted in the ComPORT's application interface module expansion slot, which
is designed to enable secure encrypted data transmission over the Internet.
Com21 believes that the secure IP module will increase cable operators' service
revenues by providing them with an advanced security feature to sell to their
subscribers, such as VPN services. The secure IP module will be commercially
available in the first quarter of 1999.

Cable Telephony Module. Com21 is leveraging existing ComCONTROLLER and
ComPORT architecture to develop an application interface module for the ComPORT
to allow cable operators to provide toll-quality voice through a standard RJ11
telephone interface on the modem. The integration of this cable telephony module
will enable PBX-extensions via the ComPORT for the telecommuter or small
office/home office user. The cable telephony module will be an integrated
component of Com21's existing ComUNITY Access system product line and is
expected to be available for commercial deployment in mid-1999. In addition,
Com21 is developing voice-over-IP technology which will be designed to allow
access to the public switched telephone network via the cable network.

DOCSIS Products Under Development

DOCSIS-Compliant Cable Modems. Com21 is leveraging its ComPORT
architecture, FastPacket ASIC and radio frequency/tuner design in conjunction
with Broadcom's media access control silicon to produce a family of
high-performance DOCSIS-compliant cable modems for the North American cable
market. Initial products will comply with the DOCSIS 1.0 specifications and are
expected to be software-upgradeable to DOCSIS 1.1 specifications. Com21's DOCSIS
1.0 cable modem will be designed to support the secure IP module designed for
the ComPORT as well as a universal serial bus interface which will eliminate the
need to install an Ethernet card in a subscriber's PC. Com21's DOCSIS 1.1 cable
modem will support the cable telephony module. We are working with Cisco to
ensure interoperability of our DOCSIS-compliant cable

37
<PAGE> 39

modems with Cisco's universal broadband router. Com21's DOCSIS 1.0 cable modems
have been undergoing formal certification and testing at CableLabs since the
fourth quarter of 1998, and we expect our initial DOCSIS modem to be
commercially available in the first half of 1999. We also plan to release a
low-cost, non-expandable DOCSIS-compliant cable modem for the North American
consumer market in the third quarter of 1999.

Home Networking Module. Com21 is developing a plug-in module for our
DOCSIS-compliant cable modems that will connect the modem to a home phone
network.

The market for cable modem systems and products is characterized by rapidly
changing technologies and short product life cycles. Our future success will
depend in part upon our ability to enhance our existing products and to develop
and introduce, on a timely basis, new products and features that meet changing
customer requirements and emerging industry standards. Com21's product
development efforts are subject to a number of risks and we cannot assure you
that these efforts will result in the introduction of any new products that
achieve market acceptance. See "Risk Factors -- Our future success will depend
in part upon our ability to enhance our existing products and to develop and
introduce, on a timely basis, new products and features that meet changing
customer requirements and emerging industry standards."

TECHNOLOGY

The Company invests in technology development to enable scalable, reliable
broadband data communications that can accommodate a wide range of applications.
Key technologies include:

- ATM architecture and ComUNITY media access control and physical layer
protocols, all of which provide the flexibility and scalability to allow
cable operators to build multi-tiered services and VPNs;

- ASIC based cable modem design that allows Com21 to provide high-speed,
cost-effective, highly functional products;

- high performance radio frequency modulators and demodulators which allow
the cable operator to use Com21's products in a wider range of cable
systems; and

- noise mitigation technology, which addresses many of the cable plant
upstream noise problems and reduces the cable operator's ongoing
maintenance and operational costs.

ATM Architecture and ComUNITY Protocols. The ComUNITY Access system has
been designed using a high-performance cell-switching broadband data transport
architecture. This architecture optimizes system performance for multiple
simultaneous applications with a variety of requirements for data rates and
latency, including Internet data, toll-quality voice and desktop video. In order
to transport and manage data flows for latency-sensitive applications such as
telephony, video conferencing or interactive games, the ComUNITY Access system
implements an ATM virtual circuit-based data transport protocol upon shared
broadband downstream and upstream channels.

The ComUNITY protocols are specifically designed to efficiently manage the
ATM cell traffic on the broadband cable television network, taking into account
topological and physical constraints of the two-way cable transmission systems.
For example, the protocol must do the following:

- provide secure point-to-point communications in physical media that are
inherently insecure broadcast channels;

- provide reliable data delivery in a noisy communications channel;

- automatically calibrate for variations in phase delay and signal
attenuation arising from the condition of the physical cable plant;

- minimize simultaneous transmission from multiple cable modems to prevent
return amplifier saturation and distortion;

- efficiently adapt to the traffic load among a large subscriber base so
that the system can grow and still provide high service levels with low
overhead costs; and

38
<PAGE> 40

- provide stable performance under increasing traffic loads and various
traffic types with different quality of service requirements.

The protocols also provide flexibility to handle a telephone return
capability for applications in a one-way system. As a result of the work to
develop robust low-level protocols, the ComUNITY Access system can reliably
perform in both coaxial systems as well as modern HFC cable plants.

In addition, the ComUNITY Access system has been designed so that each
cable modem can enable multiple virtual circuits for separate applications,
allowing simultaneous, independent data flows with different performance
requirements. Specifically, a single ComUNITY-based cable modem can
simultaneously provide a high-speed, latency-insensitive 10 megabits per second
IP-based Internet connection and a low-speed, short delay, latency-sensitive 64
kilobits per second link for a toll-quality voice connection, with both data and
voice applications operating independently.

FastPacket ASIC Technology. Com21 has internally developed a custom ASIC to
implement the major portions of the cable modem functionality, including
ComUNITY protocol control, data encryption standard encryption, ATM segmentation
and reassembly, packet switching and filtering and multicast control. Because
these functions are integrated into the ASIC, the cable modem can operate at
high speeds without requiring an expensive external processor or ATM components.
FastPacket ASIC technology allows the ComUNITY cable modem to filter and forward
minimum size packets at Ethernet wire speed. As a result, the incremental
development costs of high-speed packet-handling and additional ATM and
networking functionality have not been significant, and Com21 has been able to
decrease the size of the electronics design and reduce the implementation to a
single-sided printed circuit board.

High Performance RF Modulator and Demodulator Design. The ComUNITY Access
system's downstream and upstream channels occupy a small portion of the cable
plant and must coexist with existing signals such as television channels in the
54-750 megahertz band as well as other upstream services such as pay-per-view or
cable telephony in the 5-40 megahertz band. The transmitter must be accurate
enough to convert multi-bit symbols into a multi-level phase/amplitude signal
without creating interference into adjacent channels and robust enough to
perform in noisy upstream channels. The receiver must be sensitive enough to
detect and process a complex quadrature amplitude modulation signal, in cable
systems that add signal distortions and are susceptible to noise. Quadrature
amplitude modulation encoding is a digital transmission technique, used in a
communications channel which trades off greater signal to noise rates for higher
data rates. Additionally, these designs must be cost-effective and self-tuning
without the need for expensive, precision components or manual parametric
adjustments during the manufacturing process.

We have designed our own tuner that is less sensitive to operating
temperature fluctuations, works well with low signal levels, has improved
tolerance to adjacent TV signals, and cleanly transmits signals with low noise.
This technology has enabled us to sell our internally developed radio frequency
modulator as an integrated component of our ComCONTROLLER product family,
whereas most other commercially available cable modem systems require cable
operators to purchase a frequency translator from third-party cable equipment
suppliers.

Noise Containment Technology. Reliable system performance in the presence
of a significant level of noise in the upstream channel is a key issue for any
cable modem system. There are two basic ways to minimize the effect of noise on
upstream data transmission:

- reduce or eliminate noise from the upstream channel; or

- compensate for high noise levels using error correction techniques. Com21
utilizes a combination of these techniques.

Com21 has developed technology specifically designed to reduce upstream
noise. The Ingress Noise Blocker is a cable modem-activated filter attached to
the cable tap outside the subscriber's house. Using Com21's signal-powered
dynamic radio frequency filter technology, the Ingress Noise Blocker blocks
upstream noise and only allows return signals when the ComPORT is sending data
upstream. An industry source has stated that most of the upstream ingress noise
on cable plants originates from sources which add noise into the cabling system
from the cable tap to a subscriber's television set. A cable plant with Ingress
Noise Blocker filters installed will have a lower level of ingress noise in the
upstream return path. This will

39
<PAGE> 41

result in reduced plant maintenance costs related to identifying, minimizing and
correcting ingress noise problems.

Com21 has developed an Return Path Multiplexer, which is a high-speed,
multiport analog switching device which allows up to eight upstream return paths
to be connected to a single ComCONTROLLER radio frequency receiver without
combining the accumulated noise from the return paths. Com21 has developed
high-speed radio frequency switching technology in the Return Path Multiplexer
which will allow a control signal from the ComCONTROLLER to switch from one
return path to another. This enables a specific cable modem using a specific
return path to transmit to the ComCONTROLLER. Com21 has also developed control
mechanisms and management protocols to manage traffic switching through the
Return Path Multiplexer. To illustrate an Return Path Multiplexer application,
an HFC system serving 100,000 homes would require 25 separate return paths
(assuming 500 home fiber nodes and eight return nodes combined). Without Com21's
Return Path Multiplexer, the cable operator would have to purchase several
headend units to enable data service for the entire HFC network. Instead, the
cable operator will be able to purchase a single ComCONTROLLER and several
Return Path Multiplexers at a significantly lower cost. Com21's product
development efforts are subject to a number of risks, and there can be no
assurance that these efforts will result in the successful introduction of any
other new products, or that such products will achieve market acceptance. See
"Risk Factors -- Our current products are not compatible with products offered
by our competitors and are subject to evolving industry standards. If our
products do not comply with any standards that achieve market acceptance,
customers may refuse to purchase our products."

The ComUNITY Access system incorporates an encoding technique called
forward error correction on upstream, and downstream channels. Forward error
correction is a technique that inserts redundant information into the data
stream so that a certain number of data errors can be detected and corrected.
This technique, coupled with Com21's high performance radio frequency modem
design, allows Com21's cable modems to operate at high data rates with nominal
bit error rate of 10(-9) in a cable plant with a signal-to-noise-ratio of 16
decibels. This bit error rate performance is substantially better than the MCNS
specification of 10(-9) bit error rate at 25 decibel signal-to-noise ratio. As a
result, Com21's products can provide more reliable data service in noisier cable
plants than a modem built to that specification. More specifically, the 9
decibel difference in performance lowers noise sensitivity by a factor of eight.

Contribution to the DOCSIS Standard. Com21 intends to continue to play an
integral role in the continuing evolution of the DOCSIS standard. In this
regard, Com21 has participated in the development of the DOCSIS standard, as a
core reviewer and content reviewer to DOCSIS 1.0 and 1.1, and by contributing
its protocol expertise to the development of DOCSIS 1.2.

Com21 is also a vendor-author to CableLabs' PacketCable specification and
is a core reviewer and content contributor to the IEEE 802.14 standard.

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<PAGE> 42

CUSTOMERS AND MARKETS

Customers. Com21 began commercial shipments of its cable modem products in
April 1997. In 1998, Com21 shipped approximately 320 ComCONTROLLER headends and
more than 77,000 ComPORT modems, as compared to approximately 170 ComCONTROLLER
headends and more than 12,000 ComPORT modems in 1997. Com21 has shipped its
systems for use in 67 locations in North America and 87 locations
internationally. In the U.S., we sell directly to cable operators and systems
integrators. Internationally, Com21 sells primarily to systems integrators,
including Philips and Siemens, who in turn sell to cable operators.

The number of households currently passed in service areas where Com21's
cable modem systems have been commercially deployed exceeds 9 million. Com21
considers a sale as a commercial deployment if the cable operator to whom the
sale was made has begun offering data-over-cable services to paying subscribers.
The following table depicts an example of the geographic diversity of commercial
deployments of the ComUNITY Access system as of December 31, 1998.

<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
COM21 COMMERCIAL DEPLOYMENTS
- -------------------------------------------------------------------------------
CUSTOMER LOCATION
- -------------------------------------------------------------------------------
Prime Cable Chicago, Illinois
- -------------------------------------------------------------------------------
Cox Communications Las Vegas, Nevada
- -------------------------------------------------------------------------------
TCI Baton Rouge, Louisiana
Denver, Colorado
Pittsburgh, Pennsylvania
- -------------------------------------------------------------------------------
Charter Communications Pasadena, California
Newtown, Connecticut
- -------------------------------------------------------------------------------
Fibertel/TCI-International Buenos Aires, Argentina
- -------------------------------------------------------------------------------
France Telecom Bordeaux, France
Marseilles, France
- -------------------------------------------------------------------------------
Brutele/Igretec Charleroi, Belgium
- -------------------------------------------------------------------------------
Eneco NV Rotterdam, Netherlands
- -------------------------------------------------------------------------------
CTC Barcelona, Spain
- -------------------------------------------------------------------------------
Cablecom Zurich, Switzerland
- -------------------------------------------------------------------------------
Tokyo Cable Tokyo, Japan
- -------------------------------------------------------------------------------
Destiny Cable Manila, Philippines
- -------------------------------------------------------------------------------
Jaixing Cable Jaixing, China
- -------------------------------------------------------------------------------
Saturn Communications Wellington, New Zealand
- -------------------------------------------------------------------------------
</TABLE>

Com21 did not commence product shipments until April 1997. Our success will
depend on the timely adoption of our products by cable operators and end users.
The market for our products has only recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants that
compete or intend to compete with the Company. See "Risk Factors -- We have a
short operating history, have incurred net losses since our inception and expect
future losses," "-- Our operating results in one or more future periods are
likely to fluctuate significantly and may fail to meet or exceed the
expectations of securities analysts or investors," "-- Because our market is new
and evolving, we cannot accurately predict its future growth rate or its
ultimate size, and widespread acceptance of our products is uncertain" and
"-- The market in which we operate is highly competitive and has many more
established competitors."

In 1997, revenues attributable to Philips, 3Com and Siemens accounted for
21%, 16% and 12% of total revenues, respectively. In 1998, revenues attributable
to TCI, Philips and Siemens accounted for 24%, 15% and 14% of total revenues,
respectively. For the year ended December 31, 1998, the top five customers

41
<PAGE> 43

accounted for an aggregate of 66% of total revenues. See "Risk Factors -- A
relatively small number of customers has accounted for a large part of our
revenue to date and the loss of one or more of our customers could cause our
business to suffer" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

In 1997 and 1998, revenues attributable to international customers
constituted 64% and 52% of total revenues, respectively. Com21 believes that its
ATM-based system has been adopted more rapidly in Europe and other international
markets because of the greater acceptance of the benefits of ATM-based
technology as well as the more recently upgraded and installed cable plants. See
"Risk Factors -- We are subject to risks associated with operating in
international markets" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The following customer examples illustrate how certain of Com21's customers
have deployed its products:

Fibertel/TCI-International is a cable operator with approximately 800,000
households passed in Buenos Aires, Argentina. Fibertel offers a single Internet
service priced at $125 per month for two-way service. Fibertel is marketing a
private corporate networking service that uses Com21's virtual local area
network capability and is selling dedicated line connections for business
applications using Com21's quality of service capability to provision
constant-bit-rate service per modem. Fibertel uses various features of the
ComUNITY Access system to provide different service products for different
subscribers' needs.

Charter, one of the largest cable television operators in the U.S. with
approximately 1.1 million subscribers, has deployed service in several locations
including the Pasadena, California area, which passes approximately 300,000
households. Charter offers Charter Pipeline, its general Internet service, at
prices ranging from $50 per month to $500 per month with five service tiers,
with the following service levels (upstream/downstream data rates):

- "diamond service" (2 megabits per second/1 megabits per second);

- "platinum service" (1 megabits per second/512 kilobits per second);

- "gold service" (768 kilobits per second/384 kilobits per second);

- "silver service" (512 kilobits per second/128 kilobits per second); and

- "bronze service" (256 kilobits per second/56 kilobits per second).

In addition to its general Internet access service, Charter has established
a campus local area network extension on its cable network using the ComUNITY
Access system's virtual local area network capability and provides off-campus
connections to the students and staff of the California Institute of Technology.
Charter also plans to use the ComUNITY Access system's telephone return feature
to provide access for subscribers who are not yet two-way enabled.

Telia Stofa A/S is the second largest cable operator in Denmark with more
than 200,000 households passed. Telia Stofa is using the ComUNITY Access system
to deliver high-speed data-over-cable service, along with other integrated
services, to residential and business customers, allocating varying levels of
bandwidth to address different subscriber requirements. Telia Stofa gives
residential and business users the option of choosing from three different tiers
of service: StofaNet Private, StofaNet Study and StofaNet Business. This allows
Telia Stofa to charge subscribers according to the bandwidth used, versus a flat
fee, and results in increased revenues. Telia Stofa has indicated that one of
the primary reasons that Telia Stofa selected Com21 was that we offer quality of
service, virtual local area network and other future integrated services.

