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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-50464

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NETRIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE 54-1345159
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)

13595 DULLES TECHNOLOGY DRIVE, HERNDON, VIRGINIA 20171
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 742-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.05 Par Value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

Aggregate market value of Common Stock (par value $.05 per share)
held by non-affiliates of Registrant on April 1, 1999: $33,757,620.

The number of shares of Registrant's Common Stock (par value $.05 per
share) outstanding as of April 1, 1999: 11,490,000.

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ITEM 1. BUSINESS

NETRIX Corporation ("NETRIX" or the "Company") is a worldwide provider
of voice and data networking products. NETRIX develops, manufactures, markets,
and supports networking equipment for voice, data, and image networks. NETRIX
products are designed to transport voice over data networks to enable its
customers to realize significant cost savings. NETRIX was incorporated in 1985.
The Company conducts operations in the United Kingdom and Hong Kong through its
wholly owned subsidiary, NETRIX International Corporation (a Delaware
corporation), and in Germany, and Italy through its wholly owned subsidiaries
Netrix GmbH and Netrix S.r.l., respectively.

The Company's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and third party
contract manufacturers, and dependence on key management personnel.

BACKGROUND

Recent trends in network equipment investment have shown that network
infrastructures have been consolidated, resulting in fewer networks and
protocols to support an increasing number of applications. The Internet Protocol
(IP) for the LAN, along with Frame Relay and Asynchronous Transfer Mode (ATM)
for the Wide Area (WAN) has displaced most of the previous networking
technologies in this market space. These technological trends, combined with the
proliferation of global trade, have created a growing reliance on
telecommunications to facilitate commerce. In an environment in which wide area
networking is critical to daily operations, voice and data communications
represent a significant and increasing component of operating costs for
enterprises. NETRIX has re-focused its new products to support the `voice over'
needs of this new network model.

The varying traffic characteristics of different types of networking
applications, together with the need to transmit voice and image as well as
data, has created the need for vendors to supply multi-service platforms to meet
the user requirements within a single network fabric. Technologies in use today
include IP, Frame Relay, Integrated Services Digital Network (ISDN), and ATM.
Multi-service platforms, such as the NETRIX Network Exchange products, enable
the Company's customers to support multiple applications across a single
network, thereby resulting in improved connectivity, reduced communications
costs, and improved network performance.

The increasing availability of IP and Frame Relay services on the
public networks has fueled a trend toward building corporate networks that
access these services on an as-needed basis. NETRIX products can be used to
implement voice and data networks based upon private lines, public services, or
a combination of private and public services. NETRIX believes that the trend
toward the use of services will continue to grow, especially with global
telecommunications deregulation. The use of the Internet will also expand voice
and fax applications.

In January 1998, the Company entered the voice/data/fax-over-IP gateway
market with the introduction of Vodex software for the Network Exchange 2210.
Today, the Network Exchange is still one of the industry's few voice gateways to
simultaneously deliver high quality voice over IP and voice over Frame Relay
with the ability to gateway between the two.

In mid-1998, the Company introduced a low-end version of its Network
Exchange 2210 gateway, the Network Exchange 2201. Designed for the remote/branch
office environment, the product gives customers a range of alternatives from
which to choose.

Vodex software, common to both platforms, positions the Company firmly
in the IP telephony market space, which is emerging as the next wave of network
consolidation and which leverages the vast worldwide IP infrastructures being
deployed. It also positions the gateways for the emerging service provider space
by enabling them to offer low cost telephony while realizing a short-term return
on the equipment investment.

On March 19, 1999, Mr. Steve Francesco was appointed as Chairman of
the Board of Directors to reposition the Company as an end to end solution
provider for internet-based networking of voice/data/fax for the service
provider market. Mr. Francesco has begun an indepth reworking of the Company's
strategic objectives.

Management believes that the international toll market, in particular,
represents a short-term opportunity to gain substantial service provider market
share. Management believes the Company's current product offering provides
several advantages over existing competing products in the areas of scalability,
flexibility, cost, channel capacity and band width efficiency. The Company has
recently been able to offer carrier quality voice over packet switch
transmission to service providers over wide area networks at significant
reductions in per minute operating costs. Particularly with regard to bandwidth
allocation, the Company's capability to bundle multiple voice samples from
different calls in a single packet allows exceptional transmission management
over long distances. Management believes the Company is positioned to be among
the leaders in IP voice/data wide area networking equipment in 1999.

With the introduction and continued development of the Network Exchange
2210, the Company is moving toward fully remote, provisionable bandwidth
allocation to voice or data. This will give service providers the capability to
shape traffic and prioritize applications (ATM, Frame Relay, Ethernet etc.) and
to customize bandwidth on demand to suit end users needs.

Developments slated on the Network Exchange 2500 series in 1999,
including IP and voice termination, will also give service providers a choice of
NETRIX products to deploy in their network. The multi-service nature and
scalability of the Network Exchange 2500 and 2200 series products will enable
service providers to offer a variety of services on which to differentiate
themselves. Whether provisioning service or selling customer premise equipment
(CPE) to end users, the range of products will be positioned for the service
provider market.

NETRIX PRODUCTS

The Company currently offers products that focus on providing voice
over packet solutions, which leverage the emerging IP Telephony space as well as
the Frame Relay space. The Company has two platforms which comprise the Network
Exchange product line, the 2200 and the 2500. The products scale from a gateway
consisting of as few as four voice ports to large central sites via the largest
Network Exchange switches - the 2500 family. This scaleable product offering
permits the customer to choose the most appropriate platform for each site based
upon functionality and performance requirements. All are designed to enhance the
efficiency and cost-effectiveness of the communications infrastructure.

NETWORK EXCHANGE 2210. The Network Exchange 2210 is a voice gateway
that combines switched compressed voice and data switching in a single platform.
The 2210 incorporates the Company's Vodex voice gateway software, one of the
industry's first voice gateways to simultaneously deliver high quality voice
over IP and voice over Frame Relay with the ability to gateway between the two.
This scaleable product, designed to take advantage of available IP and frame
relay facilities/services, is based upon enhanced voice over frame capabilities
developed by the Company. The 2210 has a complete set of features which support
switched compressed voice, LAN traffic as well as the traditional capabilities
found in typical access level products. The 2210 can process up to 180
simultaneous voice calls, which makes it one of the largest VoIP/VoFR gateways
currently on the market and can be interconnected to incrementally add to the
overall capacity at a given site. For a fully redundant large site, Network
Exchange 2210s can be augmented by Network Exchange 2550s.

NETWORK EXCHANGE 2201. The NETRIX Network Exchange 2201 was introduced
mid-1998 as the entry-level product in the 2200 range. The 2201 is a voice over
data switching platform that delivers the benefits of Internet Telephony and
Wide Area Network switching together with multi-protocol data support. The 2201
offers a unique combination of switched compressed voice and data switching
support in a single compact platform. As a stand-alone voice and data access
switch, or in conjunction with the other NETRIX Network Exchange 2000 series
products, it gives networks flexibility, scalability, and efficiency.

NETWORK EXCHANGE 2550. The 2550 performs as a central site voice/data
switch to provide a resilient fault-tolerant hub. The 2550 interworks with the
2210 to provide complete multi-service networking support for compressed voice
traffic as well as all existing network technologies. With the 2550, networks
can be constructed to provide support for voice over IP, Frame Relay, and ATM
using narrowband or high speed broadband interfaces running at speeds up to DS3
(45 Mbps) and E3 (34 Mbps) rates.

NETWORK EXCHANGE 2510. The NETRIX Network Exchange 2510 is the
entry-level switch in the Network Exchange 2500 series of high-performance,
multi-service switching platforms. It combines ATM, Frame Relay, X.25, TDM, and
ISDN for data, voice and image applications. Functioning as either an enterprise
backbone or a carrier edge switch, the 2510 provides cost-effective bandwidth
management of public, private, and hybrid networks, with extensive network
management and diagnostic capabilities.

NETRIX Network Exchange products provide flexible and scaleable
network solutions for small to large voice/data networks. The products are used
together to provide coverage from the access level through to the network
backbone. NETRIX products provide integrated voice and data network solutions
that use state of the art networking technology. In addition to the Network
Exchange product line, other Netrix products include the Series 10 (S10), the
Series 100 (S100), the Series 1000 (S1000), and Netrix Telecom Products.
(Telecom products consist of the RLX, RNET, RIO, and RDC).

NETRIX NETWORK MANAGEMENT SYSTEM (NMS). Each of the products listed
above is managed by NETRIX' Network Management System (NMS). The NMS provides a
full graphical user interface and remote diagnostics, allowing nodes at several
different locations to be viewed and managed by the network manager at one
central location. The NMS has the capability to monitor attached SNMP devices,
such as a router, and to participate in global network management architecture
with other SNMP managers. Built into the NMS is the capability to support
Virtual Private Networks, remote diagnostics, and extensive "gatekeeper"
functionality such as call detail records for accounting and performance
statistics for on-going capacity planning/tuning. The NMS provides extensive
capabilities to insure non-stop operation with the lowest personnel costs. The
Company supplies network management software for operation with Windows 95 and
Sun Sparc platforms.

MARKETING AND SALES

The Company's primary target customers are business users with
multiple locations. Its secondary market is providers of voice and data
services. To address these markets throughout the world, the Company has
established a multi-channel distribution and sales network. The Company's
products are designed to provide enterprise voice/data solutions and are
marketed mostly through indirect channels, either via carriers or enterprise
focused partners worldwide. In addition, the Company has been successful in its
efforts to partner with other equipment manufacturers to access their sales
channel. In October, NETRIX announced an OEM arrangement with Motorola for the
Network Exchange 2550. In addition, Motorola is funding development on the
Network Exchange 2550 that will add IP functionality and voice termination,
scheduled for delivery in 1999. Both companies will be able to sell the
resulting product. In November, NETRIX gateways were certified to interoperate
with NEC PBXs. The Network Exchange 2210 is the first Internet telephony/gateway
to be so certified by NEC. As a result, NEC America has promoted the Network
Exchange to NEC resellers; NETRIX continues to work with numerous sales
opportunities provided by NEC resellers who are in the process of becoming
NETRIX resellers.

Management is exploring the possibility of offering products for sale
on the internet as a way of achieving additional global distribution with no
incremental sales costs. Other companies in the Company's market space have
successfully integrated e-commerce into their sales cycle.

CUSTOMER SUPPORT AND SERVICE

A significant element of the Company's strategy has been to provide
service, repair, and technical support for its customers throughout the world. A
substantial portion of NETRIX' service and support activities relates to
software and network configuration and is provided by 24-hour per day, 7 days
per week telephone support through the NETRIX Technical Assistance Center
("TAC"). The Company's products are designed to allow the TAC to be on line with
any NETRIX network in the world to diagnose problems and to respond with
solutions. In addition, NETRIX hardware is designed to facilitate replacement of
failed boards; in many cases, the customer's personnel can replace a board
themselves under the direction of the TAC. TAC service is provided directly to
end users and as a backup service to the Company's international distributors.

NETRIX personnel and third party providers perform most domestic
hardware maintenance and installation. For customers outside the United States,
these services are generally provided by the Company's international Value Added
Resellers (VARs). NETRIX typically offers its customers a hardware warranty
ranging from 90 days to one year and offers an optional annually renewable
hardware maintenance and software support contract with the network.

