Broadband Networks BBNC Bus Plan 1999

BROADBAND NETWORKS CORPORATION BUSINESS PLAN

JULY 5, 1999

BROADBAND NETWORKS CORPORATION

BUSINESS PLAN

JULY 5, 1999

THIS DOCUMENT IS THE PROPERTY OF BROADBAND NETWORKS CORPORATION, WHICH RESERVES THE RIGHT TO REQUEST ITS RETURN AT ANY TIME. THE INFORMATION CONTAINED HEREIN IS CONFIDENTIAL AND PROPRIETARY TO BROADBAND NETWORKS CORPORATION AND IS NOT TO BE USED FOR OTHER THAN INFORMATIONAL PURPOSES.

NO REPRODUCTION OR DISCLOSURE IN WHOLE OR IN PART IS PERMITTED WITHOUT THE PRIOR

WRITTEN CONSENT OF AN OFFICER OF BROADBAND NETWORKS CORPORATION.

DATE: ____________________

RECEPIENT: ____________________

COPY NUMBER: ____________________

BROADBAND NETWORKS CORPORATION 990 RICHARD AVENUE SUITE 112 SANTA CLARA, CA 95050 PHONE: (408) 988-2060 FAX: (408) 988-2188 www.bbnc.com

BROADBAND NETWORKS CORPORATION

BUSINESS PLAN

JULY 5, 1999

THIS DOCUMENT IS THE PROPERTY OF BROADBAND NETWORKS CORPORATION, WHICH RESERVES THE RIGHT TO REQUEST ITS RETURN AT ANY TIME. THE INFORMATION CONTAINED HEREIN IS CONFIDENTIAL AND PROPRIETARY TO BROADBAND NETWORKS CORPORATION AND IS NOT TO BE USED FOR OTHER THAN INFORMATIONAL PURPOSES.

NO REPRODUCTION OR DISCLOSURE IN WHOLE OR IN PART IS PERMITTED WITHOUT THE PRIOR

WRITTEN CONSENT OF AN OFFICER OF BROADBAND NETWORKS CORPORATION.

DELIVERY DATE: ____________________

RECEPIENT: ____________________

COPY NUMBER: ____________________

BROADBAND NETWORKS CORPORATION 990 RICHARD AVENUE SUITE 112 SANTA CLARA, CA 95050 PHONE: (408) 988-2060 FAX: (408) 988-2188 www.bbnc.com

BROADBAND NETWORKS CORPORATION BUSINESS PLAN YEAR 1 THROUGH YEAR 5 TABLE OF CONTENTS EXECUTIVE SUMMARY----------------------------------------------------------------------------------1 Company Background --------------------------------------------------------------------------------------1 Mission Statement -------------------------------------------------------------------------------------------1 Funding Objectives ------------------------------------------------------------------------------------------1 New Product Development -------------------------------------------------------------------------------1 Existing Product Transitions ------------------------------------------------------------------------------2 Executive Leadership --------------------------------------------------------------------------------------3 Product Promotion -----------------------------------------------------------------------------------------3 Use and Administration of Funds-------------------------------------------------------------------------3 THE BUSINESS --------------------------------------------------------------------------------------------4 Company History --------------------------------------------------------------------------------------------4 Management and Organization ---------------------------------------------------------------------------4 Management Team -----------------------------------------------------------------------------------------4 Advisory Board ---------------------------------------------------------------------------------------------6 Current Status ------------------------------------------------------------------------------------------------6 Customer List -------------------------------------------------------------------------------------------------6

PRODUCT OVERVIEW -----------------------------------------------------------------------------------8 Single Channel Systems-------------------------------------------------------------------------------------8 Multi-channel Systems --------------------------------------------------------------------------------------9 Network Products ------------------------------------------------------------------------------------------10 Network Management Products ------------------------------------------------------------------------10 Product Strategy--------------------------------------------------------------------------------------------11 INDUSTRY TRENDS -------------------------------------------------------------------------------------12 MARKET 13 The Move to Digital television ---------------------------------------------------------------------------13 The Broadband Video Networking Market -----------------------------------------------------------14 Market Size --------------------------------------------------------------------------------------------------15 1997 Growth ----------------------------------------------------------------------------------------------15 Market Outlook -------------------------------------------------------------------------------------------16 Projections -------------------------------------------------------------------------------------------------17 Market Segments -------------------------------------------------------------------------------------------17 Vertical Markets ------------------------------------------------------------------------------------------18 Market Opportunities -------------------------------------------------------------------------------------19 Competitors --------------------------------------------------------------------------------------------------20