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<PAGE> 44

Markets. Com21's products enable cable operators to serve three primary
end-user markets each of which has widely varying speed, service and pricing
requirements. The table below divides these markets by user segment and outlines
their typical access requirements and attributes:

<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
TYPICAL ACCESS
SOLUTION
USER SEGMENT ACCESS REQUIREMENT POTENTIAL USED TODAY
APPLICATIONS
- ----------------------------------------------------------------------------------------------
Corporate - Remote access to - Remote local area - Analog modem
Telecommuter and corporate local area network (28.8 - 56 Kbps)
Remote Office networks and access - ISDN (128 Kbps)
Users Intranets - VPN provisioning - T-1 (1.54 Mbps)
- High speed Internet - File transfer
access - "Always on"
Internet access
- High security
- Telephony
enhancements, e.g.,
PBX extension
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------

Small Office/Home - Remote access to - "Always on" - Analog modem
Office Users local Internet access (28.8 - 56 Kbps)
area networks - Connectivity to - ISDN (128 Kbps)
- High speed Internet several businesses - Fractional T-1 (384
access - Alternate telephone Kbps)
service
- Desktop video
conferencing
- ----------------------------------------------------------------------------------------------

Residential - Low to high speed - Internet access - Analog modem
Consumer Internet Internet access - Web-based (28.8 - 56 Kbps)
Users (Occasional multimedia content, - ISDN (128 Kbps)
and Frequent) e.g. on-line
services
- E-mail, file
transfer
- ----------------------------------------------------------------------------------------------
</TABLE>

Corporate Telecommuter and Remote Office Users. The needs of corporate
telecommuter and remote office business users include high availability,
high-speed access to corporate intranets and corporate local area networks.
These users also must interconnect the local area networks among their various
offices. Such offices may be co-located, as in the case of a large campus, or
remotely located, as in the case of a sales office or a telecommuter's home. A
parallel application for this business market is the interconnection of remote
workers to a central telephone PBX, distributing voice traffic to users
throughout a campus or to a remote office. Security and reliability are of
utmost importance for corporate users. Other applications which business users
may require include desktop video conferencing and rapid two-way transfer of
large data files. Corporate telecommuters and remote office users are generally
willing to pay a premium for highly reliable, high-speed service with advanced
features.

SOHO Users. Small office/home office businesses increasingly find the
Internet an efficient and cost-effective means to communicate and transact with
their customers and suppliers. Com21 believes these businesses require
medium-to-high speed Internet access that is reliable and always available.
Small office/home office users may have a local area network to connect to cable
modem services and may require routing in order to connect multiple terminals.
These businesses may also require desktop video conferencing capability and
connectivity with other businesses. Because these requirements may be critical
to running their business, certain small office/home office users are willing to
pay more for higher-quality, secure, reliable service than are residential
consumer Internet users.

Residential Consumer Internet Users. Residential consumer Internet users
generally only require a connection to their ISP, without the same level of
security and reliability required by business users. Frequent users desire
medium-to-high speed access to the Internet for Web browsing and downloading of
multimedia applications and files. Occasional users require low-to-medium speed
access to the Internet on a limited basis for Web browsing, e-mail and on-line
services. Occasional users generally prefer low-cost service, whereas more
frequent users are generally willing to pay a slight premium for higher speed.

MANUFACTURING

Com21 tests and assembles its ComCONTROLLER headend equipment in its
facility in Milpitas, California. We outsource ComCONTROLLER printed circuit
board assemblies on a turnkey basis to Sanmina

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<PAGE> 45

and CMC, and perform final integration and burn-in on-site. Com21 configures the
headend equipment and the network management and provisioning software prior to
customer shipment.

Com21 outsources turnkey manufacturing of the ComPORT cable modem to
Celestica, a contract manufacturer located in Toronto, Canada. Together with
Celestica, Com21 has developed and implemented a series of product test
methodologies, quality standards and process control parameters. Com21 is
working with Celestica to set up production in a second Celestica facility
located in Monterrey, Mexico. We anticipate production at this facility will
begin in the first quarter of 1999. This move will enable us to continue to
reduce the cost of our modems and ensure continuous supply without disruption if
plant problems were to occur. We believe that employing a turnkey manufacturer
will enable it to meet anticipated manufacturing needs and reduce the cost of
product procurement.

Com21's engineering team designs ASICs and performs simulation testing.
When the fundamental design is stable, Com21's contract foundry fabricates the
ASIC for prototype testing and upon completion of these tests the ASIC is
manufactured in volume by Atmel. We believe our current manufacturing
capabilities can accommodate our requirements through the end of 2000. Warranty
and repair support is performed at our Milpitas facility. Com21 received ISO
9001 certification in December 1998.

Com21 maintains only a limited in-house manufacturing capability for final
assembly, testing and integration of headend products. Our future success will
depend, in significant part, on our ability to manufacture, or have others
manufacture, its products cost-effectively and in volumes sufficient to meet
customer demand. There are a number of risks associated with our dependence upon
third party manufacturers, including but not limited to the following:

- reduced control over delivery schedules;

- quality assurance;

- manufacturing yields and costs;

- the potential lack of adequate capacity during periods of excess demand;

- limited warranties on products supplied to us;

- increases in prices; and

- the potential misappropriation of Com21's intellectual property.

A manufacturing disruption could impact the production of Com21's products
for a substantial period of time, which could have a material adverse effect on
our business, operating results and financial condition. Com21 has no long-term
contracts or arrangements with any of its manufacturers that guarantee the
availability of product, the continuation of particular payment terms or the
extension of credit limits. There can be no assurance that Com21 will not
experience supply problems in the future from any of its manufacturers. Any such
difficulties could have a material adverse effect on our business, operating
results and financial condition.

In addition, Celestica is a foreign corporation, and we may increase our
use of foreign manufacturers in the future. Any foreign or domestic regulations
regarding foreign exports and imports, trade barriers and tariffs currently in
place or imposed in the future could materially and adversely affect our ability
to obtain cable modems. Because lead times for materials needed to produce cable
modems and headend equipment can be between eight and 16 weeks, Com21 may not be
able to meet the demand for its products, which could adversely affect our
ability to support cable operators' expansion of cable modem service to cable
operators' customers. We have only limited experience manufacturing and
arranging for the manufacture of our products, and there can be no assurance
that we or any manufacturer of our products will be successful in increasing its
manufacturing volume. We may need to procure additional manufacturing facilities
and equipment, adopt new inventory controls and procedures, substantially
increase our personnel and revise our quality assurance and testing practices.
We cannot assure you that any of these efforts will be successful. See "Risk
Factors -- We may not be able to produce sufficient quantities of our products
because we depend on

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<PAGE> 46

third-party manufacturers and have limited manufacturing experience" and "-- We
are subject to risks associated with operating in international markets."

MARKETING AND SALES

Marketing. Domestically, we target our marketing efforts primarily at cable
operators. A limited number of cable operators comprise the domestic cable
industry and purchase decisions by each cable operator are typically influenced
by the cable operator's technical experts. Direct marketing activities focus on
reaching these technical experts and creating product awareness and credibility
for Com21's systems within the cable operator community. Internationally, we
focus our marketing efforts on supporting our systems integration partners'
marketing programs.

A key factor to building global brand awareness for Com21 products is
promoting the success of Com21's commercial cable modem system deployments.
Com21 also educates cable operators regarding the benefits of providing tiered
services to a diverse subscriber base, ranging from residential consumers to
business users. Com21 is also building its brand name through continued
publicity and referral efforts in both media and industry-centered activities.
Com21 markets its systems through several promotional programs, including the
following:

- direct mail campaigns to the larger cable operators;

- editorial presence in various trade magazines;

- public speaking opportunities;

- national cable trade show participation;

- Web site-based communication and promotion;

- media sponsorships; and

- participation in standards activities.

In anticipation of the introduction of our DOCSIS-compliant cable modems,
we are in the process of establishing alternative distribution channels
including Internet and retail channels. We will also begin consumer marketing
activities.

Sales. We have a sales force of 19 people in five North American locations
and four locations internationally. Currently, Com21 sells its products in North
America primarily through direct sales channels to cable operators.
Internationally, we sell our products primarily to systems integrators, who in
turn sell to cable operators. Com21's two largest systems integrators are
Philips and Siemens, both of whom have a strong presence in numerous markets.
Com21's systems integrators have established customer bases and relationships
with cable operators. These relationships allow Com21 to market and create brand
awareness within each region by selling locally into their respective markets,
and the local presence of the systems integrators bridges cultural and
communication gaps. As of December 31, 1998, Com21 had agreements with 26
systems integrators in North America, Europe, Asia, Latin America and the
Pacific Rim.

RESEARCH AND DEVELOPMENT

Com21 focused its research and development efforts on increasing the
scalability and performance of its current products, reducing the cable
operator's cost of ownership, enhancing value-added services for subscribers,
reducing costs and supporting emerging cable modem standards. In addition to
enhancements of the current ComUNITY Access system products, Com21 has also
focused research and development efforts on new products, including
DOCSIS-compliant cable modems, a secure IP module, an enterprise cable telephony
module and a home networking module. Other developments underway include a 155
megabits per second OC-3 ATM interface to provide an integrated connection to
the cable operator's fiber synchronous optical network distribution network, and
next-generation DOCSIS-compliant cable modems. See "Products -- Products under
development" and "-- DOCSIS products under development."

45
<PAGE> 47

Our research and development expenditures were $12.4 million in 1996, $13.5
million in 1997 and $19.9 million in 1998. Research and development expenses
primarily consist of salaries and related costs of employees engaged in ongoing
research, design and development of our products and technology.

As of December 31, 1998, Com21 had a team of 89 engineers with expertise in
ASIC design and electronics, encryption, radio frequency modulation and
demodulation, digital electronics design, networking, embedded software, and
network management. The engineering team includes three engineers with Ph.D.s
and 42 engineers with advanced degrees. Com21 is seeking to hire additional
skilled engineers for research and development. If we encounter delays in hiring
additional engineers, our business, operating results and financial condition
could be adversely affected. See "Risk Factors -- Competition for qualified
personnel in the cable networking equipment and telecommunications industries is
intense, and we may not be successful in attracting and retaining these
personnel."

Com21's future performance depends on a number of factors, including its
ability to identify emerging technological trends in its target markets, develop
and maintain competitive products, enhance its products by adding innovative
features that differentiate its products from those of competitors, bring
products to market on a timely basis at competitive prices, properly identify
target markets and respond effectively to new technological changes or new
product announcements by others. We cannot assure you that the design and
introduction schedules for any additions and enhancements to our existing and
future products will be met, that these products will achieve market acceptance,
or that these products will be able to be sold at average selling prices that
are favorable to us. In evaluating new product decisions, we must anticipate
well in advance the future demand for product features and performance
characteristics, as well as available supporting technologies, manufacturing
capacity, industry standards and competitive product offerings. We must also
continue to make significant investments in research and development in order to
continually enhance the performance and functionality of its products to keep
pace with competitive products and customer demands for improved performance,
features and functionality. The technical innovations required for Com21 to
remain competitive are inherently complex and require long development cycles.
Such innovations must be completed before developments in networking
technologies or standards render them obsolete and must be sufficiently
compelling to induce network equipment vendors to favor them over alternative
technologies. Moreover, Com21 must generally incur substantial research and
development costs before the technical feasibility and commercial viability of a
product line can be ascertained. We cannot assure you that revenues from future
products or product enhancements will be sufficient to recover the development
costs associated with such products or enhancements or that Com21 will be able
to secure the financial resources necessary to fund future development. The
failure to successfully develop new products on a timely basis could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors -- Our future success will depend in part
upon our ability to enhance our existing products and to develop and introduce,
on a timely basis, new products and features that meet changing customer
requirements and emerging industry standards."

CUSTOMER SERVICE AND TECHNICAL SUPPORT

Com21 believes that successful long-term relations with its customers
require a service organization committed to customer satisfaction. As of
December 31, 1998, Com21 had 13 technical support employees at its headquarters.
Com21 makes available to all new customers a five day training course prior to
receiving and installing a system. Customer personnel are trained in the
installation, maintenance and operation of the ComUNITY Access system.

In North America, Com21 provides direct support by telephone and at the
customers' locations. Com21 supplies support 24 hours a day, seven days a week.
Internationally, systems integrators provide first level support, and Com21
provides second level support. Com21 maintains a customer call tracking system
that captures and monitors service activities. Com21 is able to identify
problems with a customer's ComUNITY Access system via a dialup analog modem
connection or a Web-based management interface to assist with diagnostics.

46
<PAGE> 48

COMPETITION

The markets for Com21's products are intensely competitive, rapidly
evolving and subject to rapid technological change. The principal competitive
factors in this market include, or are likely to include, product performance
and features, reliability, technical support and service, relationships with
cable operators and systems integrators, compliance with industry standards,
compatibility with the products of other suppliers, sales and distribution
capabilities, strength of brand name, price, long-term cost of ownership to
cable operators and general industry and economic conditions. Many of Com21's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, marketing and
distribution resources than we do. These competitors may undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and devote
substantially more resources to developing new products than we do. We cannot
assure you that we will be able to successfully compete against current or
future competitors or that the competitive pressures we face will not materially
adversely affect our business, operating results and financial condition. In
response to changes in the competitive environment, we may make certain pricing,
service, marketing or other strategic decisions that could have a material
adverse effect on our business, operating results and financial condition. We
cannot assure you that our competitors will not develop enhancements to, or
future generations of, products that will offer prices or performance superior
to that of our products. Com21 believes that the broad adoption of the DOCSIS
standard will cause increased competition in the North American market, which is
likely to negatively affect our gross margin. We cannot assure you that
competitors will not develop DOCSIS-compliant cable modems more quickly than
Com21. Current customers that move to the DOCSIS platform could choose
alternative cable modem suppliers or choose to purchase DOCSIS-compliant cable
modems from competing suppliers. This competition could materially adversely
affect our business, operating results and financial condition.

Com21's current and potential competitors include 3Com, Cisco Systems,
General Instrument Corporation, Hybrid, Motorola, Inc., Nortel Networks, Samsung
Electronics Company, Ltd, Terayon Communication Systems and Zenith Electronics
Corporation. Some of these competitors have existing relationships with many of
our prospective customers. We cannot assure you that we will be able to
establish relationships with cable operators who have existing relationships
with our competitors, and failure to establish these relationships could have a
material adverse effect on our business, operating results and financial
condition. In addition, Com21 anticipates that some large consumer electronics
companies, such as Matsushita (which markets products under the Panasonic brand
name), Sony Corp., Thomson and Toshiba America, Inc., will likely introduce
competitive cable modem products in the future. As the DOCSIS standard is
adopted in the North American market, the distribution of cable modems may move
into the retail channel. If this occurs, the large consumer electronics
companies could gain a competitive advantage, due to their well-established
retail distribution capabilities. There can be no assurance that Com21 will be
able to compete successfully against current or future competitors or that
competitive pressures faced by us will not have a material adverse effect on
Com21's business, operating results and financial condition. See "Risk Factors--
The market in which we operate is highly competitive and has many more
established competitors."

We also expect to face intense competition from wireless and telco-related
wireline technologies that provide high bandwidth access in the local loop.
Competing technologies include telco-related xDSL implementations, such as ADSL
and high bit rate digital subscriber line, commonly known as HDSL in the
telecommunications industry, wireless offerings such as LMDS, MMDS and DBS. We
expect competition from telco-related wireline solutions to be intense because
of the ubiquity of the telephone infrastructure. We cannot assure our cable
modem technology will compete effectively against wireline and wireless
technologies. Additionally, we believe that digital set-top boxes that integrate
cable modems to provide Internet access via the television may compete with our
cable modems in the lower end consumer Internet access market. Equipment
suppliers of such products include General Instrument, NCI, Nokia, Panasonic,
Philips, Scientific Atlanta and WebTV (Microsoft).

INTELLECTUAL PROPERTY

Com21 relies on a combination of patent, copyright and trademark laws, and
on trade secrets, confidentiality provisions and other contractual provisions to
protect its proprietary rights. These measures
47
<PAGE> 49

afford only limited protection. Com21 currently has five issued U.S. patents and
several pending patent applications. See "Risk Factors -- Our failure to
adequately protect our proprietary rights may adversely affect us."

EMPLOYEES

As of December 31, 1998, Com21 had a total of 176 full-time employees and
11 full-time contractors. Of the total number of employees, 89 were in research
and development, 31 in marketing and technical support, 23 in operations, 19 in
sales and 14 in administration. Com21's employees are not represented by any
collective bargaining agreement with respect to their employment by Com21, and
Com21 has never experienced an organized work stoppage.

Com21's future success is heavily dependent upon its ability to hire and
retain qualified technical, marketing and management personnel. The competition
for personnel is intense, particularly for engineering personnel with related
networking and integrated circuit design expertise and for technical support
personnel with networking engineering expertise. See "Risk
Factors -- Competition for qualified personnel in the cable networking equipment
and telecommunications industries is intense, and we may not be successful in
attracting and retaining such personnel."

FACILITIES

Com21 leases approximately 44,600 square feet of administrative, research
and development, and manufacturing facilities in Milpitas, California and
intends to lease an additional 26,000 square feet of space in Milpitas. Com21
believes that after entering into the lease for the additional space, its
current facilities will be sufficient to handle our operations for at least the
next 12 months. We believe that future growth can be accommodated by obtaining
the necessary additional space. Com21 also leases three sales offices, in
Denver, Colorado, Atlanta, Georgia, and Toronto, Canada.

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<PAGE> 50

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of Com21 as of December 31, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Peter D. Fenner................... 62 President, Chief Executive Officer and Director
Paul Baran........................ 71 Chairman of the Board of Directors
David L. Robertson................ 56 Chief Financial Officer, Vice President, Finance and
Secretary
William J. Gallagher.............. 54 Vice President, Sales
Buck J. Gee....................... 49 Vice President, Marketing
Michael F. Gordon................. 48 Vice President, Field and Customer Support
Kenneth C. Gorman................. 54 Vice President, Engineering
Mark E. Laubach................... 44 Chief Technical Officer and Vice President, Technology
Timothy I. Miller................. 43 Vice President, Manufacturing
C. Richard Kramlich(1)............ 62 Director
Scott J. Loftesness(2)............ 51 Director
Robert C. Hawk.................... 58 Director
William R. Hearst III............. 48 Director
Robert A. Hoff(2)................. 46 Director
Robert W. Wilmot(1)............... 53 Director
</TABLE>

- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.