The Company's support contracts with its customers offer a variety of
levels of support, with each option being priced as a percentage of the purchase
price of the installed equipment. In addition, NETRIX provides technical
consulting and training both to end-users and to distributors. Many of the
Company's customers currently have support and maintenance contracts with the
Company. Customer service as a percent of revenue was 31% in 1998, 32% in 1997
and 26% in 1996.

RESEARCH AND DEVELOPMENT

NETRIX believes its future success depends on its ability to continue
to enhance its products to improve performance and functionality and to develop
new products that address emerging networking market niches. Research and
development as a percent of revenue was 22% in 1998, and 25% in 1997 and 1996.

COMPETITION

The Company encounters substantial competition in the marketing of its
products, and many of its competitors have greater financial, marketing and
technical resources. Important competitive factors in the Company's product
markets are established customer base, product performance and features, service
and support, as well as price. The Company believes that it competes favorably
with respect to these factors. There can be no assurance that the Company's
products will compete successfully with competitive products that may be offered
in the future or that aggressive pricing will not adversely impact the
profitability of the Company.

PROPRIETARY RIGHTS

The Company relies on a combination of patents, trade secret,
copyright and trademark law, non-disclosure agreements, and technical measures
to establish and protect their proprietary rights in their products. Despite
these precautions, it may be possible for unauthorized third parties to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. The laws of some foreign countries in which the
Company sells or may sell its products do not protect the Company's proprietary
rights to the same extent as do the laws of the United States.

The Company believes that because of the rapid pace of technological
change in the networking industry, patent and copyright protection, while
important, are less significant to the Company's competitive position than
factors such as the knowledge, ability, and experience of the Company's
personnel, new product development, market recognition, and ongoing product
maintenance and support. The Company believes that its products and trademarks
do not infringe upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims in
the future.

To protect the company's intellectual property rights in the "Voice
Over" market space, the prime patents held by the company in packetized
compressed voice networking have been brought to the attention of both the Voice
over IP and Frame Relay forum organizations.

The Company also uses various licensed products of other companies in
certain of its products.

EMPLOYEES

The Company had 168 employees at December 31, 1998. None of the
employees are represented by collective bargaining agreements. The Company has
never experienced any work stoppage. The Company believes that its employee
relations are satisfactory.

ITEM 2. PROPERTIES

The Company's principal administrative and research and development
facility consists of approximately 56,000 square feet located in Herndon,
Virginia. These premises are occupied under a lease agreement which was
renegotiated for an additional ten-year term beginning May 1, 1999. A separate
facility of 8,600 square feet is under lease in Longmont, Colorado, for product
development operations. The Company also maintains space in Charlotte, North
Carolina, for its manufacturing operations. This space is leased from its main
outsourcing manufacturer. Additionally, the Company maintains international
sales offices in London, Rome, and Hong Kong. The Company believes its
facilities are in all material respects, suitable, adequate and well utilized.

ITEM 3. LITIGATION

The company is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of the Company, and adequate provision for any potential
losses has been made in the accompanying financial statements.

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

John F. Burton and Lynn C. Chapman were elected by a majority of votes
as Class III directors of the Corporation at the Corporation's 1998 Annual
Meeting of Stockholders, each to serve in accordance with the Bylaws of the
Corporation until the 2001 Annual Meeting of Stockholders and thereafter until
their successors are duly elected and qualified. John F. Burton resigned as a
director of the Company in March 1999.

At the Corporation's 1998 Annual Meeting of Stockholders there was a
majority vote that the firm of Arthur Andersen, LLP be retained as the
Corporation's independent auditors for fiscal 1999.

PART II

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

MARKET INFORMATION FOR COMMON STOCK

NETRIX Corporation's common stock is traded on the NASDAQ National
Market under the symbol NTRX. The following table reflects the range of high and
low selling prices as reported by NASDAQ for the quarters indicated.

HIGH LOW

1997
First Quarter................................ $ 6-3/8 $ 2-5/8
Second Quarter............................... $ 2-7/8 $ 1-1/2
Third Quarter................................ $ 2-5/8 $ 1-13/16
Fourth Quarter............................... $ 2-9/16 $ 2-1/32

1998
First Quarter................................ $ 2-1/8 $ 1-1/16
Second Quarter............................... $ 3-3/8 $ 2-1/16
Third Quarter................................ $ 3-1/4 $ 1-3/32
Fourth Quarter............................... $ 2-25/32 $ 1-1/16

HOLDERS

At March 31, 1999, there were approximately 251 holders of record of
Common Stock. At March 13, 1998, there were approximately 226 holders of record
of Common Stock and estimated 2,948 total holders based on the volume of proxy
and other material mailed to shareholders.

DIVIDENDS

The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below for the fiscal
years ended December 31, 1994, 1995, 1996, 1997, and 1998 have been derived from
the Company's consolidated financial statements.

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statement of operations data:
Total revenues $53,021 $48,891 $ 43,635 $ 33,087 $ 31,482
Gross profit....................... 27,557 25,225 21,572 14,647 15,388
Loss from operations............... (980) (4,500) (6,305) (8,773) (6,488)
Net loss........................... (579) (3,795) (5,968) (8,577) (6,517)
Basic and diluted loss per share... (0.06) (0.40) (0.63) (0.89) (0.60)

Balance sheet data (end of period):
Working capital.................... 25,055 21,790 17,782 10,271 7,600
Total assets....................... 45,343 41,985 34,493 24,024 20,241
Total long-term liabilities........ 843 943 614 97 --
Stockholders' equity............... 33,632 30,396 24,847 16,480 12,117

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

RECENT DEVELOPMENTS

In January 1998, the Company announced its Vodex Voice Gateway software
for its Network Exchange 2210, a Voice/Data/Fax-Over-IP Gateway Switch. Vodex is
one of the industry's first voice gateways to simultaneously deliver high
quality voice over IP and voice over Frame Relay with the ability to gateway
between the two.

In August 1998, the Company established a distribution agreement with
Packet Engines, a worldwide leader in gigabit networking solutions. As specified
in the agreement, Packet Engines will market and sell the Company's range of
Voice over data products for use in special projects such as integrated services
metropolitan area networks (MANs). The products specified include the new
Network Exchange 2201 for branch/remote offices, the mid-range Network Exchange
2210, and the multi-service Network Exchange 2550.

Also in August 1998, the Network Exchange 2210 Voice over IP/Frame
Relay Internet telephony gateway received the coveted Editor's Choice Award from
INTERNET TELEPHONY magazine.

In September 1998, the Company announced plans to integrate the H.323
Version 2 Protocol Stack from RADVision into Vodex Voice Gateway software, which
is deployed in the Company's Network Exchange 2210 and 2201 gateways.

In October 1998, the Company entered into a major IP and voice OEM and
development agreement with Motorola's Internet and Networking Group (ING). Under
the terms of the OEM agreement, Motorola will market the Network Exchange as a
high speed networking solution for enterprise headquarters and other
applications requiring high performance solutions.

The Company also announced the completion of subjective conversation
testing which compared the voice quality of the NETRIX Network Exchange 2200
using 8K ACELP voice compression with the Public Switched Telephone Network. In
the double-blind experiment, telephone users in quiet, acoustically isolated
rooms were unable to distinguish between a NETRIX 8K voice compression circuit
and a circuit provided by the local PSTN (Public Switched Telephone Network).
The experiment was performed at the U.S. Department of Commerce's (DoC)
Institute for Telecommunication Sciences (ITS) in Boulder, Colorado in
conjunction with NETRIX under the terms of a five-year Cooperative Research and
Development Agreement.

In November 1998, NETRIX gateways were certified to interoperate with
NEC PBXs. The Network Exchange 2210 is the first Internet telephony gateway to
be so certified by NEC. As a result, NEC America has promoted the Network
Exchange to NEC resellers; NETRIX continues to work with numerous sales
opportunities uncovered by NEC resellers who are in the process of becoming
NETRIX resellers.

The Company announced on March 25, 1999 that is has had significant
changes to its Board of Directors. Steven T. Francesco has been appointed to the
position of Chairman of the Board of Directors. In addition John M. Faccibene
has been named to fill one of the four current vacancies on the Board. The
Company expects to make additional Board appointments over the next two months.

Netrix has renegotiated the terms of the line of credit agreement with
Coast Business Credit. The new terms include a significantly lower quarterly
tangible net worth covenant and an extension through May 2001. Concurrently, the
lending institution granted the Company a waiver of the past covenant violations
and waived its right to call the line of credit for these covenant violations.

This Annual Report on Form 10-K contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results".

RESULTS OF OPERATIONS

The results of operations for the year ended December 31, 1998 reflect
a 5% decrease in revenues, a 13% decrease in cost of revenues, and a 7% decrease
in operating expenses from 1997. During 1998, NETRIX continued to experience a
decline in revenues in the product line it acquired from Republic Telcom, and an
increase in its new products, the 2210, which combines the Republic technology
with NETRIX switching capability, and the 2550, NETRIX enhanced switching
platform.

In both March of 1996 and April of 1997, the Company implemented a
restructuring of operations to reduce and economize its work force in response
to declining revenues and the discontinuance of its micro.pop product. The
restructuring resulted in an overall reduction of personnel and related
compensation and other associated operating costs of the Company for these
years. The 1996 restructuring charges of $.9 million resulted from approximately
$.5 million of accrued severance and outplacement costs associated with a
reduction-in-force of approximately 41 employees across all functional areas of
the Company, and approximately $.4 million of accrued facility costs resulting
from the consolidation of facilities and premature termination of various office
leases. The reduction-in-force occurred over approximately a one-year period and
severance payments were made in a lump sum in April and June 1996, and February
1997. As a result of the 1996 restructuring, estimated cost savings of
approximately $2.5 million annually has been realized. The 1997 restructuring
charges of $.9 million resulted from approximately $.4 million of accrued
severance and outplacement costs associated with a reduction-in-force of
approximately 37 employees across all functional areas of the Company,
approximately $.4 million of fixed-asset write-offs and facility relocation
charges for unrecoverable lease obligations associated with the consolidation of
the Longmont, Colorado, and Herndon, Virginia, operations facilities into one
facility leased in Charlotte, North Carolina, and other associated costs of
approximately $.1 million. Severance payments were made in April 1997. As a
result of the 1997 restructuring, estimated cost savings of approximately $2.5
million annually has been realized.

REVENUES. Total revenues decreased $1.6 million or 5% from 1997 to 1998
and $10.5 million or 24% from 1996 to 1997. Product revenues in 1998 of $21.8
million decreased 3% from 1997 product revenues of $22.5 million, which
decreased $10.0 million or 31% from product revenues in 1996 of $32.4 million.
The decreased sales for both 1996 and 1997 were most prominent in the United
States which saw a decrease in product revenues of $3.7 million or 32% from 1996
to 1997. The International sales regions also experienced decreased sales to a
lesser extent from 1996 to 1997. The mix of products sold contributed
significantly to the decrease in revenues in 1998 and 1997. The Telecom products
acquired in the Republic Telcom acquisition saw a steady decrease of 57% from
1996 to 1997, and 42% from 1997 to 1998. The NETRIX Exchange products, some of
which still incorporate the Republic technology, utilize more current technology
and have been developed through significant investments in R&D. The NETRIX
Exchange products generated a revenue increase of 248% and 88% respectively,
over the same periods. This trend of declining sales of older Telcom products
and increasing sales of NETRIX Exchange products is the result of technological
advances that offer improved performance and greater functionality in the
current generation of products, and thus enhanced value to customers. The NETRIX
Exchange product sales are generated by new customers as well as existing
customers who are upgrading their networks to modern technology.