MARKETING STRATEGY ------------------------------------------------------------------------------21 Products

21

Pricing

21

Sales Channels ----------------------------------------------------------------------------------------------21 Domestic21 International -----------------------------------------------------------------------------------------------22 Promotion 22 Product Launch -------------------------------------------------------------------------------------------22 Advertising ------------------------------------------------------------------------------------------------22 Literature 22 Marketing and Sales Promotion Budget ---------------------------------------------------------------22 PRODUCTION AND OPERATIONS -----------------------------------------------------------------24 Requirements ------------------------------------------------------------------------------------------------24 Policies

24

Procedures 24 Labor

24

Technologies -------------------------------------------------------------------------------------------------24 RESEARCH AND DEVELOPMENT -----------------------------------------------------------------25 Product development --------------------------------------------------------------------------------------25

Outside R&D Relationships ------------------------------------------------------------------------------25 PLANS

26

Strategic - Goals --------------------------------------------------------------------------------------------26 Corporate --------------------------------------------------------------------------------------------------26 Tactical - Implementation --------------------------------------------------------------------------------26 Marketing --------------------------------------------------------------------------------------------------26 Sales 26 Engineering ------------------------------------------------------------------------------------------------26 Production -------------------------------------------------------------------------------------------------27 REQUEST28 Key to the Investor -----------------------------------------------------------------------------------------28 USE OF FUNDS -------------------------------------------------------------------------------------------29 Year 1 – Phase 1 Amount Raised $660,000 ------------------------------------------------------------29 Year 1 – Phase 2 will require $5,000,000 for the following -----------------------------------------29 Year 2 – Phase 3 may require an additional $2,000,000: -------------------------------------------29 Repayments --------------------------------------------------------------------------------------------------30 OTHER 30 Potential Risks and Pitfalls ------------------------------------------------------------------------------30 Trademarks, Patents and Copyrights ------------------------------------------------------------------31

Legal and Accounting--------------------------------------------------------------------------------------31 Administrative ----------------------------------------------------------------------------------------------31 FINANCE 33 Financial Statement Projections -------------------------------------------------------------------------33 EXHIBITS 37 Management Biographies ---------------------------------------------------------------------------------37 Reference Material: ----------------------------------------------------------------------------------------46 Solomon Smith Barney ----------------------------------------------------------------------------------46 Multimedia Telecommunications Association --------------------------------------------------------48

1

EXECUTIVE SUMMARY

1.1

Company Background

Ralph P. Manfredo founded BroadBand Networks Corporation, the COMPANY, in April of 1998 with the purpose of being a value added reseller/systems integrator specializing in digital video networking systems.

In June 1998, the COMPANY entered into an agreement where the COMPANY had a non-exclusive license to manufacture and sell NUKO Information Systems, Inc. products under the BroadBand Networks Corporation name. The COMPANY was incorporated in the State of California as a C-Corporation in August 1998. In July 1998, the COMPANY made an offer to acquire the assets of NUKO Information Systems, Inc., of San Jose, California. The acquisition of the NUKO assets was completed in November 1998. The COMPANY has been shipping products since December 1998.

Since it’s inception, the COMPANY has been funded by its founders and through private investors.

1.2

Mission Statement

BroadBand Networks Corporation’s mission is to be a market leader in the MPEG-2 video encoding and video networking market worldwide.

1.3

Funding Objectives

The COMPANY believes the experience of its management team and their extensive market and technical knowledge of local area networking (LAN) and broadband networking coupled with their MPEG-2 digital television knowledge is key to the COMPANY’s success.

The COMPANY plans to use the investment to finance new product development, existing product transition, hire executive leadership and product promotion.