PETER D. FENNER. Mr. Fenner has been President, Chief Executive Officer and
a Director of Com21 since February 1996. From January 1989 through April 1992,
he served as President of the Transmission Systems Business Unit of AT&T Network
Systems (Lucent) and Corporate Officer at AT&T. From April 1992 to February
1996, Mr. Fenner was an independent consultant. From February 1986 through
December 1988, Mr. Fenner was Vice President, Product Planning for AT&T's
Network Systems Division. Mr. Fenner is Director of CorNet Information Ltd. Mr.
Fenner received an S.M. from the Sloan School of Management at the Massachusetts
Institute of Technology, where he was a Sloan Fellow, and a B.S. in Industrial
Engineering from Lehigh University.

PAUL BARAN. Mr. Baran has been the Chairman of the Board of Directors since
Com21's inception in June 1992. He is presently retired. Mr. Baran was chosen by
Communications Week and Data Communications as one of the top 25 visionaries in
the data communications industry and was recipient of the Electronic Frontier
Foundation Pioneer Award (1993), the Marconi International Fellowship Award
(1991), the Institute of Electronics and Electrical Engineering, Inc. ("IEEE")
Alexander Graham Bell Medal (1990), the ACM SIG/Communications Award (1989) and
the IEEE Communications Society Edwin Armstrong Award (1987). He co-founded
Equatorial Communications, Packet Technologies, Telebit Corporation and
Metricom, Inc. Mr. Baran is a Fellow of the IEEE and a Fellow of the AAAS. Mr.
Baran received an M.S. in both Electrical Engineering and Computers from the
University of California, Los Angeles, and a B.S. in Electrical Engineering and
a Dr.Sci. in Engineering (Hon.) from Drexel University.

DAVID L. ROBERTSON. Mr. Robertson has been Chief Financial Officer and Vice
President, Finance of Com21 since April 1995. From March 1993 through April
1995, Mr. Robertson was the Vice President of Finance and Chief Financial
Officer at Endosonics Corporation, a medical device company. From December 1992
to March 1993, Mr. Robertson was an independent consultant. From November 1990
through December 1992, Mr. Robertson was the Vice President and Chief Financial
Officer at Circadian, Inc., a medical device company. He also participated in
the founding of StrataCom, Inc. and served as a Director of StrataCom for two
years during its early stages. Mr. Robertson is a Certified Public Accountant
and received

49
<PAGE> 51

an M.B.A. from the University of California, Berkeley and a B.A. in economics
from the University of Washington.

WILLIAM J. GALLAGHER. Mr. Gallagher has been Vice President of Sales since
August 1995. From October 1994 to July 1995 he was Vice President of Marketing
at Pacific Gas & Electric Company, a utility company. From October 1993 to
September 1994, Mr. Gallagher was with MCI Telecommunications Corp. as Vice
President, Carrier Services. From August 1991 to September 1994, Mr. Gallagher
was a Vice President and Consultant at San Francisco Consulting Group. He
received a B.A. from the University of New Mexico.

BUCK J. GEE. Mr. Gee has been Vice President of Marketing since November
1994. From September 1993 through October 1994, Mr. Gee was the Manager of the
FDDI Adapters Group at Cisco. From December 1990 through September 1993 he was
Director of Marketing and Director of Business Development for Crescendo
Communications, Inc., a computer networking company. Mr. Gee has also held
engineering and marketing positions at Hewlett-Packard Company, 3Com and
National Semiconductor Corp. He received an M.B.A. from Harvard Business School
and both a B.S. and a M.S. in Electrical Engineering from Stanford University.

MICHAEL F. GORDON. Mr. Gordon has been Vice President of Field Services and
Customer Support since July 1997. From December 1995 through June 1997, he was
an independent technical and management consultant. From February 1992 through
December 1997, Mr. Gordon was the President and Chief Operating Officer of
Telecoupon Network, Inc. a coupon delivery kiosk company. Mr. Gordon received a
B.S. in Computer Science from the University of Michigan.

KENNETH C. GORMAN. Mr. Gorman has been Vice President of Engineering since
July 1995. From April 1992 through June 1995, he was employed at Resound, Inc.,
a consumer health company where he served in various capacities including Vice
President, Engineering. From April 1989 to April 1992 Mr. Gorman was employed at
Sun Microsystems, Inc. Mr. Gorman received an S.M.E. in Electrical Engineering
from the Massachusetts Institute of Technology and a B.S. in Electrical
Engineering from the University of Kansas.

MARK E. LAUBACH. Mr. Laubach has been Vice President of Technology and
Chief Technical Officer of Com21 since June 1996. He is a co-founder of the
Company and has also been Chief Architect since June 1994. From November 1979 to
June 1994, Mr. Laubach was an engineer at Hewlett-Packard Laboratories, where he
was directly responsible for impacting the international IP over ATM networking
standards. He is a member of the Internet Engineering Task Force ("IETF") and
past chair of the IP over ATM Working Group. Mr. Laubach participates in the ATM
Forum's Residential Broadband working group and is the past liaison to the IEEE
802.14 working group. He participates in the IEEE 802.14 working group and the
SCTE High-Speed Digital Communications standards working group. Mr. Laubach
received both a M.S.C.S. in Computer Engineering and a B.S. in Electrical
Engineering from the University of Delaware.

TIMOTHY I. MILLER. Mr. Miller has been Vice President of Manufacturing
since November 1996 and has been employed by Com21 since October 1994. From
November 1990 to September 1994, he was Director of Manufacturing and Materials
at Coactive Computers, a computer software company, where he was responsible for
scheduling and production. Mr. Miller has also held senior management positions
with Tidewater Associates and Morrison Design. Mr. Miller received both a B.S.
in Business Administration and a B.A. from San Jose State University.

C. RICHARD KRAMLICH. Mr. Kramlich has been a Director of Com21 since May
1994. Mr. Kramlich is the co-founder and has been General Partner of New
Enterprise Associates since 1978. He is a Director of Ascend Communications,
Inc., Chalone, Inc., Lumisys, Inc., Macromedia, Inc. and Silicon Graphics, Inc.
Mr. Kramlich received an M.B.A. from Harvard Business School and a B.S. from
Northwestern University.

SCOTT J. LOFTESNESS. Mr. Loftesness has been a Director of Com21 since its
inception in 1992 and is a co-founder of Com21. Mr. Loftesness was previously
the President of DigiCash, Inc., an electronic cash product company, Mr.
Loftesness was previously a Group Executive of Merchant Systems, First Data
Corporation, a credit card processing and payment system company, where he was
employed from June 1994 through July 1998. From September 1991 through June
1994, he was Group Executive at Visa International.

50
<PAGE> 52

His other prior experience includes senior management positions with FMR Corp.
(a parent of Fidelity Investments) and International Business Machines
Corporation. He is a Director of several private companies. Mr. Loftesness
attended the University of California, Berkeley.

ROBERT C. HAWK. Mr. Hawk has been a Director of Com21 since January 1997.
Mr. Hawk has been an independent business consultant since April 1997. From
April 1996 through March 1997, he was President of U.S. West Multimedia, a cable
company. From April 1986 through March 1996, he was the President of Carrier
Division, U.S. West Communications, a telecommunications Company. He is a
Director of PairGain Technologies, COVAD Communications, Inc., Xylan Corp.,
Concord Corp., and RADCom Corp. Mr. Hawk received an M.B.A. from the University
of San Francisco and a B.B.A. from the University of Iowa.

WILLIAM R. HEARST III. Mr. Hearst has been a Director of Com21 since April
1998. Mr. Hearst has also been a Director of @Home Corporation since August 1995
and has served as Vice Chairman of the Board of Directors of @Home since July
1996. He has been a general partner of Kleiner Perkins Caulfield & Byers
("KPCB"), a venture capital firm, since January 1995. From May 1995 to July
1996, he was the founding Chief Executive Officer of @Home. Before joining KPCB,
Mr. Hearst was editor and publisher of the San Francisco Examiner for ten years.
He is a Fellow of the AAAS and a Trustee of the Carnegie Institute of Washington
and the California Academy of Sciences. Mr. Hearst holds an A.B. in mathematics
from Harvard University.

ROBERT A. HOFF. Mr. Hoff has been a Director since Com21's inception in May
1994. He has been a general partner at CrossPoint Venture Partners since 1983.
Mr. Hoff serves as a Director of PairGain Inc., Onyx Acceptance Corp. and US Web
Corporation. Mr. Hoff received an M.B.A. from Harvard Business School and a B.S.
in Business Administration from Bucknell University.

ROBERT W. WILMOT. Dr. Wilmot has been a Director of Com21 since April 1995.
Dr. Wilmot has been Chairman at Wilmot Consulting Inc. since May 1995. From
April 1994 to May 1995, Mr. Wilmot was an independent consultant and investor.
From May 1985 through April 1994, he was Chairman at Wilmot Enterprises Ltd. His
other prior positions include Vice President and Managing Director of Texas
Instruments and CEO of International Computers PLC, a computer company. Dr.
Wilmot is a founder of a number of companies including ES2 SA, the OASiS Group
Plc, CMI Ltd., MOVID Technology Inc., Poqet Computer Inc., VXtreme, Inc. and
Integrity Arts, Inc. He is a Director of FVC.COM and Sequent Computer Systems.
Dr. Wilmot received a B.S. in Electrical Engineering from Nottingham University.

Com21 has authorized eight directors. Each director is elected for a period
of one year at Com21's annual meeting of stockholders and serves until the next
annual meeting or until his successor is duly elected and qualified. The
executive officers serve at the discretion of the board of directors. There are
no family relationships among any of Com21's directors or executive officers.

COMMITTEES OF THE BOARD OF DIRECTORS

Compensation Committee. The compensation committee is primarily responsible
for reviewing and approving Com21's general compensation policies and setting
compensation levels for our executive officers. The committee also administers
Com21's incentive compensation plans. The committee currently consists of two
directors, Mr. Loftesness and Mr. Hoff.

Audit Committee. The audit committee is primarily responsible for approving
the services performed by the Company's independent auditors and reviewing the
auditor's reports regarding Com21's accounting practices and systems of internal
accounting controls. The committee currently consists of two directors, Mr.
Wilmot and Mr. Kramlich.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the compensation committee of Com21's board of directors are
Mr. Loftesness and Mr. Hoff. No executive officer of Com21 serves on the board
of directors or compensation committee of any entity which has one or more
executive officers serving as a member of Com21's board of directors or
compensation committee.
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<PAGE> 53

DIRECTOR COMPENSATION

Com21 currently does not compensate any member of Com21's board of
directors. Members of the board of directors are eligible to receive
discretionary option grants and stock issuances under the 1998 Stock Incentive
Plan. In addition, under the 1998 Stock Incentive Plan, non-employee directors
will receive automatic option grants upon becoming directors and on the date of
each annual meeting of stockholders. The 1998 Stock Incentive Plan also contains
a director fee option grant program. Should this program be activated in the
future, each non-employee board member will have the opportunity to apply all or
a portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. See "Management -- Benefit Plans."

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation of Com21's chief executive officer and each of the four other
executive officers who were serving as executive officers of Com21 during fiscal
year 1998 and whose total annual salary and bonus during such fiscal year
exceeded $100,000 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION($) SECURITIES
NAME AND ------------------------- UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED(#)(1)
- ------------------------------------- ----- ----------- -------- ---------------------
<S> <C> <C> <C> <C>
Peter D. Fenner...................... 1998 $311,580 $120,000 100,000
President and Chief Executive
Officer 1997 300,040 -- --

Buck J. Gee.......................... 1998 170,100 70,000 36,425
Vice President, Marketing 1997 144,585 -- --

David L. Robertson................... 1998 170,100 80,000 36,425
Chief Financial Officer, 1997 144,585 -- --
Vice President, Finance and
Secretary

William J. Gallagher................. 1998 149,443 235,018 22,505
Vice President, Sales 1997 150,020 78,065 --

Kenneth C. Gorman.................... 1998 171,369 66,000 36,425
Vice President, Engineering 1997 152,790 25,000 --
</TABLE>

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

(1) The options listed in the table were granted under Com21's 1998 Stock
Incentive Plan. See "-- Option Grants in Fiscal Year 1998" for a description
of these options.

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<PAGE> 54

OPTION GRANTS IN FISCAL YEAR 1998

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES IN FOR OPTION TERM($)(4)
OPTIONS GRANTED FISCAL YEAR EXERCISE EXPIRATION -------------------------
NAME (#)(1) (%)(2) PRICE($)(3) DATE 5% 10%
- ------------------------ --------------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Fenner......... 60,417(5) 4.41% 9.00 04/21/08 $341,963 $866,602
............ 39,583(6) 2.89 9.00 04/21/08 224,042 567,766
Buck J. Gee............. 15,000 1.10 7.00 01/14/08 66,034 167,343
............ 21,425 1.57 9.00 04/21/08 121,267 307,313
David L. Robertson...... 15,000 1.10 7.00 01/14/08 66,034 167,343
............ 21,425 1.57 9.00 04/21/08 121,267 307,313
William J. Gallagher.... 21,425 1.57 9.00 04/21/08 121,267 307,313
............ 1,080(7) .08 9.00 04/21/08 6,113 15,491
Kenneth C. Gorman....... 15,000 1.10 7.00 01/14/08 66,034 167,343
............ 21,425 1.57 9.00 04/21/08 121,267 307,313
</TABLE>

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

(1) With the exception of Mr. Gallagher's 1,080-share option grant and Mr.
Fenner's 60,417-share and 39,583-share option grants, all options granted to
the Named Executive Officers in fiscal year 1998 vest as follows:
Twenty-five percent (25%) of the option shares will vest upon the optionee's
continuation in service through one year following the grant date and the
balance in thirty-six (36) equal installments upon the optionee's continued
service at the completion of each of the next thirty-six (36) months
thereafter. The date of Mr. Gee's 15,000-share option grant, Mr. Robertson's
15,000-share option grant and Mr. Gorman's 15,000-share option grant was
January 15, 1998. The date of all other option grants was April 22, 1998.
Each option has a maximum term of ten (10) years, subject to earlier
termination in the event of the optionee's cessation of service with Com21.

(2) Based on an aggregate of 1,368,615 options granted to employees, consultants
and directors, including the Named Executive Officers during the fiscal year
1998.

(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors after consideration of a number of factors, including, but not
limited to, Com21's financial performance, market conditions, the price and
preferred rights and privileges of shares of equity securities sold to or
purchased by outside investors and third-party appraisals.

(4) The potential realizable value is calculated based on the term of the option
at its time of grant, which is ten years. It is calculated assuming that the
fair market value of Com21's common stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price.

(5) Mr. Fenner's 60,417-share option grant was granted under Com21's 1998 Stock
Incentive Plan. The 60,417-share grant vests in the following manner: 11,111
shares will vest upon Mr. Fenner's continuation in service through March 10,
1999, and the balance of the shares become exercisable in amounts of
approximately 2,083 shares on the tenth day of each month January through
June in 2000, January through May in 2001 and January through March in 2002.

(6) Mr. Fenner's 39,483-share option grant was granted under Com21's 1998 Stock
Incentive Plan. The 39,583-share grant vests in the following manner: 13,889
shares will vest upon Mr. Fenner's continuation in service through March 10,
1999, and the balance of the shares become exercisable in amounts of
approximately 2,083 shares on the tenth day of each month, April through
December in 1999, June through December in 2000 and June through December in
2001.

(7) Mr. Gallagher's 1,080-share option grant vested in six (6) successive equal
monthly installments upon Mr. Gallagher's completion of each month of
service over the six month period following April 22, 1998, the grant date
of the option.

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<PAGE> 55

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND LAST FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning option exercises and
option holdings for fiscal year 1998 with respect to the Named Executive
Officers. Except as set forth below, no options or stock appreciation rights
were exercised by any such individual during such year, and no stock
appreciation rights were outstanding on December 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(5)
ACQUIRED ON VALUE --------------------------------- -----------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE(3) UNEXERCISABLE(4) EXERCISABLE UNEXERCISABLE
---- ----------------- -------------- -------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Fenner............ 64,000 $650,400 307,500 100,000 $6,334,500 $1,200,000
Buck J. Gee................ -- -- 15,000 21,425 210,000 257,100
David L. Robertson......... -- -- 30,000 21,425 513,000 257,100
William J. Gallagher....... 4,000 65,900 94,580 21,425 1,930,060 257,100
Kenneth C. Gorman.......... -- -- 15,000 21,425 210,000 257,100
</TABLE>

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

(1) As of December 31, 1998, Mr. Fenner was vested in all of the shares
exercised and Mr. Gallagher was vested in all of the shares exercised.

(2) Based on the fair market value of the purchased option shares at the time of
exercise less the option exercise price paid for those shares.

(3) Each of the options was granted under Com21's 1995 Stock Option Plan and has
been incorporated in Com21's 1998 Stock Incentive Plan. Each of the options
is immediately exercisable, but all shares purchased under the options are
subject to vesting requirements and may be repurchased by Com21 at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses with
respect to 25% of the option shares upon completion of one year of service
from the vesting commencement date and the balance in a series of equal
monthly installments over the next 36 months of service thereafter. Each
option has a maximum term of ten years, subject to earlier termination in
the event of the optionee's cessation of service with Com21. As of December
31, 1998, Mr. Fenner was vested in 161,663 shares of his outstanding
options, Mr. Gee was vested in none of his outstanding options, Mr.
Robertson was vested in 7,499 shares of his outstanding options, Mr.
Gallagher was vested in 73,639 shares of his outstanding options and Mr.
Gorman was vested in none of his outstanding options.