Service revenues decreased $1.0 million or 9% from 1997 to 1998, and
$0.6 million or 5% from 1996 to 1997. Service revenues are primarily the result
of the renewal of existing maintenance contracts as well as the negotiation of
new equipment service contracts. Overall, service revenues have decreased as a
result of the elimination of older product servicing which is partially offset
by new product and customer contracts.

GROSS PROFIT. Total gross profit increased $0.7 million or 5% from 1997
to 1998, and decreased $6.9 million or 32% from 1996 to 1997. Gross profit as a
percentage of total revenues was 49% in 1998, 44% in 1997, and 49% in 1996. The
product gross margin decreased from 55% in 1996 to 49% in 1997 because of lower
introductory pricing offered on the new 2550 product and a greater proportion of
sales made through distributors, which generally have higher discounts, than
direct retail sales. Product margins increased by 1% in 1998 from 1997 as a
result of higher-margin product mix, and decreased 6% in 1997 from 1996.

The service gross margin was 34% in 1996 and 1997, and 47% in 1998. The
increase in the service margin from 1997 to 1998 was approximately 13%, or $1.5
million, This net margin improvement was the combined result of a decrease of
approximately $.8 million in personnel and infrastructure costs resulting from
the 1997 restructuring and the elimination of approximately $1.0 million in
support service costs outsourced to contract maintenance organizations, which
was partially offset by a decrease in margin of approximately $.3 million
resulting from the $1.0 million decrease in service revenue volume from 1997 to
1998.

SALES AND MARKETING. Sales and marketing expenses increased $0.6
million or 5% from 1997 to 1998, and decreased $1.4 million or 12% from 1996 to
1997. The 1998 increase of $0.6 million is the combined result of a net increase
of approximately $0.4 million of consignment inventory reserves for obsolete
equipment and $1.5 million of bad debt expense, which was partially offset by a
decrease of approximately $1.1 in personnel and infrastructure costs attributed
to the 1997 restructuring discussed above. The net decrease from 1996 to 1997
resulted primarily from a decrease of approximately $1.8 million in personnel
and infrastructure costs resulting from the restructuring in 1996 and 1997,
which was partially offset by an increase of approximately $.4 million in costs
for marketing material and advertising initiatives. For the years 1998, 1997,
and 1996, the increase in the provision for consignment equipment expense was
approximately $1.8 million, $1.5 million, and $.3 million, respectively. During
1998, 1997, and 1996, approximately $1.7 million, $.6 million, and $.2 million
of consignment equipment was charged to the reserve account. The significant
increases in the provision for consignment equipment and related charges in 1998
and 1997 were primarily the result of a proportionally greater amount of
consignment equipment provisioned to existing and potential customers as sales
incentives to promote the new Network Exchange series product line, which was
rolled-out initially in 1996.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$1.5 million or 19% from 1997 to 1998, and $2.8 million or 25% from 1996 to
1997. As a percentage of revenues, R&D expenses decreased from 25% of revenues
in 1996 and 1997 to 22% of revenues in 1998. The decreases in R&D expenses for
1998 and 1997 were primarily the result of the restructurings discussed above.
The 1998 decrease of $1.5 million was the result of decreases of approximately
$.9 million in personnel and infrastructure costs and approximately $.6 million
in materials and contract engineering services due to fewer R&D projects. The
1997 decrease of $2.8 million was the result of decreases of approximately $1.9
million in personnel and infrastructure costs and approximately $.9 million in
materials and contract engineering services due to fewer R&D projects.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $0.3 million or 8% from 1997 to 1998, and decreased $0.2 million or 6%
from 1996 to 1997. The 1998 increase was primarily the result of an increase in
professional fees of approximately $.2 million, and increases of approximately
$.1 million in other expenses. The 1997 decrease was the combined result of a
decrease of approximately $.3 million of personnel costs due to the
restructuring discussed above, which was partially offset by an increase of
approximately $.1 million in outside purchased services.

PROVISION FOR BAD DEBTS. For the years 1998, 1997, and 1996, the
provision for bad debts expense was approximately $1.5 million, $.1 million, and
$-0-, respectively. As a percentage of revenues, the provision for bad debts was
approximately 5% in 1998, and negligible in 1997 and 1996. The increase of $1.4
million in the 1998 provision for bad debts was the result of writing off aged
accounts receivable that were previously deemed collectible, but which had
continued to age beyond a period deemed reasonable for realization.

INTEREST AND OTHER, NET. Net interest expense increased $225,000
from 1997 to 1998 as a result of increased borrowing in 1998. Net interest
expense increased $207,000 from 1996 to 1997 as a result of increased borrowing
and decreased interest income.

ACCOUNTS RECEIVABLE, NET. As of December 31, 1998, net accounts
receivable increased by $1.3 million, or approximately 21%, to $7.5 million, up
from $6.2 million at the end of 1997. As a percentage of annual revenues, net
accounts receivable as of December 31, 1998 and 1997 were approximately 24% and
19%, respectively. This proportional increase in net accounts receivable was
primarily caused by an increase in quarter over quarter revenues of
approximately $.9 million, which are included in the year-end net accounts
receivable balances as of December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

For the years ended December 31, 1998 and 1997, the Company
experienced declining revenues and net losses of approximately $6.5 million and
$8.6 million respectively, due to declining sales of the Company's mature
products which were partially offset by increases in sales of new products. As a
result, the Company's tangible net worth decreased from $15.7 million at
December 31, 1997 to $11.2 million at December 31, 1998. The Company's line of
credit agreement requires it to maintain a tangible net worth of at least $13.5
million measured at the end of each month. Since October 31, 1998 the Company
has been in violation of this covenant. This covenant violation allows the
Company's lending institution to call for collection of the outstanding loan
balance. As of April 12, 1999 the lending institution had not exercised this
right. On April 12, 1999 the lending institution granted the Company a waiver of
the current and past months' covenant violations and waived its right to call
the line of credit for these covenant violations. The lending institution
amended the line of credit agreement to measure the Company's tangible net worth
on a quarterly basis and set the minimum tangible net worth covenant at $9.8
million as of March 31, 1999 and $9.0 million for all subsequent quarters.
Management believes that this new covenant will be adequate for the Company to
operate under in the foreseeable future. However, there can be no assurances
that the Company will not violate the new covenant or that the outstanding loan
balance will not be called by the lending institution upon violation of the new
covenant.

The success and the future of the Company is dependent on its ability
to generate net income or to increase its net worth by the sale of additional
equity. The Company's ability to generate net income is in large part dependent
on its success at increasing sales of its new products and/or controlling costs.
The Company's plan to increase revenues through sales of its Network Exchange
product line is continuing to evolve in order to exploit new markets and
customer channels; however, due to market conditions, competitive pressures, and
other factors beyond its control, the Company has been unable to achieve
sufficient incremental growth in new product sales to replace the decline in
mature product sales and there can be no assurances that the Company will be
able to adequately increase new product sales in the future. The Company has
implemented cost control measures and is continually evaluating expense levels
to generate net income and mitigate its liquidity risk.

At December 31, 1998, the Company had approximately $ 2.4 million of
total eligible borrowing availability and approximately $2.2 million outstanding
under the line of credit. At December 31, 1997, the Company had approximately
$2.0 million of eligible borrowing and approximately $1.1 million outstanding
under the line of credit. In August 1998, as a result of concerns about the
deterioration of aged international accounts receivable, the lending institution
initiated discussions regarding the elimination of international receivables as
qualified accounts receivable for borrowing collateral. The lending institution
also increased the interest rate for all outstanding loan amounts to prime plus
3 1/2% from prime plus 2%. In October 1998, a sub-line of credit for selected
foreign receivables up to an amount of $600,000 on selected accounts receivable.
As of December 31, 1998, the Company's domestic accounts receivable have
generated adequate borrowing for operations, and the Company has not had to use
the foreign sub-line of credit.

At December 31, 1998, the Company had approximately $2.5 million in
cash and investments compared to $2.8 million at December 31, 1997. For the year
ended December 31, 1998, the Company used $2.1 million of cash for operations.
Non-cash items consisting of depreciation and amortization of $2.7 million
contributed to the loss of $6.5 million. The reduction in accounts payable and
accrued expenses of $0.3 million combined with the increase in accounts
receivable of $1.3 million had a negative effect on cash flow for the year.

Inventory levels at December 31, 1998 were $2.8 million lower than at
December 31, 1997 and were $2.4 million lower than at June 30, 1998. This
reduction is the result of efforts during the last half of 1998 to bring
inventories in line with current sales volume and the expected phase out of
older products.

Capital acquisitions during 1998 were $1.3 million compared to $1.7
million in 1997, and $2.1 million in 1996. These acquisitions were mostly for
equipment used for research and development purposes along with some computer
and test equipment.

The success of the Company is dependent on its ability to generate
adequate cash for operations and capital needs. Its ability to generate adequate
cash for such needs is in part dependent on its success in increasing sales of
its products. The Company intends to increase revenues through sales of its
Network Exchange product line; however, due to market conditions and other
factors beyond its control, there can be no assurance the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets, including technologies, or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional cash through such sales, such sales may be
dilutive and there can be no assurances that adequate funds will be available or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company. The
Company has implemented cost control measures and is continually evaluating
expense levels to mitigate its liquidity risk.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company believes revenues will increase through sales of its
Network Exchange products. However, the Company may have to generate additional
cash through other means, which may include the sale of assets, including
intellectual property and proprietary technology, the sale of equity, additional
borrowings, the sale of selected operations, or one or more strategic
partnerships. Although the Company believes it has the ability to generate
additional cash through such sales, such sales may be dilutive and there can be
no assurances that adequate funds will be available, or available on terms that
are reasonable or acceptable, to the Company.

The lending institution amended the line of credit agreement to measure
the Company's tangible net worth on a quarterly basis and set the minimum
tangible net worth covenant at $9.8 million as of March 31, 1999 and $9.0
million for all subsequent quarters. Management believes that this new covenant
will be adequate for the Company to operate under in the foreseeable future.
However, there can be no assurances that the Company will not violate the new
covenant or that the outstanding loan balance will not be called by the lending
institution upon violation of the new covenant. If the Company is unable to
generate or borrow adequate cash, there will be a material and adverse effect on
the business and financial condition of the Company, to the extent that a sale,
liquidation or restructuring of the Company will be required, in whole or in
part.

Future operating results may be affected by a number of other factors
including the timing of new products in the market place, competitive pricing
pressures and global economic conditions. Because the market for the Company's
products is characterized by rapidly changing technology, the development,
introduction, and evolution of competitive products may require a significant
investment of financial resources. Additionally, the Company relies on reseller
channels, which are not under its control for a significant portion of its
revenues, particularly in its international regions. In addition, while the
Company has generally been able to obtain adequate supplies of components to
date, the interruption or termination of the Company's current manufacturing
relationships could have an adverse effect on the Company's liquidity and
operating results.

The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.

A limited number of relatively large customer orders has accounted for
and is likely to continue to account for a substantial portion of revenues in
any particular fiscal period. As a result, the timing of orders could
significantly affect the Company's operating results. In any period, the
unexpected loss of or decline in revenues from a major customer, or the failure
to generate significant revenues from other customers, could have an adverse
effect on the business and operating results of the Company. Although the
Company's expense levels are based in part on its expectations as to future
revenue, certain expenses are relatively fixed and cannot be adjusted in the
short term. Accordingly if revenue levels are below expectations, operating
results could be adversely affected. In addition, the Company's products often
represent a significant capital expenditure for its customers and, for that
reason, the Company's operating results may vary significantly depending upon
general economic conditions and customers' budgetary cycles.