1.3.1

New Product Development

The COMPANY is in the planning stage in the development of new products. Funding will be used for the development of these products, which consists of the following:

•New standard definition television (SDTV) MPEG-2 encoder based on the new IBM single chip encoder. The new encoder architecture will be a state-of-the-art in design that will provide a broadcast quality video display while requiring minimum network bandwidth. In addition, the new encoder will be scaleable so that with the addition of a daughter board will allow the encoder to encode both SDTV and high definition television (HDTV). The new encoder will also provide two stereo channels (primary and secondary audio programming) and have provisions for accepting Dolby Digital 5.1 Surround Sound ™, Digital Theater Systems, Inc. (DTS) Digital 5.1 Surround Sound ™ with the ability to accept other surround sound systems as they become available. In addition to video and audio, the new encoder will accept digital data from a computer and will be DVB/ ATSC compliant. Each encoder will be a standalone device and will require no other hardware to operate. The new encoder will provide MPEG-2 SDTV and HDTV over ATM, SDH/SONET, and IP over ATM and native IP network protocol compatibility. This protocol should allow the COMPANY to transmit MPEG-2 video data over the most popular broadband networks currently in use and over new planned broadband networks.

•The COMPANY will also update its current network management system (NMS) product, known as he Millennium Management System to work with these new products and to add new features. The Millennium Management System runs on a SUN workstation with SUN’s Solaris operating system and HP OpenView In addition, the COMPANY will update the graphical user interface (GUI) known as HighView a hardware set-up program that requires either an X-Windows terminal or a computer operating a X-Windows emulation program.

•The COMPANY is also planning to port both its NMS and HighView to a JAVA based program. This will make both programs capable of operating on any customer computer or workstation. This will reduce the customer’s entry cost for hardware and software license acquisitions.

•The COMPANY is also evaluating whether it should develop set top box that will meet the requirements of interactive TV and will meet the new standard for Full Service Access Network (FSAN) currently in development. This standard is being developed by the major international telephone company so that hey can provide their customers with the ability to have standard telephony, high-speed Internet access and watch television (both broadcast and video on demand) over normal telephone wire that is currently in the home.

1.3.2

Existing Product Transitions

The COMPANY also plans to update software it acquired so that it is Y2K compliant. In addition upgrading software that the COMPANY currently is selling, it will also offer updates to the NUKO customer base. This will be a goodwill gesture that can be used to maintain loyalty to the COMPANY and should make these customers reference accounts. The COMPANY has informed the NUKO customer that the COMPANY has acquired the NUKO assets and will be providing sales, service and support of NUKO

products.

1.3.3

Executive Leadership

In order for the COMPANY to meet its development objectives, the COMPANY will need to hire Engineering and Marketing management to ensure the COMPANY develops products that are market leaders, and hire a controller to provide financial controls.

The Company plans to hire Directors of Marketing and Engineering, plus Product Managers, field service, applications engineers, salespersons, hardware, and software and firmware engineers. In addition, the COMPANY will need to increase staff in the manufacturing department including materials planning, purchasing and shipping and receiving. It is anticipated that the company will also have to open a sales office on the east coast and will also need additional facilities as it grows this next year.

1.3.4

Product Promotion

The COMPANY will be exhibiting at the National Association of Broadcasters 2000, SuperComm2000, Cable Television Industry Association 2000, and the Western Cable Show 2000 in the United States and the International Broadcasters Conference 2000 industry exhibit in Europe. In addition, the COMPANY is planning an advertising campaign in those leading magazines read by the COMPANY’s typical customer.

1.4

Use and Administration of Funds

The COMPANY’s facilities are approx. 7,000 sq. ft, housing Administration, Engineering, Marketing, Production and Sales. Funds will be used hire engineers, manufacturing, sales and marketing personnel. Board assembly, and basic testing will be performed by “turn-key” contract manufacturing services. COMPANY manufacturing personnel will perform final assembly, system test, verification and burn-in.

The COMPANY currently has furniture, cubicles and test equipment to support existing designs and a staff of at least 20. The COMPANY intends to either rent, lease or purchase that test equipment needed to design and test next generation products. When test equipment utilization will be low, it will be rented or acquired on a short-term lease.

The COMPANY plans to capital in excess of immediate operating expenses into a secured interest bearing account.