(4) Each of the options was granted under Com21's 1998 Stock Incentive Plan. All
options granted vest as follows: Twenty-five percent (25%) of the option
shares will vest upon the optionee's continuation in service through one
year following the vesting commencement date, and the balance of the shares
vest in thirty-six (36) successive equal monthly installments upon the
optionee's continued service at the completion of each of the next
thirty-six (36) months thereafter. Each option has a maximum term of ten
years, subject to earlier termination in the event of the optionee's
cessation of service with Com21.

(5) Based on the fair market value of the option shares on December 31, 1998
($21.00 per share) less the option exercise price payable for those shares.

BENEFIT PLANS

1998 Stock Incentive Plan. Com21's 1998 Stock Incentive Plan serves as the
successor equity incentive program to Com21's 1995 Stock Option Plan, as
amended. The 1998 Stock Incentive Plan was adopted by the board on March 10,
1998 and was subsequently approved by the stockholders in March 1998. The 1998
Stock Incentive Plan became effective on April 1, 1998 (the "Plan Effective
Date").

3,474,520 shares of common stock have been authorized for issuance under
the 1998 Stock Incentive Plan. This reserve may be automatically increased by an
additional 254,838 shares to the extent any unvested shares of common stock
issued under the 1995 Stock Option Plan are repurchased by Com21 after April 1,
1998. The number of shares of common stock reserved for issuance under the 1998
Stock Incentive Plan is
54
<PAGE> 56

automatically increased on the first trading day of each calendar year,
beginning in calendar year 1999, by an amount equal to the lesser of five
percent (5%) of the total number of shares of common stock outstanding on the
last trading day of the preceding calendar year or 1,500,000 shares. In no
event, however, may any one participant in our 1998 Stock Incentive Plan receive
option grants, separately exercisable stock appreciation rights or direct stock
issuances for more than 500,000 shares of common stock in the aggregate per
calendar year.

On April 1, 1998, all outstanding options and unvested shares issued under
our 1995 Stock Option Plan were incorporated into our 1998 Stock Incentive Plan,
and no further option grants have been made under the 1995 Stock Option Plan
since that date. The incorporated options and unvested shares continue to be
governed by their existing terms. Except as otherwise noted below, the
incorporated options have substantially the same terms as will be in effect for
grants made under the Discretionary Option Grant Program of our 1998 Stock
Incentive Plan.

Our 1998 Stock Incentive Plan is divided into five separate components:

- the Discretionary Option Grant Program;

- the Stock Issuance Program;

- the Salary Investment Option Grant Program;

- the Automatic Option Grant Program; and

- the Director Fee Option Grant Program.

The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the compensation committee with respect to Com21's executive
officers and non-employee board members. A secondary committee of the board
administers these programs for all other eligible individuals. The board may at
any time terminate the secondary committee and either the board or the
compensation committee would assume all powers and authority previously
delegated to such committee. The compensation committee, the board or the
secondary committee as plan administrator will have complete discretion to
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the option grants or
stock issuances are to be made, the number of shares subject to each grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the Federal tax laws, the vesting schedule
to be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. However, any discretionary
option grants or stock issuances to members of the compensation committee shall
be made by a disinterested majority of the board. The compensation committee
will also have the exclusive authority to select the executive officers and
other highly compensated employees who may participate in the Salary Investment
Option Grant Program in the event that program is activated for one or more
calendar years, but neither the compensation committee nor the board will
exercise any administrative discretion with respect to option grants under the
Salary Investment Option Grant Program or under the Automatic Option Grant or
Director Fee Option Grant Program for the non-employee board members. All grants
under those three latter programs will be made in strict compliance with the
express provisions of each program.

The exercise price for the shares of common stock subject to option grants
made under our 1998 Stock Incentive Plan may be paid in cash or in shares of
common stock. The option may also be exercised through a same-day sale program.
In addition, the plan administrator may allow one or more optionees to exercise
their outstanding options or purchase their unvested shares promissory notes.

The plan administrator has the authority to cancel outstanding options and
grant new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the common stock on
the new grant date.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
Com21 equal to the excess of (i) the fair market value of the vested shares of
common

55
<PAGE> 57

stock subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of common stock. None of the incorporated options from our 1995 Stock
Option Plan contain any stock appreciation rights.

In the event that Com21 is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent Com21's repurchase rights
with respect to those shares are to be assigned to the successor corporation.
The plan administrator will have complete discretion to provide for additional
acceleration features in connection with a merger or asset sale and with respect
a change in control of Com21 due to a tender offer of contested board elections.
The vesting of outstanding shares under the Stock Issuance Program may be
accelerated upon similar terms and conditions. The options incorporated from our
1995 Stock Option Plan will immediately vest upon an acquisition of Com21 by
merger or asset sale, unless those options are assumed or replaced by, and
Com21's repurchase rights assigned to, the successor entity. The plan
administrator will have the discretion to extend the acceleration provisions of
the 1998 Stock Incentive Plan to options outstanding under our 1995 Stock Option
Plan.

In the event the plan administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of Com21 selected for
participation may elect, prior to the start of the calendar year, to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. If this election is approved by the plan
administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
common stock determined by dividing the salary reduction amount by two-thirds of
the fair market value per share of common stock on the grant date. The option
will be exercisable at a price per share equal to one-third of the fair market
value of the option shares on the grant date. The option will vest and become
exercisable in a series of twelve (12) equal monthly installments over the
calendar year for which the salary reduction is to be in effect.

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the completion of this offering
will automatically receive an option grant for 15,000 shares as of the date the
individual joins the board, provided such individual has not been in the prior
employ of Com21. In addition, on the date of each annual stockholders meeting
held after April 1, 1998, each non-employee board member who is to continue to
serve as a non-employee board member will automatically be granted an option to
purchase 5,000 shares of common stock, provided the individual has served on the
board for at least six months.

Each automatic grant for the non-employee board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by Com21, at the exercise price paid per share, should
the optionee cease board service prior to vesting in those shares. The shares
subject to each initial 15,000-share automatic option grant will vest in four
equal annual installments upon the individual's completion of each year of board
service measured from the option grant date. Each 5,000-share automatic option
grant will vest in two. However, the shares subject to each automatic grant will
immediately vest in full upon the optionee's death or disability while a board
member.

Should the Director Fee Option Grant Program be activated in the future,
each non-employee board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on

56
<PAGE> 58

the grant date. The option will vest and become exercisable for the option
shares in a series of twelve (12) equal monthly installments over the calendar
year for which the election is to be in effect. However, the option will become
immediately exercisable and vested for all the option shares upon the death or
disability of the optionee while serving as a board member.

The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon either:

- an acquisition of Com21 by merger or asset sale; or

- the successful completion of a tender offer for more than 50% of Com21's
outstanding voting stock or a change in the majority of the board
effected through one or more contested elections for board membership.

Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of Com21 as part of their option grants under the Discretionary Option
Grant Program. Options with such a limited stock appreciation right may be
surrendered to Com21 upon the successful completion of a hostile tender offer
for more than 50% of Com21's outstanding voting stock. In return for the
surrendered option, the optionee will be entitled to a cash distribution from
Com21 in an amount per surrendered option share equal to the excess of (i) the
highest price per share of common stock paid in connection with the tender offer
over (ii) the exercise price payable for the share.

The board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Stock Incentive Plan will terminate on
the earliest of:

- March 9, 2008;

- the date on which all shares available for issuance under the 1998 Stock
Incentive Plan have been issued as fully-vested shares; or

- the termination of all outstanding options in connection with certain
changes in control or ownership of Com21.

1998 Employee Stock Purchase Plan. Com21's 1998 Employee Stock Purchase
Plan was adopted by the board on March 10, 1998. Our 1998 Employee Stock
Purchase Plan is designed to allow eligible employees and participating
subsidiaries to purchase shares of common stock, at semi-annual intervals,
through their periodic payroll deductions under our 1998 Employee Stock Purchase
Plan, and a reserve of 250,000 shares of common stock has been established for
this purpose.

Our 1998 Employee Stock Purchase Plan operates in a series of successive
offering periods, each with a maximum duration for 24 months. The initial
offering period began on May 18, 1998 and will end on the last business day in
April 2000. The next offering period will commence on the first business day in
May 2000, and subsequent offering periods will commence as designated by the
plan administrator.

Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than 5 calendar months per year) on the start date of
any offering period may enter our 1998 Employee Stock Purchase Plan on that
start date or on any subsequent semi-annual entry date.

Payroll deductions may not exceed 10% of base salary and the accumulated
payroll deductions of each participant will be applied to the purchase of shares
on his or her behalf on each semi-annual purchase date at a purchase price per
share equal to 85% of the lower of:

- the fair market value of the common stock on the participant's entry date
into the offering period; or

- the fair market value on the semi-annual purchase date. In no event,
however, may any one participant purchase more than 1,500 shares, nor may
all participants in the aggregate purchase more than 60,000 shares on any
one semi-annual purchase date.

57
<PAGE> 59

Should the fair market value per share of common stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.

In the event Com21 is acquired by merger or asset sale, all outstanding
purchase rights will automatically be exercised immediately prior to the
effective date of the acquisition. The purchase price will be equal to 85% of
the lower of:

- the fair market value per share of common stock on the participant's
entry date into the offering period in which the acquisition occurs; or

- the fair market value per share of common stock immediately prior to the
acquisition.

Our 1998 Employee Stock Purchase Plan will terminate on the earlier of:

- the last business day of April 2008;

- the date on which all shares available for issuance under our 1998
Employee Stock Purchase Plan shall have been sold pursuant to purchase
rights exercised thereunder; or

- the date on which all purchase rights are exercised in connection with an
acquisition of Com21 by merger or asset sale.

The board may at any time alter, suspend or discontinue our 1998 Employee
Stock Purchase Plan. However, certain amendments to our 1998 Employee Stock
Purchase Plan may require stockholder approval.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

Com21 does not presently have any employment contracts in effect with the
chief executive officer or any other Named Executive Officers. Com21 provides
incentives such as salary, benefits and option grants to attract and retain
qualified employees.

In the event that Com21 is acquired by merger or asset sale, each
outstanding option held by the chief executive officer or any Named Executive
Officer under our 1998 Stock Incentive Plan will automatically accelerate in
full, and all unvested shares held by those individuals under this plan will
immediately vest in full, except to the extent such options are to be assumed
by, and Com21's repurchase rights with respect to those shares are to be
assigned to, the successor corporation. The plan administrator will have the
authority to grant options which will immediately vest upon an acquisition of
Com21, whether or not those options are assumed by the successor corporation.
The plan administrator is also authorized under the Discretionary Option Grant
and Stock Issuance Programs to grant options and to structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a change in control of Com21 (whether by
merger or asset sale, or successful tender offer for more than fifty percent
(50%) of the outstanding voting stock or a change in the majority of the board
by reason of one or more contested elections for board membership), with the
vesting to occur either at the time of the change in control or upon the
subsequent termination of the individual's service within a designated period
(not to exceed eighteen months) following such change in control. The options
incorporated from our 1995 Stock Option Plan will immediately vest upon an
acquisition of Com21 by merger or asset sale, unless those options are assumed
by, and Com21's repurchase rights are assigned to, the successor entity. In
addition, certain options granted to executive officers provide that if the
options are assumed in an acquisition and the optionee's service is
involuntarily terminated within eighteen months following the acquisition the
option shares will vest in full and Com21's repurchase rights will lapse. The
plan administrator will have the discretion to extend the acceleration
provisions of our 1998 Stock Incentive Plan to options outstanding under the
1995 Stock Option Plan.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Com21's certificate of incorporation limits the liability of Com21's
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the

58
<PAGE> 60

Delaware General Corporation Law. This limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or recission.

Com21's bylaws provide that Com21 shall indemnify its directors and
officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. Com21 has entered into indemnification agreements with its officers and
directors containing provisions that may require Com21, among other things, to
indemnify its officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

At present, there is no pending litigation or proceeding involving a
director or officer of Com21 where indemnification is required or permitted.

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<PAGE> 61

CERTAIN TRANSACTIONS

TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS

Since its inception, Com21 has raised capital primarily through the sale of
its preferred stock. In June 1994, Com21 sold 1,805,674 shares of Series A
Preferred Stock at a price of $1.58 per share. In September 1994, Com21 sold
250,000 shares of Series B Preferred Stock at a price of $2.00 per share, and
each share of Series B Preferred Stock was accompanied by the right to purchase
0.667 shares of Series C Preferred Stock at a price $3.00 per share. In May
1995, upon the exercise of the Series C Preferred Stock Warrants, the Company
issued 166,667 shares of Series C Preferred Stock for aggregate consideration of
$500,000. In May 1995, Com21 sold 1,812,500 shares of Series D Preferred Stock
at a price of $4.00 per share, and each share of Series D Preferred Stock was
accompanied by the right to purchase 0.20 shares of Series E Preferred Stock at
a price of $4.50 per share. From August 1997 through December 1997, upon
exercise of the Series E Preferred Stock Warrants, the Company issued 361,908
shares of Series E Preferred Stock for aggregate consideration of $1.63 million.
From April 1996 through July 1996 Com21 sold 2,905,730 shares of Series F
Preferred Stock at a price of $8.00 per share. From July 1997 through September
1997, Com21 sold 2,655,125 shares of Series G Preferred Stock at a price of
$8.70 per share.

The following table summarizes the shares of preferred stock purchased by
executive officers, directors, and 5% stockholders of Com21 and persons
associated with them since June 1994. All share numbers reflect the number of
shares purchased by the respective party on an as-converted basis, and includes
292,070 shares of Series F Preferred Stock and 81,339 shares of Series G
Preferred Stock sold by 3Com Corporation to each of the entities affiliated with
CrossPoint Venture Partners LS 1997, Kleiner Perkins Caufield & Byers and New
Enterprise Associates for an aggregate of 1,120,222 shares at a per share price
of $9.00 for an aggregate purchase price of $10,082,043.

<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, --------------------------------------------------------------------------------
DIRECTORS AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F SERIES G
----------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with CrossPoint Venture
Partners(1).............................. 632,910 -- -- 295,888 59,178 386,952 196,282
Entities affiliated with Kleiner Perkins
Caufield & Byers(2)...................... -- -- -- 750,000 150,000 349,135 99,826
Entities affiliated with Paul and Evelyn
Baran Trust Agreement(3)................. 235,441 -- -- 110,070 22,014 12,500 --
Entities affiliated with New Enterprise
Associates(4)............................ 632,912 -- -- 295,888 59,178 386,951 541,109
Paul Baran(5).............................. 235,441 -- -- 110,070 22,014 12,500 --
Robert C. Hawk............................. -- -- -- -- -- 6,250 7,453
Robert A. Hoff(6).......................... 632,910 -- -- 295,888 59,178 94,882 114,943
C. Richard Kramlich(7)..................... 632,912 -- -- 295,888 59,178 94,881 459,770
Scott J. Loftesness........................ 6,329 -- -- 2,960 592 -- 22,989
Robert W. Wilmot(8)........................ -- -- -- 62,500 12,500 -- --
</TABLE>

- ---------------
(1) Represents shares purchased by CrossPoint Venture Partners 1993, CrossPoint
Entrepreneurs Fund and CrossPoint Venture Partners LS 1997. Mr. Hoff, a
General Partner of CrossPoint Venture Partners, is a Director of Com21.

(2) Represents shares purchased by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II. Mr. Hearst, a General Partner of
Kleiner Perkins Caufield & Byers, is a Director of Com21.

(3) Represents shares held by the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984. Mr. Baran is chairman of the board of directors of Com21.

(4) Represents shares held by New Enterprise Associates VI, Limited Partnership,
New Enterprise Associates VI, L.P., New Enterprise Associates VII, NEA
Venture 1998 L.P. and NEA Presidents Fund L.P. Mr. Kramlich, a Managing
Partner of New Enterprise Associates, is a Director of Com21.

60
<PAGE> 62

(5) Mr. Baran is co-trustee of the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984, and serves as chairman of Com21 board of directors. Mr. Baran
disclaims beneficial ownership of 540,000 of such shares.

(6) Mr. Hoff, a General Partner of CrossPoint Venture Partners, is a Director of
Com21.

(7) Mr. Kramlich, a General Partner of New Enterprise Associates VI, L.P., is a
Director of Com21. Mr. Kramlich disclaims beneficial ownership of such
shares.

(8) Represents shares purchased by Dr. Wilmot as trustee of a living trust. Dr.
Wilmot is a Director of Com21.

TRANSACTION AMONG STOCKHOLDERS

On April 21, 1998, 3Com Corporation sold 292,070 shares of Series F
Preferred Stock and 81,339 shares of Series G Preferred Stock to each of the
entities affiliated with CrossPoint Venture Partners, Kleiner Perkins Caufield &
Byers and New Enterprise Associates for an aggregate of 1,120,227 shares at a
per share price of $9.00 per share for an aggregate purchase price of
$10,082,043.

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<PAGE> 63

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to Com21 with
respect to the beneficial ownership of Com21's common stock as of January 31,
1999, except as noted in the footnotes below by:

- all persons who are beneficial owners of five percent (5%) or more of
Com21's common stock;
- each director;
- Com21's Named Executive Officers;
- all directors and executive officers as a group; and
- the selling stockholders.

Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(2) NUMBER OF THE OFFERING(2)
------------------- SHARES BEING -------------------
NAMES AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------------------------- --------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
C. Richard Kramlich.............................
New Enterprise Associates VI, L.P.(3)......... 1,617,344 8.6% -- 1,617,344 7.8%
2490 Sand Hill Road
Menlo Park, CA 94025
Robert A. Hoff..................................
CrossPoint Venture Partners 1993(4)........... 420,495 2.2 -- 420,495 2.0
18552 MacArthur Boulevard, Suite 400
Irvine, CA 92715
William R. Hearst III...........................
Kleiner Perkins Caufield & Byers(5)........... 562,092 3.0 -- 562,097 2.7
2750 Sand Hill Road
Menlo Park, CA 94025

Peter D. Fenner(6).............................. 516,000 2.7 30,000 486,000 2.3

Paul and Evelyn Baran Trust Agreement(7)........ 980,025 5.2 300,000(19) 680,025 3.3

Paul Baran(8)................................... 980,025 5.2 300,000(19) 680,025 3.3

David L. Robertson(9)........................... 86,679 * 6,530 80,149 *

William J. Gallagher(10)........................ 94,116 * 6,000 88,116 *

Buck J. Gee(11)................................. 90,679 * 10,000 80,679 *

Kenneth C. Gorman(12)........................... 86,684 * 25,000 61,684 *

Scott J. Loftesness............................. 262,870 1.4 100,000 162,870 *

Robert C. Hawk(13).............................. 34,969 * 9,470 25,499 *

Robert W. Wilmot(14)............................ 112,500 * 20,000 92,500 *

Michael Gordon(15).............................. 34,145 * 3,000 31,145 *

Mark Laubach(16)................................ 76,258 * 6,000 70,258 *

Timothy Miller(17).............................. 46,552 * 4,000 42,552 *

All directors and officers as a group (15
persons)(18).................................. 5,024,067 26.1% 520,000 4,504,069 21.2%
</TABLE>

- ---------------
* Less than one percent.

(1) Except as otherwise noted below, the address of each person listed on the
table is c/o Com21, Inc., 750 Tasman Drive, Milpitas, California 95035.

62
<PAGE> 64

(2) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on 18,738,310 shares outstanding as of January
31, 1999. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and includes voting and
investment power with respect to such shares. All shares of common stock
subject to options currently exercisable or exercisable within 60 days
after January 31, 1999 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other person.
Except as indicated in the footnotes to the table and subject to applicable
community property laws, based on information provided by the persons named
in the table, such persons have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.

(3) Represents 1,243,934 shares held by New Enterprise Associates VI, L.P. Also
includes 369,521 shares held by New Enterprise Associates VII, 556 shares
held by NEA Venture 1998 L.P. and 3,333 shares held by NEA Presidents Fund
L.P. which were purchased from 3Com Corporation on April 21, 1998. Voting
and dispositive power over the shares is held among all the general
partners of New Enterprise Associates. Mr. Kramlich is a General Partner at
New Enterprise Associates, the General Partner of New Enterprise Associates
VI, L.P., and as such he may be deemed to share voting and investment power
with respect to such shares. However, Mr. Kramlich disclaims beneficial
ownership of all such shares.

(4) Represents 405,789 shares of common stock held by CrossPoint Venture
Partners 1993, 25,309 shares of common stock held by CrossPoint 1993
Entrepreneurs Fund. Voting and dispositive power over the shares is held by
all the General Partners of CrossPoint Venture Partners. Mr. Hoff is a
General Partner at CrossPoint Venture Partners and as such he may be deemed
to share voting and investment power with respect to such shares. However,
Mr. Hoff disclaims beneficial ownership of all such shares. Includes 312
shares held by Mr. Hoff.

(5) Represents 528,350 shares held by Kleiner Perkins Caufield & Byers VII and
33,747 shares held by KPCB Information Sciences Zaibatsu Fund II. Voting
and dispositive power over the shares is held by all the General Partners
of Kleiner Perkins Caufield & Byers. Mr. Hearst is a General Partner of
Kleiner Perkins Caufield & Byers, and as such he may be deemed to share
voting and investment power with respect to such shares. However, Mr.
Hearst disclaims beneficial ownership of all such shares. Includes 2,654
shares held by Mr. Hearst.

(6) Includes 332,500 shares of common stock issuable upon exercise of
immediately exercisable options. Includes 198,500 shares of common stock
acquired pursuant to a stock option exercise, none of which are subject to
Com21's right of repurchase.

(7) Represents 600,000 shares held by the Baran Family Limited Partnership and
380,025 shares held under the Paul and Evelyn Baran Trust Agreement dated
May 23, 1984.

(8) Represents 600,000 shares held by the Baran Family Limited Partnership and
380,025 shares held in the name of the Paul and Evelyn Baran Trust
Agreement dated May 23, 1984. Mr. Baran is a General Partner of the Baran
Family Limited Partnership, and as such he may be deemed to share voting
and investment power with respect to such shares. However, Mr. Baran
disclaims beneficial ownership of 540,000 of such shares.

(9) Includes 30,000 shares of common stock issuable upon exercise of
immediately exercisable options. Also includes 60,000 shares acquired
pursuant to exercise of certain options, 4,800 shares of which are subject
to Com21's right of repurchase.

(10) Includes 68,500 shares of common stock issuable upon exercise of
immediately exercisable options. Includes 29,000 shares of common stock
acquired pursuant to exercise of certain options, none of which are subject
to Com21's right of repurchase.

(11) Includes 15,000 shares of common stock issuable upon exercise of
immediately exercisable options. Also includes 25,000 shares of common

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<PAGE> 65

stock acquired pursuant to a stock option exercise, of which 9,272 shares
are subject to Com21's right of repurchase.

(12) Includes 15,000 shares of common stock issuable upon exercise of
immediately exercisable options. Also includes 75,000 shares of common
stock acquired pursuant to a stock option exercise, 13,460 shares of which
are subject to Com21's right of repurchase.

(13) Includes 15,000 shares of common stock acquired pursuant to a stock option
exercise, 7,194 of which are subject to Com21's right of repurchase.

(14) Represents 37,500 shares of common stock acquired pursuant to a stock
option exercise, 4,428 of which are subject to Com21's right of repurchase.

(15) Includes 33,587 shares of common stock issuable upon exercise of
immediately exercisable options.

(16) Includes 28,772 shares of common stock issuable upon exercise of
immediately exercisable options.

(17) Includes 18,558 shares of common stock issuable upon exercise of
immediately exercisable options.

(18) Includes 535,918 shares of common stock issuable upon exercise of
immediately exercisable options. Also includes 440,000 shares of common
stock acquired pursuant to an option exercise, 34,354 of which are subject
to Com 21's right of repurchase.

(19) Represents 150,000 shares of common stock offered by the Paul and Evelyn
Baran Trust Agreement dated May 23, 1984 and 150,000 shares of common stock
offered by the Baran Family Limited Partnership.

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<PAGE> 66

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of Com21 consists of 40,000,000 shares of
common stock, $0.001 par value per share, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value per share. As of December 31, 1998 and after
giving effect to this offering, there will be an aggregate of 21,165,560 shares
of common stock issued and outstanding and approximately 2,369,341 shares of
common stock issuable upon exercise of outstanding options. There are no shares
of preferred stock issued or outstanding.

The following description of Com21's capital stock does not purport to be
complete and is subject to and qualified in its entirety by Com21's Amended and
Restated Certificate of Incorporation and Bylaws and by the provisions of the
applicable Delaware law.

COMMON STOCK

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for that purpose. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of Com21, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be outstanding upon
completion of this offering will be fully paid and nonassessable.

PREFERRED STOCK

The board of directors has the authority to issue the preferred stock in
one or more series and to fix the price, rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of the series, without any further vote or action by Com21's
stockholders. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of Com21 without further action by the stockholders and may adversely
affect the market price, and the voting and other rights, of the holders of
common stock. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting control to others. Com21 has no current plans to issue any
shares of preferred stock.

WARRANTS

As of December 31, 1998, we had outstanding warrants to purchase 46,286
shares of common stock at a weighted average exercise price of $7.76 per share.

REGISTRATION RIGHTS

Under the terms of a registration rights agreement, subject to certain
exceptions, if Com21 proposes to register any of its shares of common stock
under the Securities Act, either for its own account or the account of any
shareholder, in any public offering, certain investors holding an aggregate of
6,112,217 shares of the common stock of Com21 as of December 31, 1998 are
entitled to notice of such registration and are entitled to include their
registrable securities therein. In addition, the holder or holders of an
aggregate of at least 33% of the then outstanding registrable securities shall
have the right to require Com21 to file a registration

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<PAGE> 67

statement on a form, other than Form S-3 under the Securities Act, in order to
register the Registrable Securities then held by such holder or holders,
provided that:

- at least three months have passed since Com21's initial public offering
of shares of common stock under a registration statement; and

- the anticipated aggregate offering price to the public is at least
$7,500,000.

Further, a holder or holders may require Com21 to use all reasonable efforts to
file additional registration statements on Form S-3, provided that Com21 shall
not be required to file more than two such registration statements in any twelve
month period. The right to include any of the above described registrable
securities in any registration is subject to certain limitations and conditions,
including the underwriters' right to limit the number of shares being registered
by all holders. Com21 is required to indemnify holders of registrable securities
and the underwriters, if any, for such holders under certain circumstances. In
general, Com21 is required to bear the expenses of two requested demand and all
piggyback registrations, except for the selling shareholders' pro rata portion
of the underwriting discounts and commissions.

LISTING

Com21's common stock is traded on The Nasdaq National Market under the
trading symbol "CMTO."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of the common stock is Boston EquiServe.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Certificate of Incorporation and Bylaws. Com21's certificate of
incorporation and bylaws contain certain provisions that, together with the
ownership position of the officers, directors and their affiliates, could
discourage potential takeover attempts and make more difficult, attempts by
stockholders to change management, which could adversely affect the market price
of Com21's common stock. Furthermore, Com21's board of directors has the
authority to impose various procedural and other requirements that could make it
more difficult for stockholders to effect certain corporate actions. Any vacancy
on the board of directors may be filled only by vote of the majority of
directors then in office.

Com21's board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of Com21.

Section 203 of the Delaware General Corporation Law. Com21 is subject to
Section 203 of the DGCL which imposes restrictions on business combinations
(which include a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder) with interested stockholders
(being any person who acquired 15% or more of Com21's outstanding voting stock).
In general, Com21 is prohibited from engaging in business combinations with an
interested stockholder, unless:

- before such person became an interested stockholder, the board of
directors of Com21 approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination;

- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of Com21 outstanding at the time the
transaction commenced (excluding for purposes of determining the number
of shares outstanding stock held by directors who are also officers of
Com21 and by employee stock plans that

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do not provide employees with the rights to determine confidentiality
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or

- at or subsequent to the time which such person became an interested
stockholder, the business combination is approved by the board of
directors of Com21 and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting
stock of Com21 not owned by the interested stockholder.

Under Section 203, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the earlier of the announcement or notification of one of certain extraordinary
transactions involving Com21 and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of Com21's board of directors, if the
extraordinary transaction is approved or not opposed by a majority of the
directors who are directors prior to any person becoming an interested
stockholder during the previous three years or who were recommended for election
or elected to succeed these directors by a majority of these directors. By
restricting the ability of Com21 to engage in business combinations with an
interested person, the application of Section 203 to Com21 may provide a barrier
to hostile or unwanted takeovers.

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SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of shares of Com21's common stock in
the public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.

Upon the completion of this offering, 21,165,560 shares of common stock
will be outstanding (based on shares outstanding as of December 31, 1998, and
assuming no exercise of outstanding options or warrants), assuming the issuance
by Com21 of an aggregate of 2,480,000 shares of common stock. An aggregate of
8,750,000 shares, including 3,000,000 shares sold in this offering, will be
freely tradable without restriction under the Securities Act. Of the remaining
shares outstanding upon completion of the offering, 12,415,560 shares of common
stock held by existing stockholders are restricted securities in that they may
be sold in the public market only if registered or if they qualify for an
exemption from registration under the Securities Act or Rules 144, 144(k) or 701
as promulgated under the Securities Act. Of such shares, 7,127,296 shares are
subject to lock-up agreements as described below.

All of the officers and directors and certain stockholders and
optionholders of Com21 holding an aggregate of 7,127,296 shares of common stock
have entered into lock-up agreements generally providing that they will not
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 90 days after the date of this prospectus, without the prior written
consent of Credit Suisse First Boston Corporation, subject to certain limited
exceptions. Credit Suisse First Boston Corporation may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. Credit Suisse First Boston Corporation currently
has no plans to release any portion of the securities subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Credit Suisse First Boston Corporation will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. Following the expiration of the 90 day lock-up period, additional shares
of common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.

In general, under Rule 144 as currently in effect, an affiliate of Com21 or
a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one (1) year, including the holding period of
any prior owner except an affiliate, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent (1%) of the then outstanding shares of Com21's common stock or the
average weekly trading volume of Com21's common stock on the Nasdaq National
Market during the four (4) calendar weeks preceding the sale. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about Com21. Any person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of Com21 at any time during the ninety (90) days preceding a sale, and who has
beneficially owned shares for at least two (2) years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell those
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.

Com21 has also agreed not to offer, sell, contract to sell or otherwise
dispose of shares of common stock or any securities convertible into common
stock for a period of ninety (90) days after the date of this prospectus,
without the prior written consent of Credit Suisse First Boston Corporation,
subject to certain limited exceptions.

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UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated February , 1999, we and the selling stockholders have
agreed to sell to the underwriters named below the following respective numbers
of shares of common stock:

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation .....................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
---------
Total.................................................. 3,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 450,000 additional shares at the public offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the public offering of the common stock,
the public offering price and concession and discount to dealers may be changed
by the underwriters.

The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.

<TABLE>
<CAPTION>
Total
-------------------------------
Without With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid by us... $ $ $
Expenses payable by us.............................. $ $ $
Underwriting Discounts and Commissions paid by the
selling stockholders.............................. $ $ $
Expenses payable by the selling stockholders........ $ $ $
</TABLE>

We and certain of our directors, officers and stockholders have agreed that
we will not offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus, except in
our case issuances as a result of the grant of employee stock options under a
plan in effect on the date of this prospectus, the conversion or exchange of
convertible or exchangeable securities, or the exercise of warrants or options,
in each case outstanding on the date of this prospectus, or sales of stock to
employees under our employee stock purchase plan.

We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities under the Securities Act or contribute to payments
which the underwriters may be required to make in that respect.

The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the
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<PAGE> 71

stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the shares of common stock originally sold by that
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. In "passive" market making, market makers in the
securities who are underwriters or prospective underwriters may, subject to
certain limitations, make bids for or purchases of the securities until the
time, if any, at which a stabilizing bid is made. These stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the common stock to be higher than it would otherwise be in the absence
of these transactions. These transactions may be effected on The Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and the
dealer from whom the purchase confirmation is received that:

- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under these securities laws;

- where required by law, that the purchaser is purchasing as principal and
not as agent; and

- the purchaser has reviewed the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the

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sale of any common stock acquired by the purchaser in this offering. This report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

LEGAL MATTERS

The validity of the issuance of the shares of common stock offered hereby
will be passed upon for Com21 by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. Members of the firm Brobeck, Phleger & Harrison LLP beneficially own
an aggregate of 7,850 shares of Com21's common stock. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The financial statements as of December 31, 1997 and 1998 and for each of
three years in the period ended December 31, 1998 included in this prospectus
and the related financial statement schedule included elsewhere in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file reports, proxy
statements and other information with the SEC. These reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by 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, IL 60661 and Seven World
Trade Center, 13th Floor, New York, NY 10048. Copies of these materials can be
obtained from the Public Reference Section of the SEC upon payment of certain
fees prescribed by the SEC. The SEC's Web site contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of that site is http://www.sec.gov. Our
common stock is quoted on the Nasdaq National Market and our reports, proxy
statements and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.

We have filed a registration statement on Form S-1 with the SEC under the
Securities Act in respect of the common stock we are offering. This prospectus,
which is part of the registration statement, omits certain information contained
in the registration statement as permitted by the SEC's rules and regulations.
For further information with respect to us and the common stock we are offering,
please reference the registration statement, including its exhibits. Statements
herein concerning the contents of any contract or other document filed with the
SEC as an exhibit to the registration statement are not necessarily complete and
are qualified in all respects by such reference. Copies of the registration
statement, including all exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the SEC, or
obtained at prescribed rates from the Public Reference Section of the SEC at the
above address.

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GLOSSARY OF TECHNICAL TERMS

10BASET....................... Ethernet standard which applies to the physical
layer of the OSI Reference Model for 10 Mbps
Ethernet over two pairs of category 3, 4 or 5
Unshielded Twisted Pair (UTP) wire.

56 KBPS....................... Equivalent to a single high-speed telephone
service line, capable of transmitting one voice
call or 56 Kbps of data.

ANALOG........................ A from of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.

ADSL.......................... Asymmetric Digital Subscriber Line. A
high-speed technology that enables the transfer
of data over existing copper line.

ASYNCHRONOUS.................. A form of concurrent input and output
communication transmission with no timing
relationship between the two signals.
Slower-speed asynchronous transmission requires
start and stop bits to avoid a dependency on
timing clocks (10 bits to send an 8-bit byte).

ATM........................... Asynchronous Transfer Mode. A fixed length
53-byte packet-based transmission technology
that may be used to transmit data, voice and
video traffic; ATM utilizes cell switching.

BANDWIDTH..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).

BER........................... Bit Error Rate. Percentage of received bits in
error compared to the total number of bits
received. Usually expressed as a number to a
power of 10.

BROADBAND COMMUNICATIONS...... A transmission that has a bandwidth greater
than a voice-grade line of 3KHz, usually at
transmission speeds of greater than 1.5 Mbps
(T-1).

CENTRAL OFFICE................ A facility that provides switching services for
telephone calls. A local exchange central
office can switch calls within exchange
groupings that are identified by an area code
and the first three digits of a phone number. A
long-distance carrier central office switches
calls between the long-distance network and the
local exchange central office.