During 1998, a nominal portion of the Company's revenues has been
derived from sales to the United States government, primarily through systems
integrators. The revenues generated by government business, which is spread
across numerous agencies and departments, could be adversely affected by
governmental budgetary or fiscal restraints or changes in government policy.

The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and changes in
telecommunications services offered by public carriers. The introduction of
products embodying new technologies and the emergence of new industry standards
or telecommunications services may adversely affect the Company's ability to
market its products. This may require the Company to make substantial
expenditures on research and development in order to develop new products or to
maintain the competitiveness of its existing products. The Company's ability to
anticipate changes in technology and in industry standards, to anticipate
changes in market requirements and to successfully develop and introduce new and
enhanced products on a timely basis, will be a significant factor in the
Company's ability to remain competitive. If the Company is unable, for
technological, financial or other reasons, to develop, introduce and
successfully market products in a timely manner in response to changes in the
industry, the Company's business would be materially and adversely affected. In
addition, the Company has experienced delays in releasing certain of its
products and there can be no assurance that it will not encounter technical or
other difficulties that could delay the introduction or release of new products
in the future.

The development and introduction of new and enhanced products requires
a significant investment of financial resources. To the extent that the
Company's existing financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on terms reasonable to the Company or at
all.

The market for networking systems is extremely competitive. Many of the
Company's competitors are more established, benefit from greater market
recognition and have greater financial, technological, production and marketing
resources than the Company. Competition could increase if new companies enter
the market or if existing competitors expand their product lines. An increase in
competition could have an adverse effect on the Company's business and operating
results. Maintaining the competitiveness of the Company's products will require
continued investment by the Company in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investment or that the Company will be able to make the
technological advances necessary to maintain the competitiveness of its
products.

A significant portion of the Company's total revenues has been derived
from international sales, and the Company expects that international business
will continue to represent an important element of its business. Substantially
all of the Company's international sales have been made through third-party
distributors, and in many cases the Company relies upon only one distributor for
a particular country. A reduction in the sales by some or all of these
distributors or a termination of their relationships with the Company could have
a material adverse effect on the Company's operations and financial performance.
In addition, the Company's international business may be adversely affected by
changes in demand for its products resulting from fluctuations in exchange
rates, as well as by risks such as trade and tariff regulations, political
instability, difficulties in obtaining export licenses, difficulties or delays
in collecting accounts receivable and difficulties in staffing and managing
international operations.

The Company's success depends to a significant extent upon the
continued service of its executive officers and other key personnel. None of the
Company's executive officers or key employees is subject to an employment or
non-competition agreement. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company. The Company's future success will depend in part upon its continuing
ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel.

The Company relies on reseller channels, including distributors and
systems integrators, for a significant portion of its revenues. None of these
resellers are under the control of the Company and there can be no assurance
that future sales by resellers will continue at present levels or will not
decline. The loss of one or more significant resellers could adversely affect
the Company's business. In addition, the Company relies on resellers to provide
certain limited service and support to their customers, and any deficiencies in
such service and support could adversely affect the Company's business and
operating results.

Certain components used in the Company's products are currently
available from only one source and others are available from only a limited
number of sources. Although the Company has generally been able to obtain
adequate supplies of components to date, the Company's inability to develop
alternative sources if and as required in the future, or to obtain sufficient
sole-source or limited-source components as required, could result in delays or
reductions in product shipments, which could adversely affect the Company's
operating results. Certain products that are or may in the future be marketed
with or incorporated into the Company's products are supplied by or under
development by third parties. These third parties may be the sole suppliers of
such products. The Company also currently relies on a single contract
manufacturer to assemble and test most of the Company's products. Although a
number of such contract manufacturers exist, the interruption or termination of
the Company's current manufacturing relationship could have a short-term adverse
effect on the Company's business. The inability of any such third parties to
supply, develop or manufacture components or products in a timely manner or the
termination of the Company's relationship with any such third party could delay
shipment of the Company's products and could have a material adverse impact on
the Company's operating results.

Because of these and other factors, past financial performance should
not be considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's Common Stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the networking industry, changes in earnings estimates and
recommendations by analysts or other events.

YEAR 2000

The Year 2000 presents concerns for business and consumer computing.
Aside from the well-known problems with the use of certain 2-digit date formats
as the year changes from 1999 to 2000, the Year 2000 is a special case leap
year, and dates such as 9/9/99 were used by certain organizations for special
functions. The problem exists for many kinds of software and hardware, including
mainframes, mini-computers, PCs, and embedded systems.

Netrix Corp has divided the year 2000 task into three areas of concern,
Netrix Product, Netrix Suppliers, and Netrix Internal Systems. The Company's
core products have been reviewed, tested and if required implemented corrective
measures to ensure no year 2000 issues. This task is complete with information
regarding the Netrix Products available via Internet access and software release
notes. NETRIX suppliers are being asked to respond to the year 2000 issue. This
will be an ongoing process and is considered a low risk to the Company. Netrix
Internal systems have been audited and corrective measures are being taken to
correct identified year 2000 issues.

At the present time Internal Systems represent the largest area of
concern for the Company. The Internal Systems category has been further broken
down into hardware and software areas, business / operations applications,
engineering applications, Unix based technologies and PC based technologies. The
Company has identified all major hardware and software components that need to
be assessed and has performed a preliminary assessment of all hardware and
software identified. The Company has updated a majority of hardware in use and

is in the process of converting all software applications that are known to have
year 2000 issues. NETRIX anticipates completion of software conversions by
September 30, 1999 leaving the fourth quarter of 1999 for testing and
contingency measures. In order to ensure proper conversion of the key financial,
manufacturing, and ERP software, the Company has engaged the main supplier of
its software to assist with the conversion and implementation of the conversion.
The initial conversion of this critical system will be accomplished by June 30,
1999 and the final conversion for live production use in the third quarter of
1999.

Vendors or other third parties that could affect the Company's
operations include suppliers of utility services, travel and hotel services,
office supply vendors, equipment and technology vendors, mail, telephone,
Internet and other communications services. Each of the Company's departmental
directors has been instructed to communicate with their major suppliers with
respect to such vendors' year 2000 compliance status. All of the Company's
departments have been directed to make arrangements with an alternative vendor
if it appears that the current vendor will not achieve compliance by the year
2000. There can be no guarantee, however, that the systems of the Company's
major vendors, including providers of public utilities, will be timely
converted, or that a failure to convert by another company or organization, or a
conversion that is incompatible with the Company's systems, would not have an
adverse effect on the Company.

Although the Company anticipates that minimal business disruptions will
occur as a result of year 2000 issues, possible consequences include loss of
communications with members, inability to conduct marketing efforts and on-site
seminars as a result of travel and communications disruptions, delay in the
production and distribution of studies and reports, inability to conduct
research and surveys, and disruption of similar normal business activities. The
Company believes that the conversion and modification efforts by the Company and
its vendors will mitigate the risks associated with year 2000 issues. If,
however, the Company or its essential vendors do not complete the necessary
modifications or conversions in a timely manner or if such modifications or
conversions fail to achieve the proper results, the Company's operations may be
adversely effected.

The Company does not intend to develop any contingency plans to address
possible failures by the Company or its vendors to the year 2000 compliant with
respect to information technology systems. The Company does not believe that
such contingency plans are required because it believes that the Company and its
information technology suppliers will be year 2000 compliant before January
2000. The Company currently does not have any contingency plans to address
possible failures by its vendors to be year 2000 compliant with respect to
non-information technology systems, but expects to develop such plans by June
1999.

While Year 2000 issues present a potential risk to the Company's
internal systems, distribution and supply chain, and facilities, the Company is
minimizing its risk with a concentrated effort. The Company is performing an
extensive assessment and is in the process of testing and remediating mission
critical components. The current plan is to have the majority of these
components identified by June 1999, with the remaining components resolved by
September 1999. Management currently believes that all critical systems will be
ready by January 1, 2000 and that the costs to address these issues will not
exceed the budgeted amounts. Management estimates the cost to address and
resolve Year 2000 issues will approximate $0.5 million, and these costs have
been included in the Company's operating plan for 1999.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and the
Shareholders of Netrix Corporation:

We have audited the accompanying consolidated balance sheets of Netrix
Corporation (a Delaware corporation) and subsidiaries (together the "Company")
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in 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 an 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Netrix Corporation
and subsidiaries as of December 31, 1998 and 1997, 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.

ARTHUR ANDERSEN LLP

Washington, DC
April 14, 1999

NETRIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenues:
Product $21,840 $22,474 $32,434
Service 9,642 10,613 11,201
------- ------- -------
Total revenues 31,482 33,087 43,635
------- ------- -------

Cost of revenues:
Product 10,939 11,395 14,700
Service 5,155 7,045 7,363
------- ------- -------
Total cost of revenues 16,094 18,440 22,063
------- ------- -------
Gross profit 15,388 14,647 21,572
------- ------- -------

Operating expenses:
Sales and marketing 9,292 10,120 11,632
Research and development 6,771 8,323 11,079
General and administrative 4,324 4,002 4,266
Restructuring charge - 875 900
Bad debt expense 1,489 100 0
------- ------- -------
Loss from operations (6,488) (8,773) (6,305)

Interest and other, net (29) 196 403
-------- ------- -------
Loss before income taxes (6,517) (8,577) (5,902)

Provision for income taxes - - (66)
--------- --------- ---------
Net loss $ (6,517) $ (8,577) $ (5,968)
========= ========= =========
Other comprehensive gain (loss) (103) 35 (83)
--------- --------- ---------
Comprehensive Loss $ (6,620) $ (8,542) $ (6,051)
========= ========= =========

Basic and diluted net loss per share $ (0.60) $ (0.90) $ (0.63)
========= ========= =========

Basic and diluted weighted average shares outstanding 10,891 9,553 9,468
========= ========= =========

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

NETRIX CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31,
--------------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Current assets:
Cash and cash equivalents $2,488 $2,758
Accounts receivable, net of allowance for doubtful accounts
of $796 and $1,505, respectively 7,499 6,212
Inventory 5,265 8,035
Other assets 472 713
-------- --------
Total current assets 15,724 17,718
Property and equipment, net of accumulated depreciation
and amortization of $20,473 and $18,016, respectively 3,823 4,969
Deposits and other assets 165 543
Goodwill, net of accumulated amortization of $1,712 and
$1,447, respectively 529 794
-------- --------
$ 20,241 $ 24,024
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Line of credit $ 2,167 $ 1,147
Accounts payable 3,011 3,002
Accrued liabilities 2,946 3,298
------- -------
Total current liabilities 8,124 7,447
------- -------
Other liabilities - 97
------- -------
Total liabilities 8,124 7,544
------- -------

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares authorized; none
issued and outstanding - -
Common stock, $0.05 par value; 15,000,000 shares authorized;
11,490,000 and 9,593,253 shares issued and outstanding,
respectively 575 480
Warrants 257 -
Additional paid-in capital 57,679 55,774
Accumulated comprehensive loss (120) (17)
Accumulated deficit (46,274) (39,757)
-------- --------
Total stockholders' equity 12,117 16,480
-------- --------

$ 20,241 $ 24,024
======== ========

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

NETRIX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

ADDITIONAL ACCUMULATED
COMMON PAID-IN COMPREHENSIVE ACCUMULATED
STOCK CAPITAL WARRANTS LOSS DEFICIT TOTAL
-------- ----------- -------- ------------- ----------- -----
(IN THOUSANDS)