2

THE BUSINESS

2.1

Company History

Mr. Ralph P. Manfredo founded the COMPANY, on April 13, 1998. He then invited Mr. Kit Sakamoto and Mr. Neil Mammen to join the company as co-founders. Mr. Sakamoto accepted and is currently Vice President, Sales. Mr. Mammen had a prior commitment and could not join the COMPANY as an employee, but was willing to become a member of the COMPANY’S Technical Advisory Committee.

2.2

Management and Organization

The COMPANY's management team is composed of individuals with extensive management and technical backgrounds, each of whom brings an expertise to the company. A key factor governing the success of the COMPANY is Mr. Manfredo's previous association with members of the management team.

2.2.1

Management Team

The COMPANY is a California corporation and was incorporated as a C-Corporation on August 13, 1998. The management team consists of the following: Mr. Ralph P. Manfredo, President, Chief Executive Officer and Founder.

With over 20 years of high technology management experience, Mr. Manfredo has created history in the networking marketplace by introducing numerous uniquely first-of-their-kind products in the industry. In addition to his visionary approach to networking products, Mr. Manfredo brings with him to BroadBand Networks Corporation his vast experience as a manager, having held several positions with other companies including NUKO Information Systems, Inc., BroadBand Networks Corporation's predecessor.

Mr. Manfredo's experiences also include: founding Spectrum Networks Corporation of San Jose, CA,, where he was President & CEO; Ferranti Datacom, Inc. of Sunnyvale, CA, where he was Director of Marketing & Sales and NUKO Information Systems, Inc. where, among other positions, he was Product Line Manager. Mr. Manfredo has a Bachelor of .Science in.Electrronic Engineering from the Utica New York campus of Syracuse University.

Mr. Kit Sakamoto, Vice President, Sales and Co-Founder.

Mr. Sakamoto brings to BroadBand Networks Corporation over 20 years of successful technical sales and marketing experience with

the last twelve having been in sales and market management. Mr. Sakamoto has been involved with the analog/digital video convergence since 1993, and is considered an expert in the emerging Digital Video Networking marketplace.

As Channel Sales Manager at FutureTel, Inc. he developed the early strategy for sending MPEG digital video over data networks. His resellers successfully implemented the first MPEG streaming video for ADSL networks, cable headends, video surveillance, distance learning and video dailies for the entertainment industry. As AVP of OEM Sales for NUKO Information Systems and then Director of World Wide Sales at InnovaCom, Inc., Mr. Sakamoto expanded upon his prior successful installations by implementing high quality video over broadband networks.

As Director of Business Development at LS2, Inc., Mr. Sakamoto's 20-person group in the US subsidiary was instrumental in developing hardware/software system networking solutions and subsequently set up the marketing and sale s program that became extremely profitable for the company. Mr. Sakamoto has a Bachelor of Science degree in Business from San Jose State University.

Jeffrey O. Kraft, Vice President, Operation.

Mr. Kraft joined BroadBand Networks Corporation in January 1999. Mr. Kraft's vast experience as both a manager and an executive at several high tech companies has proven to be of great benefit to BroadBand Networks Corporation.

Prior to joining BroadBand Networks Corporation, Mr. Kraft was the President of Artificial, Inc., of Marco Island, FL, a web site developer. In addition to this Mr. Kraft was Vice President of Sales for DiagSoft, Inc., a wholly owned subsidiary of Sykes Enterprises, Inc. with headquarters in Tampa, Florida. Concurrently he was President of Maui Analytical Synthesis Technologies, Inc. (MAST) of Kehei, Hawaii, a developer of neural network and artificial intelligence software technologies.

Mr. Kraft holds a Bachelor of Science degree in Business Administration from San Jose State University.