COAXIAL CABLE................. A large-capacity data transmission medium
consisting of insulated wires grouped together
inside an insulated cable. Used for broadband
and baseband communications networks and cable
TV; usually free from most external
interferences and capable of high transmission
rates over long-distances.

DAVIC......................... Digital Audio Video Interactive Council. A
European standards-setting committee.

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DOCSIS........................ Data Over Cable Service Interface
Specification. Cable modem specification set by
the MCNS partnership of North American cable
operators.

DSL........................... Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried
over twisted-pair copper wire on the local loop
between a network service provider's central
office and the customer site at limited
distances.

DBS........................... Direct Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.

DOWNSTREAM.................... The data path from service provider to
customer.

ETHERNET (10BASET)............ Networking standard for the access method
widely used in LANs for connecting devices by
means of copper twisted pair wiring at speeds
of 10 Mbps.

FAST ETHERNET (100BASET)...... An extension to the 10BaseT Ethernet network
access method which operates at 100 Mbps.

FORWARD ERROR CORRECTION...... A receiver technique for correcting errors in
the received data.

FREQUENCY..................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation or
wave in radio propagation.

GBPS.......................... Gigabits per second. Billion bits per second.

HEADEND....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.

HDSL.......................... High Bit Rate Digital Subscriber Line. A
technology that enables high speed transmission
of data over copper wires.

HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.

IC............................ Integrated Circuit.

IEEE.......................... Institute of Electrical and Electronics
Engineers, Inc.

IETF.......................... Internet Engineering Task Force.

IP............................ Internet Protocol.

ISDN.......................... Integrated Services Digital Network. An
internationally accepted standard for voice,
data and signaling that makes all transmission
circuits end-to end digital and defines a
standard out-of-band signaling system.

KBPS.......................... Kilobits per second. Thousand bits per second.

LOCAL AREA NETWORK............ A private data communications network linking a
variety of data services such as computers and
printers within an office or home environment.

LOCAL LOOP.................... A term used to describe the copper cables that
connect a customer's phone to the Central
Office.

LMDS.......................... Local Multipoint Distribution Service. A
broadband wireless communications network that
uses millimeter wave frequencies around 28 to
38 GHz to transmit video and data to residences
over a cellular-like network at distances under
a few miles.
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MBPS.......................... Megabits per second.

MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.

MCNS.......................... Multimedia Cable Network System. Industry
specification that defines the technical
requirement for interoperability of high-speed
cable modem and headend equipment.

QUADRATURE AMPLITUDE
MODULATION.................... A digital modulation technique that allows very
efficient transmission of data over media with
limited available bandwidth.

QUADRATURE PHASE SHIFT
KEYING........................ A digital modulation technique which is widely
employed in direct broadcast satellite
transmission systems.

RADIO FREQUENCY............... The range of electro-magnetic frequencies above
the audio range and below visible light.

RADIO FREQUENCY MODULATION.... The transmission of a signal through a carrier
frequency.

ROUTER........................ A device for interconnecting local area
networks that have dissimilar operating
protocols but which share a common network
interconnection protocol. A router receives and
transmits data packs between segments in a
network or different networks.

SYNCHRONOUS................... A form of communication transmission with a
direct timing relationship between input and
output signals. The transmitter and receiver
are in sync and signals sent at a fixed rate.
Information is sent in multibyte packets.

S-CDMA........................ Synchronous Code Division Multiple Access. A
digital spectrum technology that codes signals
over the airwaves to accommodate more
transmission streams over a single frequency
band.

T-1 LINES..................... Telecommunications lines that operate in North
America at speeds of 1.544 Mbps.

UPSTREAM...................... The data path from the customer to the service
provider.

VIRTUAL LOCAL AREA NETWORK.... The use of a selected group of computers that
are permitted to communicate directly with each
other, irrespective of their physical location
within a network.

VPN........................... Virtual Private Network. A public data network
that transports private data reliably, securely
and seamlessly to the end user.

XDSL.......................... Other Digital Subscriber Line. Generic
representation of entire family of Digital
Subscriber Line technology spanning data rates
from 128 Kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.

74
<PAGE> 76

COM21, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and 1998............. F-3
Statements of Operations and Comprehensive Loss for the
Years Ended December 31, 1996,
1997 and 1998............................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 77

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Com21, Inc.:

We have audited the accompanying balance sheets of Com21, Inc. as of December
31, 1997 and 1998, and the related statements of operations and comprehensive
loss, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Com21, Inc. as of December 31, 1997 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP
San Jose, California
January 18, 1999

F-2
<PAGE> 78

COM21, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 17,950 $ 7,135
Short-term investments.................................... -- 58,609
Accounts receivable:
Trade (net of allowances of $121 and $908 in 1997 and
1998, respectively).................................... 3,984 3,190
Related parties......................................... 1,052 1,644
Inventories............................................... 2,643 5,282
Prepaid expenses and other................................ 430 586
-------- --------
Total current assets............................... 26,059 76,446
Property and Equipment -- Net............................... 5,311 6,247
Other Assets................................................ 203 255
-------- --------
Total Assets....................................... $ 31,573 $ 82,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,832 $ 4,033
Accrued compensation and related benefits................. 1,009 1,739
Deferred revenue (principally related party in 1997)...... 1,004 238
Other current liabilities................................. 481 1,232
Current portion of capital lease and debt obligations..... 1,210 1,120
-------- --------
Total current liabilities.......................... 6,536 8,362
Deferred Rent............................................... 246 284
Capital Lease Obligations................................... 1,320 936
Debt Obligations............................................ 188 --
-------- --------
Total liabilities.................................. 8,290 9,582
-------- --------
Commitments and Contingencies (Notes 6 and 13)
Stockholders' Equity:
Convertible preferred stock, none authorized, issued and
outstanding in 1998:
Series A; $0.001 par value; 1,805,674 shares authorized,
issued and outstanding; liquidation preference
$2,853................................................. 2 --
Series B; $0.001 par value; 250,000 shares authorized,
issued and outstanding; liquidation preference $500... -- --
Series C; $0.001 par value; 166,667 shares authorized,
issued and outstanding; liquidation preference $500... -- --
Series D; $0.001 par value; 1,817,655 shares authorized;
1,812,500 shares
issued and outstanding; liquidation preference
$7,250................................................. 2 --
Series E; $0.001 par value; 362,500 shares authorized;
361,908 shares
issued and outstanding; liquidation preference
$1,629................................................. -- --
Series F; $0.001 par value; 3,125,000 shares authorized;
2,905,730 shares
issued and outstanding; liquidation preference
$23,246................................................ 3 --
Series G; $0.001 par value; 3,000,000 shares authorized;
2,655,125 shares
issued and outstanding; liquidation preference
$23,100................................................ 3 --
Preferred stock, $0.001 par value; none authorized, issued
and outstanding in 1997;
5,000,000 shares authorized and undesignated; none
issued and outstanding in 1998.......................... -- --
Common stock, $0.001 par value; shares authorized: 1997,
35,000,000; 1998,
40,000,000; shares issued and outstanding: 1997,
2,772,139; 1998, 18,685,560............................. 3 19
Additional paid-in capital................................ 58,722 122,131
Deferred stock compensation............................... (116) (82)
Accumulated deficit....................................... (35,336) (48,699)
Accumulated other comprehensive loss...................... -- (3)
-------- --------
Total stockholders' equity......................... 23,283 73,366
-------- --------
Total Liabilities and Stockholders' Equity......... $ 31,573 $ 82,948
======== ========
</TABLE>

See Notes to Financial Statements.
F-3
<PAGE> 79

COM21, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product ($4,014 and $6,637 in 1997 and 1998,
respectively,
from related parties)................................ $ -- $ 15,142 $ 47,121
License fees -- related party (Note 10)................. 1,000 507 993
-------- -------- --------
Total revenues.................................. 1,000 15,649 48,114
Cost of Product Revenues ($2,024 and $4,113 in 1997 and
1998,
respectively, for related parties)...................... -- 8,372 29,573
-------- -------- --------
Gross Profit.............................................. 1,000 7,277 18,541
-------- -------- --------
Operating Expenses:
Research and development................................ 12,395 13,481 19,936
Sales and marketing..................................... 1,970 5,277 10,273
General and administrative.............................. 1,548 1,782 3,871
-------- -------- --------
Total operating expenses........................ 15,913 20,540 34,080
-------- -------- --------
Loss From Operations...................................... (14,913) (13,263) (15,539)
-------- -------- --------
Other Income (Expense):
Interest and other income............................... 629 679 2,535
Interest expense........................................ (185) (396) (318)
Other income (expense) -- net........................... 3 (54) (27)
-------- -------- --------
Total other income, net......................... 447 229 2,190
-------- -------- --------
Loss Before Income Taxes.................................. (14,466) (13,034) (13,349)
Income Taxes.............................................. 5 21 14
-------- -------- --------
Net Loss.................................................. (14,471) (13,055) (13,363)
Other Comprehensive Loss, Net of Tax:
Unrealized loss on available-for-sale investments....... -- -- (3)
-------- -------- --------
Comprehensive Loss........................................ $(14,471) $(13,055) $(13,366)
======== ======== ========
Net Loss Per Share, Basic and Diluted..................... $ (7.64) $ (6.15) $ (1.10)
======== ======== ========
Shares Used in Computation, Basic and Diluted............. 1,894 2,124 12,150
======== ======== ========
Pro Forma Net Loss Per Share, Basic and Diluted (Note
1)...................................................... $ (0.83)
--------
Shares Used in Pro Forma Computation, Basic and Diluted
(Note 1)................................................ 16,062
========
</TABLE>

See Notes to Financial Statements.
F-4
<PAGE> 80

COM21, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFERRED ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK OTHER
------------------- ------------------ PAID-IN COMPEN- ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT LOSS
---------- ------ --------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996.......... 4,034,841 4$.... 1,910,042 $ 2 $ 11,092 $ -- $ (7,810) $ --
Exercise of stock options.......... -- --... 102,639 -- 46 -- -- --
Repurchase of shares............... -- --... (14,584) -- (3) -- -- --
Sale of Series F convertible
preferred stock (net of issuance
costs of $50).................... 2,905,730 3.... -- -- 23,193 -- -- --
Net loss........................... -- --... -- -- -- -- (14,471) --
---------- ---- --------- --- -------- ----- -------- -------
Balances, December 31, 1996........ 6,940,571 7.... 1,998,097 2 34,328 -- (22,281) --
Exercise of stock options.......... -- --... 774,042 1 529 -- -- --
Exercise of Series E preferred
warrants......................... 361,908... -- -- -- 1,629 -- -- --
Issuance of Series F preferred
warrants......................... -- --... -- -- 72 -- -- --
Sale of Series G convertible
preferred stock (net of issuance
costs of $1,069)................. 2,655,125 3.... -- -- 22,028 -- -- --
Deferred stock compensation........ -- --... -- -- 136 (136) -- --
Amortization of deferred stock
compensation..................... -- --... -- -- -- 20 -- --
Net loss........................... -- --... -- -- -- -- (13,055) --
---------- ---- --------- --- -------- ----- -------- -------
Balances, December 31, 1997........ 9,957,604 10 2,772,139 3 58,722 (116) (35,336) --
Exercise of stock options.......... -- -- 222,187 -- 236 -- -- --
Issuance of common stock (net of
issuance costs of $6,209)........ -- -- 5,750,000 6 62,785 -- -- --
Sale of stock under employee stock
purchase plan.................... -- -- 40,403 -- 412 -- -- --
Conversion of preferred stock...... (9,957,604) (10) 9,957,604 10 -- -- -- --
Repurchase of shares............... -- -- (56,773) -- (24) -- -- --
Amortization of deferred stock
compensation..................... -- -- -- -- -- 34 -- --
Unrealized loss on
available-for-sale investments... -- -- -- -- -- -- -- (3)
Net loss........................... -- -- -- -- -- -- (13,363) --
---------- ---- --------- --- -------- ----- -------- -------
Balances, December 31, 1998........ -- $ -- 18,685,560 $19 $122,131 $ (82) $(48,699) $ (3)
========== ==== ========= === ======== ===== ======== =======

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances, January 1, 1996.......... $ 3,288
Exercise of stock options.......... 46
Repurchase of shares............... (3)
Sale of Series F convertible
preferred stock (net of issuance
costs of $50).................... 23,196
Net loss........................... (14,471)
--------
Balances, December 31, 1996........ 12,056
Exercise of stock options.......... 530
Exercise of Series E preferred
warrants......................... 1,629
Issuance of Series F preferred
warrants......................... 72
Sale of Series G convertible
preferred stock (net of issuance
costs of $1,069)................. 22,031
Deferred stock compensation........ --
Amortization of deferred stock
compensation..................... 20
Net loss........................... (13,055)
--------
Balances, December 31, 1997........ 23,283
Exercise of stock options.......... 236
Issuance of common stock (net of
issuance costs of $6,209)........ 62,791
Sale of stock under employee stock
purchase plan.................... 412
Conversion of preferred stock...... --
Repurchase of shares............... (24)
Amortization of deferred stock
compensation..................... 34
Unrealized loss on
available-for-sale investments... (3)
Net loss........................... (13,363)
--------
Balances, December 31, 1998........ $ 73,366
========
</TABLE>

See Notes to Financial Statements.
F-5
<PAGE> 81

COM21, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(14,471) $(13,055) $(13,363)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest expense (Note 7)...................... -- 72 --
Depreciation and amortization.......................... 1,042 2,163 3,517
Deferred rent.......................................... 77 169 38
Gain on sales and maturities of investments............ -- -- (755)
Changes in operating assets and liabilities:
Accounts receivable -- trade......................... -- (3,984) 794
Accounts receivable -- related parties............... -- (1,052) (592)
Inventories.......................................... -- (2,643) (2,639)
Prepaid expenses and other........................... (183) (149) 59
Other assets......................................... (68) (98) (52)
Accounts payable..................................... 379 1,612 1,201
Accrued compensation and related benefits............ 518 428 730
Deferred revenue (principally related party)......... 1,000 4 (766)
Other current liabilities............................ 68 388 751
-------- -------- --------
Net Cash Used in Operating Activities.................. (11,638) (16,145) (11,077)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (2,345) (2,085) (3,744)
Purchases of investments.................................. -- -- (101,886)
Proceeds from sales and maturities of investments......... -- -- 44,029
-------- -------- --------
Net Cash Used in Investing Activities.................. (2,345) (2,085) (61,601)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................... 43 530 63,415
Proceeds from issuance of preferred stock................. 23,196 23,660 --
Proceeds from issuance of debt obligations................ 250 2,440 --
Repayments under capital lease obligations................ (232) (607) (1,033)
Repayments on debt obligations............................ (120) (2,270) (519)
-------- -------- --------
Net Cash Provided by Financing Activities.............. 23,137 23,753 61,863
-------- -------- --------
Net Change in Cash and Cash Equivalents..................... 9,154 5,523 (10,815)
Cash and Cash Equivalents, Beginning of year................ 3,273 12,427 17,950
-------- -------- --------
Cash and Cash Equivalents, End of year...................... $ 12,427 $ 17,950 $ 7,135
======== ======== ========
Noncash Investing and Financing Activities:
Property and equipment acquired under capital leases...... $ 1,722 $ 1,146 $ 675
======== ======== ========
Deferred stock compensation............................... $ -- $ 136 $ --
======== ======== ========
Issuance of preferred stock warrants in connection with
debt obligations....................................... $ -- $ 72 $ --
======== ======== ========
Conversion of preferred stock into common stock........... $ -- $ -- $ 10
======== ======== ========
Unrealized loss on available-for-sale investments......... $ -- $ -- $ 3
======== ======== ========
Issuance of debt obligation for other current assets...... $ -- $ -- $ 215
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for income taxes................................ $ 5 $ 14 $ 14
======== ======== ========
Cash paid for interest.................................... $ 182 $ 324 $ 335
======== ======== ========
</TABLE>

See Notes to Financial Statements.
F-6
<PAGE> 82

COM21, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Business -- Com21, Inc. (the "Company") was incorporated in Delaware in
June 1992. The Company designs, develops, markets and sells value-added,
high-speed communications solutions for the broadband access market. During
1997, the Company exited the development stage for financial reporting purposes
as it completed its initial product development activities and commenced
shipping product.

Financial Statements Estimates -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include allowances for potentially
uncollectible accounts receivable, lower of cost or market inventory valuation
reserves, warranty costs, sales returns and a valuation allowance for deferred
tax assets. Actual results could differ from those estimates.

Reclassifications -- Certain prior year amounts in the accompanying
financial statements have been reclassified to conform to current year
presentation. These reclassifications had no effect on the results of operations
or financial position for any year presented.

Fiscal Period -- Although for presentation purposes the Company has
indicated that its year end is December 31, its fiscal year actually ends on the
last business day of the year. The Company's fiscal years for 1996, 1997 and
1998 all ended on December 31.

Cash Equivalents -- The Company considers all highly liquid debt
instruments with maturities at the date of purchase of three months or less to
be cash equivalents.

Short-Term Investments -- Short-term investments consist of corporate and
government bonds and are stated at fair value based on quoted market prices.
Short-term investments are classified as available-for-sale based on the
Company's intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
stockholders' equity as accumulated other comprehensive loss. Gains and losses
on sales of investments are determined on a specific identification basis.

Inventories -- Inventories consist of networking equipment, modems and
sub-assemblies stated at the lower of cost (first-in, first-out method) or
market.

Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to seven years. Amortization of
leasehold improvements and assets recorded under capital lease agreements are
computed using the straight-line method over the shorter of the lease term or
the estimated useful lives of the related assets.

Long-Lived Assets -- The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

Income Taxes -- The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely than not to be realized.