Balance, January 1, 1996....... $ 472 $ 55,105 -- $ 31 $ (25,212) $ 30,396
-------- --------- ------ ------- --------- -------

Stock options exercised........ 2 218 -- -- -- 220
Employee stock purchase plan... 2 144 -- -- -- 146
Retire escrow shares........... -- (36) -- -- -- (36)
Compensation element of
stock options.............. -- 172 -- -- -- 172
Net change in unrealized
investment holding loss.... -- -- -- (49) -- (49)
Cumulative translation
adjustment................. -- -- -- (34) -- (34)
Net loss....................... -- -- -- -- (5,968) (5,968)
-------- --------- ------ ------- --------- -------
Balance, December 31, 1996..... 476 55,603 -- (52) (31,180) 24,847
-------- --------- ------ ------- --------- -------

Stock options exercised........ 3 134 -- -- -- 137
Employee stock purchase plan... 1 37 -- -- -- 38
Net change in unrealized
investment holding gain.... -- -- -- 7 -- 7
Cumulative translation
adjustment................. -- -- -- 28 -- 28
Net loss....................... -- -- -- -- (8,577) (8,577)
-------- --------- ------ ------- --------- -------
Balance, December 31, 1997..... 480 55,774 -- (17) (39,757) 16,480
-------- --------- ------ ------- --------- -------

Stock options exercised........ 2 59 -- -- -- 61
Proceeds from private placement, net 88 1,988 -- -- -- 2,076
Warrants issued in connection with
private placement.......... -- (257) 257 -- -- --
Employee stock purchase plan... 5 115 -- -- -- 120
Cumulative translation
adjustment................. -- -- -- (103) -- (103)
Net loss....................... -- -- -- -- (6,517) (6,517)
-------- --------- ------ ------- --------- -------

Balance, December 31, 1998..... $ 575 $ 57,679 $ 257 $ (120) $ (46,274) $12,117
======== ========= ====== ======= ==-====== =======

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

NETRIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,517) $(8,577) $(5,968)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,722 3,338 3,602
Stock compensation expense -- -- 172
Changes in assets and liabilities
Accounts receivable (1,287) 5,437 (597)
Inventories 2,770 82 505
Other current assets 241 298 (49)
Deposits and other assets 378 (299) 38
Accounts payable 9 (457) (1,485)
Accrued liabilities (352) (1,280) 224
Other liabilities (97) (278) (248)
------- ------- -------
Net cash used in operating activities (2,133) (1,736) (3,806)
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments - (2,473) (9,395)
Sales and maturities of short-term investments - 7,823 11,320
Purchases of property and equipment (1,311) (1,665) (2,059)
------- ------- -------
Net cash provided by (used in) investing activities (1,311) 3,685 (134)
------- ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit, net 1,020 393 4
Principal payments of long-term debt - (481) (80)
Proceeds from private placement 2,076 - -
Proceeds from exercise of stock options 61 137 220
Proceeds from employee stock purchase plan 120 38 146
------- ------- -------
Net cash provided by financing activities 3,277 87 290
------- ------- -------

Effect of foreign currency exchange rate changes on cash and cash
equivalents (103) 35 (33)

Net increase (decrease) in cash and cash equivalents (270) 2,071 (3,683)

Cash and cash equivalents, beginning of period 2,758 687 4,370
------- ------- -------

Cash and cash equivalents, end of period $ 2,488 $ 2,758 $ 687
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 183 $ 117 $ 139

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

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:

Netrix Corporation (the "Company") develops, manufactures, markets, and
supports networking equipment for voice, data, and image networks. The Company's
products are designed to transport voice over data networks to enable its
customers to realize cost savings. The Company was incorporated in 1985. The
Company conducts operations in the United Kingdom and Hong Kong through its
wholly owned subsidiary, Netrix International Corporation (a Delaware
corporation), and in Germany, and Italy through its wholly owned subsidiaries
Netrix GmbH and Netrix S.r.l., respectively.

These consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated.

RISKS AND OTHER IMPORTANT FACTORS

For the years ended December 31, 1998 and 1997, the Company experienced
declining revenues and net losses of approximately $6.5 million and $8.6 million
respectively, due to declining sales of the Company's mature products which were
partially offset by increases in sales of new products, the Network Exchange
product line. As a result, the Company's tangible net worth decreased from $15.7
million at December 31, 1997 to $11.2 million at December 31, 1998. The
Company's line of credit agreement requires it to maintain a tangible net worth
of at least $13.5 million measured at the end of each month. Since October 31,
1998 the Company has been in violation of this covenant. This covenant violation
allows the Company's lending institution to call for collection of the
outstanding loan balance. As of April 12, 1999 the lending institution had not
exercised this right. On April 12, 1999 the lending institution granted the
Company a waiver of the current and past months' covenant violations and waived
its right to call the line of credit for these covenant violations. The lending
institution amended the line of credit agreement to measure the Company's
tangible net worth on a quarterly basis and set the minimum tangible net worth
covenant at $9.8 million as of March 31, 1999 and $9.0 million for all
subsequent quarters. Management believes that this new covenant will be adequate
for the Company to operate under in the foreseeable future. However, there can
be no assurances that the Company will not violate the new covenant or that the
outstanding loan balance will not be called by the lending institution upon
violation of the new covenant. See Note 4.

The success and the future of the Company is dependent on its ability
to generate net income or to increase its net worth by the sale of additional
equity. The Company's ability to generate net income is in large part dependent
on its success at increasing sales of its new products and/or controlling costs.
The Company's plan to increase revenues through sales of its Network Exchange
product line is continuing to evolve in order to exploit new marketing channels;
however, due to market conditions, competitive pressures, and other factors
beyond its control, the Company has been unable to achieve sufficient
incremental growth in new product sales to replace the decline in mature product
sales and there can be no assurances that the Company will be able to adequately
increase new product sales in the future.

For the years ended December 31, 1998 and 1997, the Company's operating
activities used approximately $2.1 million and $1.7 million of cash,
respectively. The cash used by operations was primarily due to continued net
losses from operations. The success of the Company is also dependent on its
ability to generate adequate cash for operations and capital needs. At December
31, 1998, the Company had approximately $2.5 million in cash and cash
equivalents with approximately $2.2 million outstanding of the $2.4 million
available under the line of credit agreement. The Company is relying on future
sales and the collection of the related accounts receivable to meet its cash
obligations. The Company may be unable to meet these obligations as they become
due and may be required to curtail its operations. If the Company is required to
curtail its operations there can be no assurances that the carrying value of the
Company's assets will be fully realized.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company may have to generate additional equity or cash through
other means, which may include the sale of assets, including intellectual
property and proprietary technology, the sale of equity, additional borrowings,
the sale of selected operations, or one or more strategic partnerships. Although
the Company believes it has the ability to generate additional equity and cash

through sales, such sales may be dilutive and there can be no assurances that
adequate funds will be available, or available on terms that are reasonable or
acceptable to the Company. If the Company is unable to generate additional
equity and adequate cash, there will be a material and adverse effect on the
business and financial condition of the Company, to the extent that a sale,
liquidation or restructuring of the Company will be required, in whole or in
part.

Future operating results may be affected by a number of other factors including
the timing of new products in the market place, competitive pricing pressures
and global economic conditions. Because the market for the Company's products is
characterized by rapidly changing technology, the development, introduction, and
evolution of competitive products may require a significant investment of
financial resources. Additionally, the Company relies on reseller channels that
are not under its control for a significant portion of its revenues,
particularly in its international regions. Also, while the Company has generally
been able to obtain adequate supplies of components to date, the interruption or
termination of the Company's current manufacturing relationships could have an
adverse effect on the Company's liquidity and operating results.

CASH EQUIVALENTS

Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities with original maturities of three months or less.
These investments are carried at cost which approximates market value.

SHORT TERM INVESTMENTS

Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," debt securities that are
classified as available-for-sale are reported at fair value, with unrealized
gains and losses reported as a component of stockholders' equity. For the years
ended December 31, 1998 there was no unrealized holding gain/loss as the Company
did not have any short-term investments. For the year ended December 31, 1997
the Company had a short term investment gain of $7,000 and for the year ended
December 31, 1996 there was a short term investment loss of approximately
$49,000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. SFAS No.
107 excludes certain financial instruments and all nonfinancial instruments from
these disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The carrying
amounts reported in the balance sheet approximate the fair value for cash and
cash equivalents, accounts receivable, accounts payable and borrowings under the
line of credit agreement.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INVENTORIES

Inventories are valued at the lower of cost or market, using the
first-in, first-out ("FIFO") method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:

Manufacturing and test equipment.. 3-5 years
Office furniture and equipment.... 5 years
Purchased software................ 3 years
Leasehold improvements............ shorter of useful life or
remaining lease term

GOODWILL

Goodwill represents the excess purchase price of net assets acquired
and is amortized over a seven-year period.

REVENUE RECOGNITION

The Company recognizes revenue both from sales of product and from
service contracts. Revenue from product sales is generally recognized upon
shipment. Where sales contracts provide for customer acceptance, the Company
recognizes revenue upon acceptance of the product by the customer. Revenue from
service contracts is deferred and recognized ratably over the period covered by
the contract. Revenue from product installations is recognized upon completion
of the installation. Product sales accounted for 69% of total revenues in 1998,
68% of total revenues in 1997, and 74% of total revenues in 1996.

Revenue on long-term contracts is recognized under the percentage of
completion method of accounting based upon the ratio of the costs incurred to
total estimated costs. Estimates to complete are revised periodically based on
changes in facts. Any losses on contracts are recognized in the period when the
loss is estimated.

WARRANTY

The Company generally warrants its products for periods ranging from 90
days to one year and sells an optional, annually renewable, maintenance contract
with most networks. Estimated future warranty obligations related to certain
products are provided by charges to operations in the period in which the
related revenue is recognized.

FOREIGN EXCHANGE GAIN/LOSS

Assets and liabilities denominated in foreign currencies are translated
into US dollars at current exchange rates. Operating results are translated into
US dollars using the average rates of exchange prevailing during the period.
Gains or losses resulting from the translation of assets and liabilities are
included in the cumulative translation adjustment account in stockholders'
equity and other comprehensive income/loss on the statement of operations except
for the translation effect of intercompany balances that are anticipated to be
settled in the foreseeable future.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

EARNINGS PER SHARE

The Company implemented Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," at December 31, 1997. SFAS No. 128
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share and requires a reconciliation of the
numerator and denominator of basic earnings per share to fully diluted earnings
per share. Options to purchase approximately 1,372,000, 1,225,000, and 1,486,000
shares of common stock were excluded from the computation of diluted loss per
share in 1998, 1997 and 1996, respectively, and warrants to purchase
approximately 140,0900 shares of common stock were excluded from the computation
of diluted loss per share in 1998, because inclusion of these options and
warrants would have an anti-dilutive effect on loss per share. Loss per share
has been computed using the weighted-average number of common shares
outstanding.

USE OF ESTIMATES

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

RECLASSIFICATIONS

Certain amounts have been reclassified in the prior year financial
statements to conform with current year presentation of these amounts.