Director of Finance/Controller – TBD Director of Engineering – Currently a search is underway for a person to fill this position Director of Marketing - TBD

2.2.2

Advisory Board

Mr. Manfredo has identified members of the Advisory Board which he feels have the expertise required to assist the company achieve success. The advisory board consists of individuals who have been extremely successful in their own respective careers as senior executives of well-known companies, founders of companies that have gone public and entrepreneurs. Advisory Board members will assist the COMPANY's management team in developing business and product strategies, provide potential customer contacts and establish contacts within the financial community. Their participation has been formally requested and the COMPANY is awaiting their decision, however Mr. Manfredo is confident most or all of them will accept. The Advisory Board is divided into two functional groups, business and technical. The groups and the identified members are: Business Advisory Board Members •Mr. Arthur Caisse – Business Development •Mr. Jim Southworth – Business Advisor Networks •Mr. Dave Crievelli – HR and Recruiting Technical Advisory Board Members •Mr. Neil Mammen – MPEG-2 and High Definition TV •Mr. Jim Southworth – High Speed & Broadband Networking 2.3

Current Status

The COMPANY is currently delivering products acquired as part of the asset acquisition from NUKO. These products include MPEG-2 encoders, decoders, ATM multiplexers, ATM demultiplexers and a network management software program. It recently announced a new line of products at the National Association of Broadcasters (NAB 99) trade show in April 1999. The new product line is based on the IBM MPEG-2 encoder chip set. The COMPANY also has a functional specification for a new design encoder based on the new single-chip encoder. This encoder will be scaleable from standard definition television (SDTV) to high definition television (HDTV). Selection of the encoder chip vendor is still under consideration, but the COMPANY is leaning toward the IBM solution. The other vendor is C-Cube Microsystems, however they have less experience in the HDTV market and also, they own DiviCom, which is a competitor. Product introduction is planned for the NAB show in April 2000.

2.4

Customer List

The COMPANY customer list includes: • Bell South - Bell South has projected their requirements for the next 12 months at 15 to 17 encoders and 70 decoders with accessories for projected revenue of between $454,500 to $487,100.

• DBOVS - DBOVS is in the test stage with their customer and they project an implementation schedule for the next 12 months of 150 encoder channel systems at an average price of approximately $15,000 per channel for a total of $2,250,000. DBOVS has selected the COMPANY is their vendor of choice for encoder systems.

• GTE • MCI • Sprint • NASA • Bosch – Bosch is currently in the planning stage for an installation in their test lab.

• Los Angeles International Airport • Telus/BCTel – Canada – Telus/BCTel are in the planning stage for a major installation in the Provinces of Calgary, Saskatchewan and British Columbia starting in 2000.

• Saturn Communications – New Zealand • Samsung – Korea • Daewoo – Korea • Korea Telecom – Korea

3

PRODUCT OVERVIEW

BroadBand Networks Millennium 2000 family consists of single and multi-channel MPEG encode/decoder/codec systems and video networking products. BBNC’s video products are fully compliant with ISO/IEC 13818. Encoders, Decoders and Codecs support NTSC, PAL and Inverse Telecine. All BroadBand Networks products have been designed to meet the rigorous reliability requirements of Bellcore. Product reliability, which had been predicted by an independent consultant using on Bellcore TR-NWT-000332 Parts Count Method, to be in excess of 12,000 hours has exceeded those calculations and has been demonstrated to be in excess of 17,000 hours.

3.1

Single Channel Systems

BBNC-2100E – The BBNC-2100E is a single channel MPEG encoder system with full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 formats. Supports encode rates of 3 Mbps through 15 Mbps. Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2100E supports closed captioning (CC) and secondary audio programming (SAP). Included with the BBNC-2100E is BBNC’s Millennium Graphical User Interface.

BBNC-2110E – The BBNC-2110E is a single channel MPEG encoder system with ½ D1 resolutions up to 352 x 480 (NTSC) and 352 x 576 (PAL) at 4:2:0 formats. System is designed for use in low bit rate applications of 1 Mbps. Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2110E supports closed captioning (CC). Included with the BBNC-2110E is BBNC’s Millennium Graphical User Interface.

BBNC-2120E – The BBNC-2120E is a single channel MPEG encoder system with built-in ATM multiplexer. The encoder supports full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps.

Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2120E supports closed captioning (CC) and secondary audio programming (SAP). The ATM multiplexer supports up to three (3) encoders and is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs). Included with the BBNC-2120E is BBNC’s Millennium Graphical User Interface.

BBNC-2130E – The BBNC-2130E is a single channel MPEG codec system with full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 formats. Supports encode rates of 3 Mbps through 15 Mbps. Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2130E supports closed captioning (CC) and secondary audio programming (SAP). Included with the BBNC-2130E is BBNC’s Millennium Graphical User Interface.