Certain Significant Risks and Uncertainties -- Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, short-term investments and accounts
receivable. Cash and cash equivalents are held primarily with one financial
institution and consist primarily of commercial paper and cash in bank accounts.
The Company's investment policy is to invest in instruments with minimum credit
ratings of A-1/P-1 (Short-Term) or AA (Long-Term).

F-7
<PAGE> 83
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

The Company sells its products primarily to cable operators in North America and
primarily to systems integrators in Europe, Asia and South/Central America, and
generally does not require its customers to provide collateral or other security
to support accounts receivable. To reduce credit risk, management performs
ongoing credit evaluations of its customers' financial condition. The Company
maintains allowances for estimated potential bad debt losses. The recorded
carrying amount of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and debt obligations approximate fair value.

The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues, and the Company expects that this trend will continue for the
foreseeable future. For the years ended December 31, 1996, 1997 and 1998, the
top five customers comprised 100%, 65% and 66%, respectively, of the Company's
total revenues.

The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash flows:
advances and trends in new technologies and industry standards; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix; changes in the overall demand for products offered by
the Company; changes in third-party manufacturers; changes in key suppliers;
changes in certain strategic relationships or customer relationships; litigation
or claims against the Company based on intellectual property (Note 13), patent,
product, regulatory or other factors; risk associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components; risks associated with Year 2000
compliance; and the Company's ability to attract and retain employees necessary
to support its growth.

Revenue Recognition -- The Company recognizes product revenue upon
shipment. Estimated sales returns and warranty costs, based on historical
experience by product, are recorded at the time the product revenue is
recognized. Installation and training revenue are recognized as services are
provided.

In 1998, the Company adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," which requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Revenue for software licenses is
recognized upon delivery provided that collection is probable. Software support
and maintenance revenue are deferred and amortized over the maintenance period
on a straight-line basis. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations and cash
flows.

Software Development Costs -- Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and accordingly, no costs have been capitalized.

Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."

Comprehensive Loss -- In 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. Statements of
comprehensive loss for the years ended December 31, 1996, 1997 and 1998 have
been included with the statements of operations.

F-8
<PAGE> 84
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Net Loss Per Share -- In 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" which requires a dual presentation of basic and diluted earnings per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing net
income attributable to common stockholders by the weighted average of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants to purchase convertible preferred stock
and common stock options and warrants using the treasury stock method) were
exercised or converted into common stock. Potential common shares in the diluted
EPS computation are excluded in net loss periods as their effect would be
antidilutive. EPS for all periods have been computed in accordance with SFAS No.
128.

Pro Forma Net Loss Per Share -- Pro forma net loss per share, basic and
diluted, is computed by dividing net loss attributable to common stockholders by
the weighted average number of common shares outstanding for the period and the
weighted average number of shares resulting from the assumed conversion of
outstanding shares of convertible preferred stock.

Geographic Operating Information -- In 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. The Company operates in one reportable
segment (Note 12).

Recently Issued Accounting Standard -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
fiscal year ending December 31, 2000. Management believes that this statement
will not have a significant impact on the Company's financial position, results
of operations or cash flows.

2. SHORT-TERM INVESTMENTS

The fair value and the amortized cost of available-for-sale securities at
December 31, 1998 are presented in the table below (in thousands):

<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED HOLDING GAINS
COST AND (LOSSES) FAIR VALUE
--------- ------------- ----------
<S> <C> <C> <C>
Corporate Bonds........................... $30,803 $ 7 $30,810
Government Bonds.......................... 27,809 (10) 27,799
------- ---- -------
Total..................................... $58,612 $ (3) $58,609
======= ==== =======
</TABLE>

Fair values are based on quoted market prices obtained from an independent
broker. Available-for-sale securities are classified as current assets and all
maturities are within one year.

F-9
<PAGE> 85
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

3. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and sub-assemblies................... $ 633 $ 142
Work-in-process.................................... 980 1,361
Finished goods..................................... 1,030 3,779
------ ------
Total.............................................. $2,643 $5,282
====== ======
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital lease............................ $ 3,367 $ 3,711
Computer equipment and software.......................... 2,904 4,604
Production equipment..................................... 1,931 3,905
Leasehold improvements................................... 208 393
Furniture and fixtures................................... 189 302
------- -------
8,599 12,915
Accumulated depreciation and amortization................ (3,288) (6,668)
------- -------
$ 5,311 $ 6,247
======= =======
</TABLE>

Accumulated amortization on capital leases as of December 31, 1997 and 1998
was approximately $1,167,000 and $2,265,000, respectively.

5. DEBT OBLIGATIONS

Debt obligations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Unsecured borrowings due July 1, 1998....................... $ 84 $ --
Unsecured borrowings due October 1, 1998.................... 119 --
Unsecured borrowings due August 1, 1999..................... 257 168
Unsecured borrowings due November 1, 1999................... 81 45
Note payable due February 4, 1999........................... -- 24
----- -----
541 237
Current portion............................................. (353) (237)
----- -----
Long-term portion........................................... $ 188 $ --
===== =====
</TABLE>

Notes Payable

The unsecured borrowings were obtained from notes payable issued to a
financing company for the purchase of computer software and equipment.
Borrowings bear interest at an effective interest rate of 16.94%

F-10
<PAGE> 86
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

per annum and are payable in monthly installments with the remaining unpaid
principal and interest due upon the maturity date. There are no debt covenants
associated with the notes payable.

In consideration for the unsecured borrowings due on October 1, 1998 and
August 1, 1999 the Company issued the financing company warrants to purchase
4,688 and 2,125 shares of Series F convertible preferred stock, respectively, at
a price of $8.00 per share. The fair values of the warrants were insignificant
(Note 7).

In June 1998, the Company issued a note payable for $215,000 to a financing
company for the payment of its directors' and officers' insurance premiums for
which the Company is the beneficiary. Borrowings bear interest at an effective
interest rate of 7.30% per annum and are payable in equal monthly installments
(principal and interest) through February 4, 1999.

Revolving Line of Credit

In May 1997, the Company entered into a revolving line of credit
arrangement for working capital purposes. Under the arrangement, the Company may
borrow up to the lesser of $5,000,000 or 80% of the Company's eligible domestic
and foreign accounts receivable. Borrowings bear interest at the LIBOR rate
(5.10% at December 31, 1998) plus 4.875% per annum. The arrangement
automatically renews for successive one-year periods until terminated at the
option of either party. Dividends may not be declared by the Company without the
lender's prior consent. As of December 31, 1998, no amounts were outstanding
under the arrangement.

Concurrent with executing the revolving line of credit arrangement, the
Company borrowed an additional $2,000,000 on a note which was repaid in full in
1997.

In consideration for these financing arrangements, the Company issued
warrants to purchase 25,000 shares of Series F convertible preferred stock at a
price of $8.00 per share (Note 7). As described in Note 7, the fair value of
such warrants was $72,000 which was recorded as additional interest expense in
the accompanying statement of operations and comprehensive loss for 1997.

6. COMMITMENTS

The Company leases its facilities and certain equipment under noncancelable
capital and operating leases. Future minimum lease payments under the Company's
capital and operating leases and the present value of minimum lease payments
under capital leases as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999........................................... $1,055 $1,464
2000........................................... 655 1,453
2001........................................... 349 853
2002........................................... 9 866
2003........................................... -- 892
Thereafter....................................... -- 303
------ ------
Future minimum lease payments.................... 2,068 $5,831
======
Amounts representing interest (12%).............. (249)
------
Present value of future minimum lease payments... $1,819
======
</TABLE>

F-11
<PAGE> 87
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

In consideration for providing capital lease financing in 1996, the Company
issued warrants to purchase 2,505 shares and 6,814 shares of Series F
convertible preferred stock at a price of $8.00 per share to two financing
companies. The fair values of the warrants were insignificant (Note 7).

Rent expense incurred under the operating leases was approximately
$501,000, $843,000 and $867,000 for the years ended December 31, 1996, 1997 and
1998, respectively. Rent expense under the facilities lease is recognized on a
straight-line basis over the term of the lease. The difference between the
amounts paid and the amounts expensed is classified as deferred rent in the
accompanying balance sheets.

In 1998, the Company entered into product development and license
agreements whereby third parties will develop certain technology deliverable in
1999 for an aggregate of $970,000.

As of December 31, 1998, the Company has aggregate purchase obligations of
approximately $15,200,000 in connection with supply and manufacturing
agreements.

7. STOCKHOLDERS' EQUITY

Stock Split

On May 13, 1998, the Company effected a one-for-two reverse split of the
outstanding shares of common and convertible preferred stock. All share and per
share amounts in these financial statements have been adjusted to give effect to
the reverse stock split.

Initial Public Offering

In May 1998, the Company completed its initial public offering of 5,750,000
shares (which includes the full exercise of the underwriters' overallotment of
750,000 shares) which generated net proceeds to the Company of $62,791,000.

Authorized Shares

On March 10, 1998, the Board of Directors adopted a change in the
authorized number of shares of the common and undesignated preferred stock to
40,000,000 and 5,000,000, respectively.

Convertible Preferred Stock

On April 22, 1998, holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consented to the
automatic conversion of all outstanding shares of Series D, E, F and G
convertible preferred stock into common stock upon the completion of the initial
public offering regardless of the offering price per share. Upon completion of
the Company's initial public offering in May 1998, all shares of Series A, B,
and C convertible preferred stock were converted to common stock in accordance
with their existing terms and all shares of Series D, E, F and G convertible
preferred stock were converted to common stock in accordance with the
stockholders' consent. All shares were converted on a one-to-one basis.

F-12
<PAGE> 88
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Common Stock Warrants

Prior to the Company's initial public offering in May 1998, the Company
issued warrants to purchase shares of various series of convertible preferred
stock. Upon completion of the Company's initial public offering, the outstanding
warrants to purchase 46,286 shares of convertible preferred stock were
automatically converted into warrants to purchase 46,286 shares of common stock
at the same exercise prices. All such warrants were outstanding at December 31,
1997 and 1998 and were comprised of the following:

- During 1995, in consideration of capital lease financing provided by a
financing company, the Company issued warrants to purchase 5,154 shares
of Series D convertible preferred stock at a price of $5.82 per share.
The warrants expire in December 2005.

- During 1996, in consideration of debt and capital lease financing
provided by two financing companies, the Company issued warrants to
purchase 14,007 shares of Series F convertible preferred stock at a price
of $8.00 per share. The warrants expire in 2006.

- During 1997, in consideration of financing arrangements provided, the
Company issued warrants to purchase 27,125 shares of Series F convertible
preferred stock at a price of $8.00 per share. The warrants expire in May
2002 (25,000 warrants) and February 2007 (2,125 warrants).

The fair value of the warrants issued in 1995 and 1996, in connection with
debt financing, were insignificant. The fair value of the warrants issued in
1997, in connection with debt financing, was approximately $72,000. Accordingly,
the fair value was recognized as additional interest expense in the accompanying
statement of operations and comprehensive loss for 1997.

Common Stock

At December 31, 1997 and 1998, the Company had the right to repurchase
320,311 and 139,640 shares of common stock outstanding, respectively. The number
of shares subject to repurchase is reduced over a two- to four-year vesting
period. The Company has the right to repurchase these shares at the original
issuance price.

Net Loss Per Share

The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net Loss (Numerator):
Net loss, basic and diluted................... $(14,471) $(13,055) $(13,363)
-------- -------- --------
Shares (Denominator):
Weighted average common shares outstanding.... 1,910 2,244 12,377
Weighted average common shares outstanding
subject to repurchase...................... (16) (120) (227)
-------- -------- --------
Shares used in computation, basic and
diluted.................................... 1,894 2,124 12,150
-------- -------- --------
Net Loss Per Share, Basic and Diluted........... $ (7.64) $ (6.15) $ (1.10)
======== ======== ========
</TABLE>

During 1996, 1997 and 1998, the Company had securities outstanding which
could potentially dilute basic EPS in the future, but were excluded in the
computation of diluted EPS in such periods, as their effect would have been
antidilutive due to the net loss reported in such periods. Such outstanding
securities consist of the following at December 31, 1998: warrants to purchase
46,286 shares of common stock;

F-13
<PAGE> 89
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

139,640 outstanding shares of common stock subject to repurchase; and options to
purchase 2,369,341 shares of common stock.

Equity Plans

Under the Company's 1995 Stock Option Plan (the "1995 Plan"), as restated
and amended in January 1998, the Company may grant options to purchase up to
3,000,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at the date of grant for incentive
stock options and not less than 85% of fair market value at the date of grant
for nonstatutory stock options. These options generally expire ten years from
the date of grant and are immediately exercisable. The Company has a right of
repurchase (at the option exercise price) of common stock issued from option
exercises for unvested shares. The right of repurchase generally expires 25%
after the first 12 months from the date of grant and then ratably over a
36-month period.

In 1998, the Company adopted the 1998 Stock Incentive Plan (the "1998 Stock
Plan") and the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan").

The 1998 Stock Plan serves as the successor equity incentive program to the
Company's 1995 Plan. Options outstanding under the 1995 Plan on April 1, 1998
(2,023,510 shares) were incorporated into the 1998 Stock Plan. Such incorporated
options continue to be governed by their existing terms. In addition, the share
reserve was increased by 500,000 shares and could be increased up to an
additional 271,570 shares for repurchases of unvested common shares issued under
the 1995 Plan. As of December 31, 1998, 16,732 shares of such unvested common
shares were repurchased and added to the share reserve. Under the 1998 Stock
Plan, the Company is authorized to issue shares of common stock to employees,
directors and consultants under five separate programs: Discretionary Option,
Stock Issuance, Salary Investment Option Grant, Automatic Option Grant and
Director Fee Option Grant. The number of shares reserved for issuance under the
1998 Stock Plan automatically increases at the beginning of each calendar year,
beginning in 1999, by an amount equal to 5% of the total number of shares of
common stock outstanding at the end of the preceding year (934,278 shares on
January 4, 1999). The Discretionary Option Program of the 1998 Stock Plan
provides for the grant of options under terms comparable to those provided on
options granted under the 1995 Plan except that all options are to be granted at
a price not less than fair market value on the date of grant.

F-14
<PAGE> 90
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Stock option activity under the Plans was as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------------
AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
----------- ----------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1996 (3,130 vested at
a weighted average price of $0.40 per
share).................................. 158,750 566,250 $0.39
Reserved.................................. 1,000,000 -- --
Granted (weighted average fair value of
$0.16 per share)........................ (1,171,315) 1,171,315 0.58
Canceled.................................. 44,698 (44,697) 0.62
Exercised................................. -- (102,639) 0.45
----------- -----------
Balances, December 31, 1996 (205,706
vested at a weighted average price of
$0.44 per share)........................ 32,133 1,590,229 0.52
Reserved.................................. 500,000 -- --
Granted (weighted average fair value of
$1.29 per share)........................ (587,990) 587,990 3.66
Canceled.................................. 75,266 (75,266) 0.64
Exercised................................. -- (774,042) 0.68
----------- -----------
Balances, December 31, 1997 (286,130
vested at a weighted average price of
$0.57 per share)........................ 19,409 1,328,911 1.80
Reserved.................................. 1,266,732 -- --
Granted (weighted average fair value of
$5.45 per share)........................ (1,368,615) 1,368,615 11.59
Canceled.................................. 105,998 (105,998) 4.05
Exercised................................. -- (222,187) 1.06
----------- -----------
Balances, December 31, 1998............... 23,524 2,369,341 7.42
=========== ===========
</TABLE>

Additional information regarding options outstanding at December 31, 1998
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING VESTED OPTIONS
------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
- ------------ ----------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
$0.20-$ 0.40 464,855 7.0 $ 0.40 275,821 $0.40
$0.80-$ 0.88 310,999 7.9 0.81 118,333 0.81
$3.30-$ 7.10 457,869 8.9 6.46 66,637 6.33
$9.00-$24.25 1,135,618 9.5 12.49 3,716 9.00
---------- --------
$0.20-$24.25 2,369,341 8.7 7.42 464,507 1.42
========== ========
</TABLE>

Under the 1998 Purchase Plan, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. The initial purchase
period commenced upon the initial public offering of the Company's common stock
in May 1998. In 1998, 40,403 shares were purchased by and distributed to
employees at a price of $10.20 per share. At December 31, 1998, $211,000 had
been contributed by employees that will be used to purchase shares in 1999 at a
price determined under the terms of the 1998 Purchase Plan. At December 31,
1998, the Company had 209,597 shares of its common stock reserved for future
issuance under this plan.

F-15
<PAGE> 91
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Deferred Stock Compensation

As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25.
Accordingly, the Company recorded deferred compensation expense equal to the
difference between the grant price and deemed fair value of the Company's common
stock for options granted prior to December 31, 1997. Such deferred compensation
expense aggregated $136,000 and is being amortized to expense over the four-year
vesting period of the options.

Additional Stock Plan Information

Since the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of
pro forma net income (loss) and earnings (loss) per share had the Company
adopted the fair value method as of the beginning of 1995. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's fair value calculations on stock-based awards under the
1995 and 1998 Stock Plans were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 5 years from the
date of grant in 1996 and 1997 and 4.5 years from the date of grant in 1998;
stock volatility, 0% in 1996 and 1997 and 50% in 1998; risk-free interest rate,
6.75% in 1996 and 1997 and 5.0% in 1998; and no dividends during the expected
term. The Company's calculations are based on a single option award valuation
approach, and forfeitures are recognized as they occur. The Company's fair value
calculations on stock-based awards under the 1998 Purchase Plan were also made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, six months; stock volatility, 50%; risk free
interest rate, 5.0%; and no dividends during the expected term. If the computed
fair values of the 1996, 1997 and 1998 awards had been amortized to expense over
the vesting period of the awards, pro forma net loss would have been
approximately $(14,522,000) ($(7.67) per share, basic and diluted) in 1996,
$(13,153,000) ($(6.19) per share, basic and diluted) in 1997 and $(14,454,000)
($(1.19) per share, basic and diluted) in 1998.