LONG-LIVED ASSETS

The Company reviews its long-lived assets, including property and
equipment, identifiable intangibles and goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the future, undiscounted, net cash flows compared to the
carrying amount of the assets.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of a statement of financial position. The Company implemented SFAS No.
130 in 1998. SFAS No. 131 requires the Company to report financial and
descriptive information about its reportable operating segments. The Company has
adopted SFAS No. 131 at its year-end December 31, 1998

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. BALANCE SHEET DETAILS:

INVENTORIES
DECEMBER 31,
--------------------
1998 1997
---- ----

Raw materials................................ $ 350 $ 462
Work in process.............................. 364 772
Finished goods............................... 4,551 6,801
------- --------
Total inventories........................ $ 5,265 $ 8,035
======= ========

PROPERTY AND EQUIPMENT
DECEMBER 31,
--------------------
1998 1997
---- ----

Manufacturing and test equipment............ $ 14,634 $ 13,512
Office furniture and equipment.............. 6,667 6,708
Purchased software.......................... 2,995 2,765
-------- --------
Total property and equipment............ 24,296 22,985
Accumulated depreciation and amortization... (20,473) (18,016)
-------- --------
Net $ 3,823 $ 4,969
======== ========

ACCRUED LIABILITIES
DECEMBER 31,
--------------------
1998 1997
---- ----

Deferred revenue ........................... $ - $ 699
Payroll and related compensation............ 627 1,207
Taxes....................................... 758 -
Other....................................... 1,561 1,392
-------- --------
$ 2,946 $ 3,298
======== ========

3. COMMON STOCK AND STOCK PLANS:

The Company maintains three plans which are described below, whereby
employees and directors of the Company are granted the opportunity to acquire an
equity interest in the Company. A total of 2,925,000 shares of Common Stock have
been reserved for issuance in aggregate under these plans. SFAS No. 123,
"Accounting for Stock-Based Compensation" defines a "fair value based method" of
accounting for an employee stock option or similar equity instrument. Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period. The Company
has historically accounted for employee stock options or similar equity
instruments under the "intrinsic value method" as defined by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting had been applied. The Company has
elected to apply APB Opinion No. 25 and the related interpretations in
accounting for its stock-based compensation. Had compensation cost for the
Company's three stock-based compensation plans been determined based upon the
fair value method at the grant dates for award under those plans, the Company's
net loss and loss per share would have been increased to the pro forma amounts
indicated below.
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----

Net loss As reported $ (6,517) $ (8,577) $ (5,968)
Pro forma $ (7,203) $(10,377) $ (6,807)

Net loss per share As reported $ (0.60) $ (0.90) $ (0.63)
Pro forma $ (0.66) $ (1.08) $ (0.72)

The fair value of each option is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively: no dividend
yield; expected volatility of 98 percent, 98 percent, and 70 percent; risk free
interest rates approximating 5.5 percent, 5.5 percent, and 5 percent; and an
average expected life of approximately 5 years. The per share weighted average
fair value of the options on the date of grant for shares issued in 1998, 1997
and 1996 was approximately $2.96, $2.30 and $5.89, respectively. The weighted
average remaining contractual life for options outstanding as of December 31,
1998 is 8.5 years.

1996 STOCK OPTION PLAN

Under the terms of the Company's 1996 Stock Option Plan, either
incentive stock options or nonstatutory options may be granted. Generally, the
purchase price of shares subject to any incentive option granted will not be
less than the fair market value at the date of grant. Stock options granted
expire five to ten years from the grant date and typically vest 20% to 25% per
year. Compensation expense recorded for options granted at less than the fair
market value at the date of the grant is recognized on a straight-line basis
over the performance period. The expense approximated $172,000 in 1996 with no
expense in 1997 and 1998. At December 31, 1998 there is no remaining deferred
compensation expense related to these grants.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1996 STOCK OPTION PLAN

The following table summarizes the option activity under this plan:

WEIGHTED AVERAGE
NUMBER OPTION PRICE OPTION PRICE
OF SHARES PER SHARE PER SHARE
--------- ------------ ----------------

Outstanding, January 1, 1996................ 849,706 $1.680-$17.250 $5.90
1996:
Granted............................ 820,055 $4.250-$9.625 $5.89
Exercised.......................... (43,113) $1.680-$6.250 $5.12
Canceled........................... (140,500) $1.680-$7.875 $5.88
---------
Outstanding, December 31, 1996.............. 1,486,148 $1.680-$17.250 $5.92
1997:
Granted............................ 396,940 $1.250-$3.250 $2.30
Exercised.......................... (63,077) $1.680-$6.250 $2.18
Canceled........................... (594,786) $1.680-$7.875 $5.57
---------
Outstanding, December 31, 1997.............. 1,225,225 $1.250-$8.690 $2.93
1998:
Granted............................ 659,200 $1.090-$3.130 $2.96
Exercised.......................... (3,441) $3.000-$3.125 $2.85
Canceled........................... (508,937) $1.680-$7.875 $3.65
---------
Outstanding, December 31, 1998.............. 1,372,047 $1.250-$8.690 $2.92
=========

Exercisable, December 31, 1998.............. 599,418 $1.090-$8.690 $3.19
=========

EMPLOYEE STOCK PURCHASE PLAN

Under the 1992 Employee Stock Purchase Plan (the "Plan"), the Company
is authorized to issue semi-annual offerings of up to 50,000 shares. The number
of shares available for an offering may be increased at the election of the
Board of Directors by the number of shares of Common Stock, if any, which were
made available but not purchased during an earlier offering. Each offering is
six months in length and commences on each July 1 and January 1. Under the terms
of the Plan, employees can choose prior to each offering to have up to 10
percent of their annual base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of its
beginning-of-offering or end-of-offering market price. Under the Plan, the
Company sold 90,932 shares, 20,067 shares, and 36,556 shares to employees in
1998, 1997, and 1996, respectively.

DIRECTOR OPTION PLAN

Under the terms of the Director Option Plan, directors of the Company
who are not officers or employees of the Company each receive nonstatutory
options to purchase 9,000 shares of Common Stock of the Company. In 1998, 1997,
and 1996, independent members of the Board of Directors were granted options to
purchase a total of 9,000, 9,000, and 27,000, respectively, of common stock at
$2.75, $2.19, and $4.69 per share, respectively, under the Director Option Plan.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

PRIVATE PLACEMENT

In April 1998, the Company completed a private placement by issuing and
selling 1,750,000 shares of common stock at a price of $1.25 per share and by
issuing warrants to purchase an additional 140,000 shares of common stock at an
exercise price of $1.75 per share. In connection with the private placement, the
Company received net proceeds of approximately $2.1 million. The shares issued
in the private placement and issuable upon exercise of the warrants were
registered for resale pursuant to a registration statement declared effective by
the Securities and Exchange Commission on June 12, 1998. The fair value of the
warrants, $257,000, was estimated on the date of grant using the Black-Scholes
pricing model. The warrants were issued to the underwriter of the private
placement and are subject to adjustment under antidilution provisions of the
warrant agreement. The offering costs were accounted for as a reduction to
additional paid in capital in the accompanying consolidated statements of
changes in stockholders' equity.

4. COMMITMENTS AND CONTINGENCIES:

LINE OF CREDIT

In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital. This
agreement provided for interest at a per annum rate equal to the lender's prime
rate plus 2.0%. In August 1998, as a result of concerns about the deterioration
of aged international accounts receivable the Company's lending institution
eliminated international receivables as qualified accounts receivable for
borrowing collateral. The lending institution also increased the interest rate
for outstanding loan amounts to prime plus 3 1/2% from prime plus 2%. In October
1998, the lending institution reinstated a sub-line of credit up to an amount of
$600,000 for selected foreign accounts receivable.

The Company's line of credit agreement requires it to maintain a
tangible net worth covenant of at least $13.5 million measured at the end of
each month. Since October 31, 1998 the Company has been in violation of this
covenant. This covenant violation allows the Company's lending institution to
call for collection of the outstanding loan balance. As of April 12, 1999 the
lending institution had not exercised this right. On April 12, 1999 the lending
institution granted the Company a waiver of past covenant violations and waived
its right to call the line of credit for these covenant violations. The lending
institution amended the line of credit agreement to measure the Company's
tangible net worth on a quarterly basis and set the minimum tangible net worth
covenant at $9.8 million as of March 31, 1999 and $9.0 million for all
subsequent quarters. Management believes that this new covenant will be adequate
for the Company to operate under in the foreseeable future. However, there can
be no assurances that the Company will not violate the new covenant or that the
outstanding loan balance will not be called by the Company's lending institution
upon violation of the new covenant. Concurrent with the April 1999 waiver of
default, the lending institution extended the line of credit agreement to May
31, 2001. In connection with the waiver of default and extension of the line of
credit agreement, the Company granted the lending institution 50,000 warrants at
an exercise price of $2.00 per share.

Borrowings under the line are based on qualified domestic accounts
receivable and are collateralized by the Company's assets. At December 31, 1998,
the Company had approximately $2.2 million outstanding of the $2.4 million
available under the line of credit agreement. At December 31, 1997, the Company
had approximately $1.1 million outstanding of the $2.0 million available under
the line of credit.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

LONG-TERM DEBT

In conjunction with the working capital line of credit obtained in
November 1997, the Company repaid its equipment note payable in full. At
December 31, 1996, the Company had approximately $481,000 outstanding under the
equipment note payable. Interest expense related to the above borrowings was
approximately $117,000 and $125,000 for the years ended December 31, 1997 and
1996, respectively.

RESTRUCTURING CHARGE

In both March of 1996 and April of 1997, the Company implemented a
restructuring of operations to reduce and economize its work force in response
to declining revenues and the discontinuance of its micro.pop product. The
restructuring resulted in an overall reduction of personnel and related
compensation and other associated operating costs of the Company for these
years. The 1996 restructuring charges of $.9 million resulted from approximately
$.5 million of accrued severance and outplacement costs associated with a
reduction-in-force of approximately 41 employees across all functional areas of
the Company, and approximately $.4 million of accrued facility costs resulting
from the consolidation of facilities and premature termination of various office
leases. The reduction-in-force occurred over approximately a one-year period and
severance payments were made in a lump sum in April and June 1996, and February
1997. The 1997 restructuring charges of $.9 million resulted from approximately
$.4 million of accrued severance and outplacement costs associated with a
reduction-in-force of approximately 37 employees across all functional areas of
the Company, approximately $.4 million of fixed-asset write-offs and facility
relocation charges for unrecoverable lease obligations associated with the
consolidation of the Longmont, Colorado, and Herndon, Virginia, operations
facilities into one facility leased in Charlotte, North Carolina, and other
associated costs of approximately $.1 million. Severance payments were made in
April 1997. At December 31, 1998, approximately $100,000 of the accrual remains,
and will be used for severance payments in 1999.

LEASES

The Company has existing lease agreements for office space and
equipment expiring through April 2009. The lease for the Company's headquarters
facility in Herndon, Virginia, includes annual escalations of a fixed amount
during each year of the lease. Additionally, the Company leases approximately
8,600 square feet in Longmont, Colorado, for the purpose of continuing certain
product development activities and approximately 8,000 square feet of space from
its main outsourcing manufacturer in Charlotte, North Carolina, for its
operations facilities. The Company was relieved of its lease commitment for
48,000 square feet of space in Boulder, Colorado, in August 1997. The Company
also leases space for sales offices in the US, the UK, Germany, Italy and Hong
Kong. The Company recognizes rent expense, net of any sublease revenue, on a
straight-line basis. Net rent expense in 1998, 1997, and 1996 was approximately
$1,821,000, $1,643,000, and $2,475,000, respectively.