BBNC-2140E – The BBNC-2140E is a single channel MPEG codec system with ½ D1 resolutions up to 352 x 480 (NTSC) and 352 x 576 (PAL) at 4:2:0 formats for use in low bit rate applications of 1 Mbps. Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2140E supports closed captioning (CC). Included with the BBNC-2140E is BBNC’s Millennium Graphical User Interface.

BBNC-2150E – The BBNC-2150E is a single channel MPEG codec system with built-in ATM multiplexer. The encoder supports full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps.

Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2120E supports closed captioning (CC) and secondary audio programming (SAP). The ATM multiplexer supports up to three (3) encoders and is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs). Included with the BBNC-2150E is BBNC’s Millennium Graphical User Interface.

BBNC-2160E – The BBNC-2160E is a single channel MPEG codec system with built-in ATM demultiplexer. The encoder supports full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps.

Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2120E supports closed captioning (CC) and secondary audio programming (SAP). The ATM demultiplexer drives up to nine (9) decoders and is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs). Included with the BBNC-2160E is BBNC’s Millennium Graphical User Interface.

BBNC-2100D – The BBNC-2100D is a single channel MPEG decoder that supports closed captioning (CC) and secondary audio programming (SAP). The decoder supports resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps. The BBNC-2100D has both analog and digital audio and video outputs.

3.2

Multi-channel Systems

BBNC-2200E – The BBNC-2200E is a Fault Tolerant multi-channel MPEG encoder system with N+1 redundancy of all critical components which are "hot swap" capable. The BBNC-2200E supports up to nine (9) MPEG encoder channels with built-in ATM multiplexers, Audio/Video/MPEG Router Switch, and monitoring Decoder. The encoders support full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps. Capable of encoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2200E supports closed captioning (CC) and secondary audio programming (SAP). The ATM multiplexer supports up to three (3) encoders and is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs).

Included with the BBNC-2200E is BBNC’s Millennium Management System.

BBNC-2210E – The BBNC-2210E is a Fault Tolerant multi-channel MPEG codec system with N+1 redundancy of all critical

components which are "hot swap" capable. The BBNC-2210E supports up to nine (9) MPEG codec channels with built-in ATM multiplexers, Audio/Video/MPEG Router Switch, and monitoring Decoder. The codecs support full D1 resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 formats at encode rates of 3 Mbps through 15 Mbps. Capable of encoding and decoding MPEG-1, MPEG1+ and MPEG-2, the BBNC-2210E supports closed captioning (CC) and secondary audio programming (SAP). The ATM multiplexer supports up to three (3) encoders and is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs). Included with the BBNC-2210E is BBNC’s Millennium Management System.

BBNC-2220N - The BBNC-2200N consists of two independent ATM multiplexers each capable of supporting three (3), six (6) or nine (9) MPEG-2 input ports. Each ATM mux is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs).

BBNC-2230N - The BBNC-2230N consists of two independent ATM demultiplexers each with nine (9) output ports. Each ATM demux is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs).

BBNC-2200D - The BBNC-2200D is a multi-channel MPEG decoder system that supports closed captioning (CC) and secondary audio programming (SAP). The decoder supports resolutions up to 704 x 480 (NTSC) and up to 704 x 576 (PAL) in 4:2:0 format at encode rates of 3 Mbps through 15 Mbps. The BBNC-2100D has both analog and digital audio and video outputs.

3.3

Network Products

BBNC-2300N - The BBNC-2300N is a stand-alone ATM multiplexer capable of supporting three (3), six (6) or nine (9) input ports.

Each ATM mux is available with DS3, E3, OC-3c or STM-1 network interface modules (NIMs). Included with the BBNC-2300E is BBNC’s Millennium Graphical User Interface.

BBNC-2310N - The BBNC-2310N is a stand-alone ATM demultiplexer capable of supporting nine (9) output ports. Each ATM demux is available with DS3, E3, OC-3C or STM-1 network interface modules (NIMs). Included with the BBNC-2310E is BBNC’s Millennium Graphical User Interface.