8. INCOME TAXES

Income tax expense for the years ended December 31, 1996, 1997 and 1998
consisted solely of state franchise taxes.

F-16
<PAGE> 92
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

The components of deferred income tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently
deductible................................ $ 827 $ 1,868
Capitalized start-up costs................... 765 472
Capitalized research and development costs... 890 1,864
Net operating loss carryforwards............. 11,272 14,325
Tax credit carryforwards..................... 2,998 4,437
Depreciation................................. 500 1,206
-------- --------
Total gross deferred tax assets................ 17,252 24,172
Valuation allowance............................ (17,252) (24,172)
-------- --------
Total deferred tax assets...................... $ -- $ --
======== ========
</TABLE>

The net change in the total valuation allowance for the year ended December
31, 1998 was a net increase of $6,920,000. The increase in the valuation
allowance was primarily a result of increased net operating loss and tax credit
carryforwards increased accruals and reserves not currently deductible and
capitalized research and development costs generated in 1998 which the Company
provided a full valuation allowance against based on the Company's evaluation of
the likelihood of realization of future tax benefits resulting from the deferred
tax assets.

As of December 31, 1998, the Company had available for carryforward net
operating losses for federal and state income tax purposes of approximately
$37,825,000 and $19,305,000, respectively. Net operating losses of $564,000 for
federal and state tax purposes attributable to the tax benefit relating to the
exercise of nonqualified stock options and disqualifying dispositions of
incentive stock options are excluded from the components of deferred income tax
assets. The tax benefit associated with this net operating loss will be recorded
as an adjustment to stockholders' equity when the Company generates taxable
income. Federal net operating loss carryforwards will expire if not utilized
beginning in the years 2009 through 2018. State net operating loss carryforwards
will expire if not utilized beginning in the years 1999 through 2003.

As of December 31, 1998, the Company had available for carryforward
research and experimental tax credits for federal and state income tax purposes
of approximately $2,621,000 and $1,509,000, respectively. Federal research and
experimentation tax credit carryforwards expire from 2009 through 2018. The
Company also had approximately $307,000 in California manufacturers investment
credits.

Current Federal and California tax laws include substantial restrictions on
the utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such "ownership change" as defined. Such a limitation could result in
the expiration of carryforwards before they are utilized.

9. MAJOR CUSTOMERS

Revenues for 1996 resulted from license fee revenue from one preferred
stockholder.

As of December 31, 1997, one unaffiliated customer and one preferred
stockholder represented 24% and 14%, respectively, of total accounts receivable.
Sales to these customers in 1997 represented 21% and 12% of total 1997 revenues,
respectively. In addition, 1997 sales to another preferred stockholder
represented 16% of total 1997 revenues.

F-17
<PAGE> 93
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

As of December 31, 1998, three unaffiliated customers represented 15%, 10%,
and 10% of total accounts receivable, and one stockholder represented 34% of
total accounts receivable. Sales to this stockholder represented 14% of total
1998 revenues. In addition, sales to two other unaffiliated customers
represented 24% and 15% of total 1998 revenues.

10. RELATED PARTY TRANSACTIONS

In March 1996, a preferred stockholder entered into a five-year licensing
agreement with the Company to license certain technology on a nonexclusive
basis. Under the terms of this agreement: (i) the Company received a
nonrefundable license fee of $1,000,000 in 1996 (which accounted for all of 1996
revenues), and (ii) if the Company met certain conditions in 1997, it would be
entitled to an additional $500,000 of nonrefundable license fees. In March 1997,
the Company met such conditions and received additional nonrefundable license
fees of $500,000 from this preferred stockholder. Such license fees were
recognized as revenue in 1997. In addition, the Company also received prepaid
royalties pursuant to the licensing agreement of $1,000,000 in 1997. Upon
shipment of product incorporating the Company's technology, $7,000 was
recognized as license fee revenue in 1997; and the remaining $993,000 was
recognized in 1998 as license fee revenue at the expiration of the royalty
period on December 31, 1998. In April 1998, this preferred stockholder sold its
entire interest in the Company to three other existing preferred stockholders.

In 1996, the Company paid a director $22,000 in consulting fees.

For the year ended December 31, 1997, total revenues included sales to
three preferred stockholders of approximately $2,509,000, $1,889,000 and
$123,000 (with related cost of revenues of approximately $999,000, $951,000 and
$74,000, respectively). As of December 31, 1997, accounts receivable included
amounts due from the same three preferred stockholders of approximately
$364,000, $688,000, and $0, respectively.

For the year ended December 31, 1998, total revenues included sales to two
stockholders of approximately $6,600,000 and $1,030,000 (with related cost of
revenues of approximately $4,098,000 and $15,000 respectively). As of December
31, 1998, accounts receivable included amounts due from one stockholder of
approximately $1,644,000.

11. EMPLOYEE BENEFIT PLAN

In 1995, the Company adopted a defined contribution retirement plan (the
"Retirement Plan"), which has been determined by the Internal Revenue Service to
be qualified under Section 401(k) of the Internal Revenue Code of 1986. The
Retirement Plan covers essentially all full-time employees. Eligible employees
may make voluntary contributions to the Retirement Plan up to 15% of their
annual compensation. The Company has not made any employer contributions to the
Retirement Plan.

12. GEOGRAPHIC OPERATING INFORMATION

The Company operates in one reportable segment: the design, development,
marketing, and sales of value-added, high-speed communications solutions for the
broadband access market, and follows the requirements of SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." For the year ended
December 31, 1998, the Company recorded revenue from customers throughout the
United States and Canada; Switzerland, Germany, the U.K., The Netherlands,
France, Spain, Denmark, Norway, Sweden, Finland, Belgium, Czech Republic, Turkey
(collectively referred to as "Europe"); Japan, China, Thailand, Taiwan,
Indonesia (collectively referred to as "Other Asia"), Hong Kong; Argentina,
Chile, Panama, Venezuela, Colombia (collectively referred to as "Other
South/Central America"), Brazil; and Australia/New

F-18
<PAGE> 94
COM21, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Zealand. The following presents total revenues for the years ended December 31,
1996, 1997 and 1998 and long-lived assets as of December 31, 1997 and 1998 by
geographic territory (in thousands):

<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
1996 LONG- LONG-
TOTAL TOTAL LIVED TOTAL LIVED
REVENUES* REVENUES* ASSETS REVENUES* ASSETS
--------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
United States..................... $ 1,000 $ 5,589 $5,157 $23,032 $6,188
Canada............................ -- 161 357 1,332 314
Europe............................ -- 4,672 -- 12,521 --
Hong Kong......................... -- 130 -- 255 --
Other Asia........................ -- 1,597 -- 1,624 --
Brazil............................ -- 106 -- 490 --
Other South/Central America....... -- 565 -- 1,537 --
Australia/New Zealand............. -- 2,829 -- 7,323 --
------- ------- ------ ------- ------
Total............................. $ 1,000 $15,649 $5,514 $48,114 $6,502
======= ======= ====== ======= ======
</TABLE>

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

* Net revenues are attributed to countries based on invoicing location of
customer.

13. LITIGATION

In January 1998, Hybrid Networks, Inc. filed an action against the Company,
accusing the Company of infringing certain of their patents. The Company settled
this matter in January 1999 through a patent cross-license agreement that has no
material adverse effect on the Company's financial position, results of
operations or cash flows.

F-19
<PAGE> 95

DESCRIPTION FOR PAGE 35

An illustration entitled "ComUNITY Access System" depicts the products of the
Com21 cable modem system. A small cloud in the center of the page labeled "cable
infrastructure" is surrounded by arrows that branch out in different directions
indicating market segments and are of different widths in order to differentiate
the various levels of service enabled by the Company's modems. The arrows
connect the cable infrastructure cloud to illustrations typifying the
various market segments, including a house labeled "Telecommuter" next to an
illustration of a ComPORT cable modem labeled "ComPORT"; an office building
labeled "SOHO" next to an illustration of a ComPORT cable modem labeled "Cable
Return"; a house labeled "Residential" next to an illustration of a ComPORT
cable modem labeled "ComPORT"; a house labeled "Telephone Return" next to
an unlabeled illustration of a ComPORT cable modem. The cable infrastructure
cloud connects through an illustration of a Return Path Multiplexer labeled
"RPM" to an illustration of a ComCONTROLLER labeled "ComCONTROLLER" which is
connected to an illustration of a computer labeled "NMAPS" and to an office
building labeled "Corporate Office" through a line labeled "Virtual Private
Network". The illustration of the ComCONTROLLER connects to a sphere labeled
"Internet". The illustration of the house labeled "Telephone Return" includes an
illustration of a modem labeled "Telephone Modem" which connects to the sphere
labeled "Internet" through a line over telephone poles labeled "Public Switched
Telephone Network".
<PAGE> 96

LOGO
<PAGE> 97

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 27,038
NASD Filing Fee............................................. 10,226
Nasdaq National Market Listing Fee.......................... 17,500
Printing and Engraving Expenses............................. 165,000
Legal Fees and Expenses of the Company...................... 100,000
Accounting Fees and Expenses................................ 160,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent Fees......................................... 10,000
Miscellaneous............................................... 105,236
--------
Total............................................. 600,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Company's Certificate of Incorporation provides
that, subject to Delaware law, its directors shall not be personally liable for
monetary damages for breach of the directors' fiduciary duty as directors to the
Company and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the directors' fiduciary duty, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company or its stockholders for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
indemnification agreements with its officers and directors, a form of which is
filed as Exhibit 10.8 to this Registration Statement (the "Indemnification
Agreements"). The Indemnification Agreements provide the Company's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. Reference is also made to Section 6 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Company against certain liabilities, and Section 13 of the
Amended and Restated Registration Rights Agreement contained in Exhibit 4.2
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.

II-1
<PAGE> 98

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 1, 1995, the Company has issued and sold the following
securities:

1. The Company issued and sold 916,366 shares of its Common Stock to
employees and consultants for an aggregate purchase price of $644,154
pursuant to the exercise of options under its 1995 Stock Option Plan
(Exhibit 10.5).

2. On May 2, 1995, the Company issued 166,667 shares of its Series C
Preferred Stock upon exercise of certain warrants, for an aggregate
exercise price of $500,000 to several investors.

3. On May 1, 1995, the Company issued and sold an aggregate of 1,812,500
shares of its Series D Preferred Stock and Warrants to purchase an
aggregate of 362,500 shares of its Series E Preferred Stock for an
aggregate purchase price of $7,250,000 to several investors.

4. On December 11, 1995, in connection with an equipment leasing
transaction, the Company issued Warrants to purchase 5,154 shares of
its Series D Preferred Stock, at an exercise price of $5.82 per share,
to Comdisco, Inc.

5. During the period from September 4, 1997 to November 1, 1997, the
Company issued 361,908 shares of its Series E Preferred Stock upon the
exercise of certain warrants, at an aggregate purchase price of
$1,628,586 to several investors.

6. On April 4, 1996, April 22, 1996, May 7, 1996, June 28, 1996, and July
11, 1996, the Company issued and sold an aggregate of 2,905,730 shares
of its Series F Preferred Stock for an aggregate purchase price of
$23,245,840 to several investors.

7. During the period from April 11, 1996 to May 5, 1997, in connection
with an equipment leasing transaction, the Company issued Warrants to
purchase 9,318 shares of its Series F Preferred Stock, at an exercise
price of $8.00 per share, to Comdisco, Inc.

8. On August 30, 1996, in connection with an office equipment lease, the
Company issued Warrants to purchase 6,814 shares of its Series F
Preferred Stock, at an exercise price of $8.00 per share, to
Lindsay-Ferrari.

9. On May 30, 1997, in connection with a credit agreement, the Company
issued Warrants to purchase 25,000 shares of its Series F Preferred
Stock, at an aggregate exercise price of $8.00 per share, to GreyRock
Business Credit, a division of NationsCredit Commercial Corporation.

10. On July 22, 1997, August 11, 1997 and September 12, 1997, the Company
issued and sold an aggregate of 2,655,125 shares of its Series G
Preferred Stock for an aggregate purchase price of $23,099,587 to
several investors. Deutsche Morgan Grenfell Inc. acted as the placement
agent for this transaction and in connection with that placement
received cash compensation.

The issuances described in paragraph 1 were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. The issuances of the securities described in paragraphs 2
through 10 were deemed to be exempt from registration under the Act in reliance
on Section 4(2) of the Act as transactions by an issuer not involving any public
offering. In addition, the recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.

II-2
<PAGE> 99

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

The exhibits and schedule listed in the Exhibit Index and Schedule are
filed as part of this Registration Statement.

(a) Exhibits

<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant, Credit
Suisse First Boston and Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated.
3.1(1) Registrant's Amended and Restated Certificate of
Incorporation.
3.2(1) Registrant's Amended and Restated Bylaws.
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1(1) Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2+(1) Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3+(1) Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4+(1) Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5(1) Registrant's 1995 Stock Option Plan.
10.6(1) Registrant's 1998 Stock Incentive Plan.
10.7(1) Registrant's 1998 Employee Stock Purchase Plan.
10.8(1) Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9(1) Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10+(1) International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11+(1) Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12+(1) Wind River Systems, Inc. VxWorks License Agreement.
10.13+(1) Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14+(1) Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, dated November 26,
1997.
16.1(1) Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

- ---------------
* Previously filed.
+ Confidential treatment has been granted or requested as to a portion of this
Agreement.
(1) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Registration Statement on Form S-1 (File No. 333-48107)
declared effective on May 18, 1998.

(b) Schedules
Schedule II -- Valuation and Qualifying Accounts and Reserves*
- ---------------
* Previously filed.

II-3
<PAGE> 100

ITEM 17. UNDERTAKINGS

The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Company, Indemnification Agreements entered
into between the Company and its officers and directors, the Underwriting
Agreement, 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 hereunder, 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 of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(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
a form of Prospectus filed by the Company 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; and

(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-4
<PAGE> 101

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this Amendment No. 4
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Milpitas, State of California, on this
18th day of February, 1999.

COM21, INC.

By: /s/ DAVID L. ROBERTSON
------------------------------------
David L. Robertson
Vice President, Finance, Chief
Financial Officer and Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:

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

* President, Chief Executive February 18, 1999
- -------------------------------------------------------- Officer (Principal
Peter D. Fenner Executive Officer and
Director)

/s/ DAVID L. ROBERTSON Vice President, Finance, February 18, 1999
- -------------------------------------------------------- Chief Financial Officer
David L. Robertson (Principal Financial and
Accounting Officer) and
Secretary

* Director February 18, 1999
- --------------------------------------------------------
Paul Baran

* Director February 18, 1999
- --------------------------------------------------------
Robert A. Hoff

* Director February 18, 1999
- --------------------------------------------------------
C. Richard Kramlich

* Director February 18, 1999
- --------------------------------------------------------
Scott J. Loftesness

* Director February 18, 1999
- --------------------------------------------------------
William R. Hearst, III

* Director February 18, 1999
- --------------------------------------------------------
Robert C. Hawk

* Director February 18, 1999
- --------------------------------------------------------
Robert W. Wilmot

*By: /s/ DAVID L. ROBERTSON
---------------------------------------------------
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 102

EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant, Credit
Suisse First Boston, and Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated.
3.1(1) Registrant's Amended and Restated Certificate of
Incorporation.
3.2(1) Registrant's Amended and Restated Bylaws.
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Information and Registration Rights
Agreement, among the Registrant and the investors and
founders named therein, dated July 22, 1997.
5.1* Legal Opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Registrant.
10.1(1) Lease Agreement between the Company, John Arrillaga and
Richard T. Peery, dated May 10, 1996.
10.2+(1) Technology License and Reseller Agreement between the
Company and 3Com Corporation, dated March 22, 1996.
10.3+(1) Reseller Agreement between the Company and 3Com Corporation,
dated July 30, 1997.
10.4+(1) Hardware and Software Technology License Agreement between
the Company, Advanced Telecommunications Modules, Limited
and Advanced Telecommunications Modules, Inc., dated
February 1, 1996.
10.5(1) Registrant's 1995 Stock Option Plan.
10.6(1) Registrant's 1998 Stock Incentive Plan.
10.7(1) Registrant's 1998 Employee Stock Purchase Plan.
10.8(1) Form of Indemnity Agreement entered into by Registrant with
each of its executive officers and directors.
10.9(1) Loan and Security Agreement between Registrant and Greyrock
Business Credit, dated May 30, 1997.
10.10+(1) International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced
Telecommunications Modules, Limited, dated March 7, 1996.
10.11+(1) Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12+(1) Wind River Systems, Inc. VxWorks License Agreement.
10.13+(1) Purchase and License Agreement by and between the Company
and Siemens AG, dated December 2, 1997.
10.14+(1) Distribution Agreement by and between the Company and
Philips Public Telecommunication Systems, dated November 26,
1997.
16.1(1) Letter from KPMG Peat Marwick LLP regarding Change in
Certifying Accountant.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>

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

* Previously Filed.
+ Confidential treatment has been granted or requested as to a portion of this
Agreement.
(1) Incorporated by reference to the identically numbered exhibits filed with
the Registrant's Registration Statement on Form S-1 (File No. 333-48107)
declared effective on May 18, 1998.

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in Amendment No. 4 to Registration Statement No.
333-70945 of Com21, Inc. on Form S-1 of our report dated January 18, 1999
appearing in the Prospectus, which is part of the Registration Statement. We
also consent to the reference to us under the headings "Selected Financial Data"
and "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
San Jose, California

February 15, 1999