Through October 1998, the Company subleased approximately 28,000 square
feet in Herndon, Virginia. Sublease revenue for 1998, 1997 and 1996 was
approximately $371,000, $223,000 and $380,000, respectively, and is presented as
a reduction of rent expense in the accompanying consolidated statements of
operations.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Future minimum lease payments for office space and equipment under operating
leases are as follows (in thousands):

YEARS ENDING NET
DECEMBER 31, PAYMENTS
---------------------- --------

1999........................... 1,536
2000........................... 1,098
2001........................... 1,126
2002........................... 1,169
2003 and thereafter............ 7,306
---------
Total $ 12,235
=========

EMPLOYEE BENEFIT PLAN

The Company has a 401(k) savings plan ("401(k) plan") covering all
eligible employees. The Company began contributing to the 401(k) plan effective
July 1, 1996. The Company matches employee contributions up to the first 6% of
eligible income at a rate of 25%. The matching funds are subject to 20% vesting
per year beginning with the employee's first day with the Company; therefore,
certain employees were 100% vested in the Company matching contributions on July
1, 1996. In 1998, 1997 and 1996, the company contributed approximately $18,000,
$86,000 and $44,000, respectively, to the 401(k) plan.

LITIGATION

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. SEGMENT INFORMATION:

For the year ended December 31, 1998, the Company adopted the Statement
on Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company's two reportable segments
are products and services. The Company evaluates the performance of its segments
based on gross profit. Under SFAS No. 131, the Company is required to provide
enterprise-wide disclosures about revenues by product and service revenues,
long-lived assets by geographic area and revenues from major customers.

REVENUES

Revenues consisted of the following (in thousands):

YEARS ENDED DECEMBER 31,
---------------------------
PRODUCT GROUP 1998 1997 1996
------------- ---- ---- ----
2200 $ 8,343 $ 3,759 $ 1,995
2500 7,210 4,492 375
S1000 1,076 1,976 4,261
S10 3,357 9,064 18,437
Telecom 1,854 3,183 7,366
-------- ------- -------

Total product revenues 21,840 22,474 32,434
Service revenues 9,642 10,613 11,201
-------- ------- -------
Total revenues $ 31,482 $33,087 $43,635
======== ======= =======

GEOGRAPHIC INFORMATION

The Company sells its products and services through its foreign
affiliates in the United Kingdom, Germany and Italy. Information regarding
revenues and long-lived assets attributable to the United States and to all
foreign countries is stated below. The geographic classification of product and
service revenues was based upon the location of the customer.

The Company's product and service revenues for 1998, 1997 and 1996 were
generated in the following geographic regions (in thousands):

YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----

United States....................... $14,933 $12,594 $16,115
Europe, Middle East and Africa...... 13,149 14,753 17,871
Pacific Rim, Latin America and
South America.................. 3,400 5,740 9,649
------- ------- -------

Total............................... $31,842 $33,087 $43,635
======= ======= =======

Included in domestic product revenues are sales through systems
integrators and distributors to the Federal Government of approximately
$486,000, $1,110,000, and $4,384,000 in 1998, 1997, and 1996 respectively.

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company's long-lived assets were located as follows:

YEARS ENDED DECEMBER 31
-----------------------------
1998 1997
---- ----

United States....................... $ 4,055 $ 5,367
United Kingdom...................... 247 287
Germany............................. - 66
Italy............................... 50 43
------------ ------------
Total long-lived assets............. $ 4,352 $ 5,763
============ ============

SIGNIFICANT CUSTOMERS

Customers that accounted for greater than 10% of total revenues in
1998, 1997, and 1996 are described below (in thousands).

YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Distributor 1....................... $ 2,849 $ 3,640 $ 5,837
Product..................... 2,235 2.994 4,577
Service..................... 614 646 1,260

Distributor 2....................... 2,186 * *
Product..................... 2,176 * *
Service..................... 10 * *

* Revenue accounted for less than 10% of total revenues for the period.

6. INCOME TAXES

The components of income tax expense consist of the following (in
thousands):

YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
Current provision:
Federal.................................. $ (1,982) $ (2,105) $ (1,534)
State.................................... (287) (256) (185)
Foreign.................................. -- -- 66
Deferred (benefit) provision:
Federal.................................. -- -- --
State.................................... -- -- --
Increase in valuation allowance.......... 2,269 2,361 1,719
--------- -------- --------
$ -- $ -- $ 66
========= ======== ========

NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The provision for income taxes results in effective rates that differ
from the Federal statutory rate as follows:

YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1998
---- ---- ----
Statutory Federal income tax rate.................... (35.0)% (35.0) (35.0)%
Effect of graduated rates............................ 1.0 1.0 1.0
State income taxes, net of Federal tax benefit....... (4.3) (4.3 (4.3)
Losses without current tax benefit................... 38.3 38.3 38.3
Foreign income taxes................................. -- -- 1.11
----- ----- -----
Effective rate....................................... --% --% 1.1%
===== ===== =====

As of December 31, 1998, the Company had net operating losses
of approximately $38.1 million available for carryforward to offset future
income for Federal income tax purposes. The Company has additional net operating
loss carryforwards of $2.5 million as a result of the 1994 acquisition of
Republic Telecom. Due to Internal Revenue Service rules regarding change in
ownership, the use of these net operating losses is limited to $229,000 per
year. These carryforwards expire in years 2002 through 2012 as follows:

2002....................... 1,569,000
2003....................... 14,317,781
2004 and thereafter........ 32,190,219
-----------
$38,077,000
===========

These carryforwards are subject to limitation of the amount available
to be used in any given year due to significant changes in ownership interests.
In addition, the Company has research and development tax credit carryforwards
of approximately $2.1 million which are available to offset future Federal
income taxes with certain limitations. Temporary differences between financial
reporting and income tax reporting result primarily from the treatment of
deferred rent, depreciation expense, and capitalization of certain inventory
costs for tax purposes. The components of the net deferred tax asset were as
follows (in thousands):

YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997
---- -----
Federal regular tax operating
loss carryforwards............... $ 14,583 $ 13,111
Research and development tax
credit carryforwards............. 2,125 2,048
Other.............................. 3,639 2,593
-------- --------
$ 20,347 $ 17,752
Valuation allowance................ (20,347) (17,752)
-------- --------
Deferred tax asset................. $ -- $ --
======== ========

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages, position and business experience
of the executive officers and directors of NETRIX.

NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------

Steven T. Francesco, 42.. Director. Mr. Francesco has been a Director and
Chairman of the Board since March 1999 and became
Chief Executive Officer in May 1999. Mr. Francesco
is founder and President of Darien Corporation,
and was founder and former President and COO of
SmartServ Online, Inc. From 1989 to 1991, he was
Senior Vice President of Strategic Planning and
Operations for a division of Cantor-Fitzgerald
Securities. Mr. Francesco has served as a senior
strategic advisor to GTE Advanced Network
Services, KeyTrade and e-Tel. Mr. Francesco serves
as an advisor to several financial firms,
including Vantage Point Partners, Acorn
Investments, Spear Leeds Kellogg, and Renwick
Corporate Finance, Inc. Mr. Francesco has served
as a consultant to numerous companies, including
AT&T, GTE, Citibank, Chemical Bank, Chase
Manhattan Bank, J.J. Kenny, ADP, Telerate, and the
Chicago Mercantile Exchange. Mr. Francesco founded
the Market Technology Group, a computer and
technology service company providing financial
systems and market data retrieval to the financial
services industry.

John M. Faccibene, 53... Director. Mr. Faccibene has been a director of the
Company since March 1999. Since January 1999, Mr.
Faccibene has been Managing Director, Americas,
for ixNet, a subsidiary of IPC Information
Systems, Inc. From 1997 to 1998, he was Executive
Director of CIBC/Oppenheimer & Co. From 1973 to
1998, he was a senior member of the Security
Industry Association (SIA), and for two years
served as Chairman of the SIATechnology Management
Committee. For 22 years, Mr. Faccibene has been a
senior member of the Wall Street
Telecommunications Association (WSTA) Executive
Committee, and for three years served as President
of the WSTA. He has previously served as Chairman
of the NYNEX Executive Forum, Newbridge Worldwide
User Group, Ascom/Timeplex User Group, and is a
Director of the New York Technical College. Mr.
Faccibene also serves as a Director of ADVESTA, a
software company, Bridgewater Systems, a software
company, and Timestep, a software security
company.

William T. Rooker, Jr., Director. Mr. Rooker has been a Director of the
65.................... Company since July 1994. Mr. Rooker retired from
IBM Corporation ("IBM") at the end of 1992 after
37 years of service and has since served as a
private consultant. During his tenure at IBM he
held a variety of marketing and executive
management positions. From 1974 to 1990 he was
Vice President and General Manager of Federal
Marketing Programs at IBM, and from 1990 to 1992
he was Corporate Director of Government Relations
at IBM.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------

Lynn C. Chapman, 45..... Director, President and Chief Operating Officer.
Mr. Chapman joined the Company in December 1992
and was named Vice President in February 1993.
During 1996 Mr. Chapman assumed additional
responsibility as Vice President -- Network
Products, and was named President and CEO and a
director of the Company in February 1997. Prior to
joining NETRIX, Mr. Chapman served in various
management positions at Data General Corporation
from 1989 to November 1992.

Norman F. Welsch, 51.... Vice President -- Finance and Administration and
Chief Financial Officer. Mr Welsch is a CPA and
joined the Company in December 1998 after serving
as a consultant since June 1998. From 1995 to
1998, Mr. Welsch held senior financial roles in
various private companies. From 1991 to 1995, Mr.
Welsch held the position of CFO of the Systems
Integration Group of Cincinnati Bell, Inc. From
1988 to 1991, Mr. Welsch was Treasurer of
Systemhouse Federal Systems, Inc., and from 1986
to 1988, he was Corporate Controller of C3, Inc.
Mr. Welsch serves as a Director of Metron, Inc., a
scientific consulting firm.

G. Brent Wilson, 42..... Vice President Engineering Services. Mr. Wilson
joined the Company in December 1990 and was named
Vice President -- Customer Service in January 1996
and Vice President - Engineering Services in April
1997. While at NETRIX he has also served as
Director of Technical Services. Prior to NETRIX,
Mr. Wilson served as Manager of Communications for
the Price Company.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
for the last three fiscal years of the Company's Chief Executive Officer and the
Company's other most highly compensated executive officers (together, the "Named
Executive Officers") for the year ended December 31, 1998.

SUMMARY COMPENSATION TABLE

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- AWARDS
NAME/POSITION YEAR SALARY($) BONUS($) OTHER(1) OPTIONS(#)
- ------------------------------ ---- --------- -------- -------- ----------

Lynn C. Chapman (2).................. 1996 140,578 -- 1,125 75,000
President and Chief 1997 156,546 21,750 2,375 29,000
Executive Officer 1998 160,000 6,583 -- 100,000

G. Brent Wilson...................... 1996 109,701 -- -- 25,000
Vice President, Engineering 1997 114,815 14,500 -- 12,000
Services 1998 126,000 6,583 -- 45,000

Karl W. Finkelnburg.............. 1996 219,180 -- 750 13,000
Vice President, Sales 1997 197,230 -- 1,544 13,000
American Operations 1998 163,658 -- -- 10,000

(1) Represents matching 401(k) plan contributions by the Company.
(2) Mr. Chapman was appointed President and Chief Executive Officer of the
Company in February 1997.

OPTION GRANTS

The following table summarizes option grants during 1998 to the Named
Executive Officers:

STOCK OPTION GRANTS IN LAST FISCAL YEAR

PERCENT
OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
GRANTED TO MARKET ANNUAL RATES OF
OPTIONS EMPLOYEES EXERCISE PRICE STOCK PRICE APPRECIATION
GRANTED IN FISCAL PRICE ($/SHARE) EXPIRATION FOR OPTION TERM (C)
NAME (#)(A) YEAR ($/SHARE) (B) DATE 0%($) 5%($) 10%($)
- -------------------------------------------------------------------------------------------------------------------

Lynn C. Chapman 100,000(D) 15% $3.13 $3.13 5/07/08 -- 197,000 $499,000
G. Brent Wilson 45,000(D) 7 2.33 2.33 5/7/08 -- 66,000 167,000
Karl W. Finkelnburg 10,000(D) 2 3.13 3.13 3/12/07 -- 20,000 50,000

- -------------
(A) Under the terms of the Company's incentive stock option plan, the Board of
Directors retains discretion, subject to plan limits, to modify the terms
of the outstanding options and to reprice the options. The options were
granted for a term of 10 years, subject to earlier termination in the
event of termination of employment. The options were granted with tandem
tax withholding rights.
(B) Equals fair market value of Common Stock on the date of grant.
(C) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date of grant to their expiration date.
Actual gains, if any, on stock option exercises will depend upon the
future performance of the Common Stock and the date on which the options
are exercised.

(D) Identified options were granted May 8, 1998, and 20% of the options become
exercisable at the end of one year and the balance becomes exercisable in
equal monthly installments on the 30th day of each calendar month
following the date of grant, with full vesting occurring on the fourth
anniversary date.
(E) Identified options were granted December 30, 1998, and 20% of the options
become exercisable at the end of one year and the balance becomes
exercisable in equal monthly installments on the 30th day of each calendar
month following the date of grant, with full vesting occurring on the
fifth anniversary date.

OPTION EXERCISES AND YEAR-END VALUES

The following table summarizes option exercises during 1998 by the
Named Executive Officers and the value of the options held by such persons at
the end of 1998:

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

SHARES NUMBER OF VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(A)
EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- ------------ ------------ ------------- ------------ ------------

Lynn C. Chapman -- -- 66,996 74,004 143,539 158,554
G. Brent Wilson -- -- 31,247 36,779 66,947 78,799
Karl W. Finkelnburg 9,592 20,908 23,282 55,783

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of March 31,
1999, with respect to the beneficial ownership of Common Stock by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each Director of the Company and nominee for
Director, (iii) each executive officer of the Company named in the Summary
Compensation Table set forth under the caption "Executive Compensation" below
and (iv) all Directors and executive officers of the Company as a group:

NUMBER OF
SHARES PERCENTAGE OF COMMON
BENEFICIALLY STOCK OUTSTANDING (2)
BENEFICIAL OWNER OWNED(1)

Special Situations Fund III, L.P. (3)............... 1,294,200 11.26
153 E. 53 St., 51st Floor
New York, NY 10022

Pioneer Investment Management (4)................... 1,130,000 9.8
60 State Street
Boston, MA 02109

Pioneering Management Corp. (5)..................... 917,500 8.0
60 State Street, 20th Floor
Boston, MA 02109

New Enterprise Associates IV, Limited Partnership(6) 582,009 5.1
1119 St. Paul Street
Baltimore, MD 21202

Dimensional Fund Advisors, Inc (7).................. 548,600 4.8
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401

Kopp Investment Advisors (8)........................ 337,100 2.9
7701 France Avenue South, Suite 500
Edina, MN 55435

Gilder, Gagnon, Howe & Co. (9)..................... 253,725 2.2
1775 Broadway, 26th Floor
New York, NY 10019

Arthur J. Marks (10)................................ 803,039 7.0

Lynn C. Chapman..................................... 141,000 1.2

G. Brent Wilson..................................... 113,026 *

William T. Rooker, Jr............................... 9,000 *

All Directors and executive officers as a group
(3 persons)(11)................................... 263,026 2.3

* Less than 1%
(1) The number of shares of Common Stock beneficially owned by each person is
determined under the rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or

investment power and also any shares of Common Stock which the individual
has the right to acquire within 60 days after March 15, 1999 through the
exercise of any stock option or other right. The inclusion herein of any
shares of Common Stock deemed beneficially owned does not constitute an
admission of beneficial ownership of those shares. Unless otherwise
indicated, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them.
(2) Number of shares deemed outstanding includes 11,490,000 shares outstanding
as of March 15, 1998, plus any shares subject to options held by the person
or entity in question that are currently exercisable or exercisable within
60 days after March 15, 1998.
(3) This information is based on a Schedule 13G dated February 12, 1999.
(4) This information is based on a Schedule 13G dated September 2, 1998
(5) This information is based on a Schedule 13G dated January 14, 1999.
(6) This information is based on a Schedule 13G dated February 16, 1999.
(7) This information is based on a Schedule 13G dated February 9, 1998.
(8) This information is based on a Schedule 13G dated February 4, 1999.
(9) This information is based on a Schedule 13G dated September 10, 1998.
(10) Includes 582,009 shares held by New Enterprise Associates IV, Limited
Partnership and 200,000 shares held by New Enterprise Associates V, Limited
Partnership. Mr. Marks is a general partner of the general partners of New
Enterprise Associates IV, LP and New Enterprise Associates V, LAP,
respectively. Mr. Marks disclaims beneficial ownership of such shares.
(11)Includes Lynn C. Chapman, G. Brent Wilson and William T. Rooker, Jr.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

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

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

(1) FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
------------------------------------------ ----

Report of Independent Public Accountants 16
Consolidated Statements of Operations 17
Consolidated Balance Sheets 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21

(2) FINANCIAL STATEMENT SCHEDULES

INDEX TO CONSOLIDATED FINANCIAL STATEMENT SUPPLEMENTAL SCHEDULE
---------------------------------------------------------------
PAGE
----
Report of Independent Public Accountants on
Supplemental Schedule.................................... 43
For the three years in the period ended December 31, 1998:
Schedule II - Consolidated Valuation and Qualifying
Accounts........................................ 44

All other Schedules have been omitted because the required information
is either shown in the consolidated financial statements or notes thereto or
they are not applicable.

(3) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 --Amended and Restated Certificate of Incorporation of the
Registrant, as amended (incorporated by reference to Exhibit
3.1 to the Registrant's registration statement on Form S-1
filed September 18, 1992, as amended (File No. 33-50464)
(the "1992 S-1").

3.2 --Amended and Restated By-Laws of the Registrant
(incorporated by reference to Exhibit 3.2 of the 1992 S-1).

4.1 --Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of the 1992 S-1).

10.1* --Amended and Restated Incentive Stock Option Plan of the
Registrant, as amended (incorporated by reference to Exhibit
10.1 of the Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K").

10.2* --1992 Employee Stock Purchase Plan of the Registrant
(incorporated by reference to Exhibit 10.2 of the 1995
10-K).

10.3* --1992 Directors Stock Option Plan of the Registrant
(incorporated by reference to exhibit 10.3 of the 1995
10-K).

10.4* --1996 Stock Option Plan of the Registrant (incorporated by
reference to exhibit 10.4 of the 1995 10-K).

10.5 --Office Lease, dated December 9, 1988, as amended, between
the Registrant and Dulles Technology Center Venture, for the
Registrant's principal executive offices at 13595 Dulles
Technology Drive, Herndon, Virginia (incorporated by
reference to Exhibit 10.6 of the 1992 S-1).

10.6 --Office Lease, dated September 15, 1992, between the
Registrant and Brit Limited Partnership, for the
Registrant's administrative offices at The Hallmark
Building, Renaissance Centre in the Renaissance Park at
Dulles, Herndon, Virginia (incorporated by reference to
Exhibit 10.6 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (the "1992 10-K")).

10.7 --Agreement and Plan of Merger dated December 23, 1993,
among Registrant, NAC Corp., and Republic Telcom Systems
Corporation, as amended (incorporated by reference to the
Registrant's Current Report on Form 8-K filed on February 3,
1994, as amended by Amendment No. 1 on Form 8-K/A filed on
March 30, 1994 (the "8-K").

10.8 --Loan Agreement dated, November 18, 1997 between the
Registrant and Coast Business Credit (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, filed on March 31,
1998.

+21 --Subsidiaries of the Registrant.

+23.1 --Consent of Arthur Andersen LLP

27 --Financial Data Schedule (incorporated by reference to
Registrant's Annual Report on Form 10-K, filed on April 15,
1999.
- ----------------

+ Filed herewith
* This exhibit is a compensatory plan or arrangement in which executive officers
or directors of the Registrant participate.

(B) REPORTS ON FORM 8-K

None

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

NETRIX CORPORATION

By: /S/ Steven T. Francesco
Steven T. Francesco
Chief Executive Officer

SIGNATURE TITLE DATE

Chief Executive Officer and Chairman of the Board
/s/ Steven T. Francesco of Directors (Principal Executive
- ------------------------------------------- Officer) June 18, 1999
Steven T. Francesco

/s/ Lynn C. Chapman President, Chief Operating Officer
- ------------------------------------------- and Director June 18, 1999
Lynn C. Chapman

/s/ Norman F. Welsch Vice President-Finance and Administration
- ------------------------------------------- and Chief Financial Officer (Principal Financial June 18, 1999
Norman F. Welsch and Accounting Officer)

/s/ William T. Rooker Director June 18, 1999
- -------------------------------------------
William T. Rooker

Director June , 1999
- -------------------------------------------
John M. Faccibene

Director June , 1999
- -------------------------------------------
Richard Yalen

/s/ Douglas J. Mello Director June 18, 1999
- -------------------------------------------
Douglas J. Mello

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE

To the Board of Directors and
Shareholders of Netrix Corporation:

We have audited in accordance with generally accepted auditing
standards, the financial statements of Netrix Corporation (a Delaware
corporation) and subsidiaries included in this Form 10-K and have issued our
report thereon dated April 14, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule included on page 44 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, DC,
April 14, 1999

SCHEDULE II

NETRIX CORPORATION

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
----------- ----------- ---------- ----- ---------- ----------

(IN THOUSANDS)

DOUBTFUL ACCOUNTS
Year Ended December 31, 1996:
Allowance for doubtful
accounts (deducted from
accounts receivable)......... $1,530 156 (200)* 106 $1,380
Year Ended December 31, 1997:
Allowance for doubtful
accounts (deducted from
accounts receivable)......... $1,380 150 -- 25 $1,505
Year Ended December 31, 1998:
Allowance for doubtful
accounts (deducted from
accounts receivable) $1,505 1,402 -- 2,111 $796

*Amounts related to Republic Telcom purchase accounting.

CONSIGNMENT RESERVE**
Year Ended December 31, 1996:
(deducted from
consignment inventory)......... $407 320 -- 537 $190

Year Ended December 31, 1997:
(deducted from
consignment inventory)......... $190 1,478 -- 612 $1,056

Year Ended December 31, 1998:
(deducted from
consignment inventory)......... $1,056 1,825 1,692 $1,189

INVENTORY RESERVES**
Year Ended December 31, 1996:
(deducted from inventory)........... $1,149 687 -- -- $1,837

Year Ended December 31, 1997:
(deducted from inventory)........... $1,837 432 -- 949 $1,319

Year Ended December 31, 1998:
(deducted from inventory)........... $1,319 2,045 -- 1,638 $1,727

** Reserve is netted against inventory balances.
44

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------

21 --Subsidiaries of the Registrant.
23.1 --Consent of Arthur Andersen LLP