3.4

Network Management Products

BMS-2000 – The BroadBand Networks Corporation (BBNC) BroadBand Management System 2000 is an SNMPv2 compliant network management system designed to run with Hewlett-Packard’s OpenView on a Sun SPARCstation 5 or higher workstation running Sun Solaris. BMS can manage all BBNC products across the network including. BMS is an integral part of BBNC’s fault tolerant operation. BMS-2000 is MIB-II compliant and is also compliant with ATM Forum RFC1695.

3.5

Product Strategy

The COMPANY's business objective is to develop and market leading edge products designed for the new digital video networks.

These products will be based on industry standards so as to enable these products to easily be integrated in existing networks without modification. In addition, all COMPANY products can easily be sold to value added resellers (VARs), systems integrators and OEM customers. The COMPANY’s products will be priced competitively and technically competitive.

The COMPANY plans to also develop a new network management system (NMS) based on Java to enable the NMS will operate on any hardware platform. This will reduce the hardware and software costs for those customers that prefer a non-Unix based hardware platform.

4

Industry trends

Industry trends are driven by three factors; government regulations, technology and market needs. In reality, government regulations and technology can be driven by market needs. The FCC Fifth Rule of Order is an example of the government driving technology.

This Rule requires all broadcast television stations to convert to digital broadcast transmitters by 2002. The exception to this rule is PBS TV stations that will have until 2003 to complete the conversion. Conversion to Digital has been on a scheduled basis based on network affiliates and market. Those TV stations that have not converted to digital transmitters or secured a waver by the deadline will have to go off the air. Thus, by 2003 at the latest, all broadcast TV programming will be digital which means all cable companies will also have to convert to digital.

The reason for the FCC’s rule is that broadcast television has a broad spectrum of analog frequencies reserved. Analog television pictures are very inefficient because each analog TV frame has an infinite amount of transitions and there are 60 frames per second for a domestic TV picture and 50 frames per second for most international TV pictures. Digital TV on the other hand has only two transitions, a zero bit and a one bit. Once a TV picture has been digitized, it can be compressed to reduce the number of bits needed to transmit the picture. What this means is that in the bandwidth required to send an analog TV picture, you can transmit up to six (6) compressed digital pictures. The number of digital pictures that can be sent is based on the picture content and desired picture quality.

The FCC sees the conversion of analog to digital transmitters as a way to recoup a large number of frequencies that can then be sold at auction to provide the FCC revenue. In addition, the FCC has to make available more frequencies to meet the continuing demand for more wireless services.

5

MARKET

We are currently in an exciting phase in both the television and the networking industries. This is evident in the last two major industry exhibits, NAB 99 and SuperComm 99. NAB was the most exciting show since the introduction of color television. The proliferation of new digital systems and the reduced cost of HDTV products was evident everywhere.

To quote Solomon Smith Barney in their Technology Quarterly of April 1999 section on Telecommunications Equipment and Data Networking: ‘Infinite Demand For Bandwidth ‘We believe that the demand for bandwidth is a key driver of future telecommunications spending. With equipment spending forecasted to grow from $333 billion in 1998 to $500 billion in 2001, investing in the telecommunications equipment and datacom group is a key way to play in this phenomenon.

‘We believe that the demand for bandwidth is incredibly price- and availability-elastic. In other words, end users constantly find new ways to consume any additional capacity they get. This seemingly insatiable desire for network capacity has led to a problem referred to in the industry as fiber exhaust.

The COMPANY along with one of its marketing partners, ViaGate and FORE Systems, demonstrated at the NAB 99 trade show such a system that simultaneously integrated telephony, high-speed Internet access and television programming all over plain old telephone system (POTS) wire currently in use in the average home. The COMPANY along with ViaGate and FORE Systems also demonstrated the same system at SuperComm 99. In both instances, the demonstrations were very successful and we currently following up on the interest generated and in some cases have already scheduled customer visits and demonstrations.

5.1

The Move to Digital television

Current television systems are analog, however, the Federal Communications Commission (FCC) through its Fifth Report and Order has mandated that by 2003, all television broadcast television stations will transmit programming over digital television channels and by 2007, will have to relinquish their analog television channels.

The broadcast industry has driven how cable television channels are sent over their cable network. This conversion of broadcast

television will drive the cable companies to distribute their programming using digital cable technology. The new digital video distribution business is currently based on well-established standards: Advanced Television Standards Committee (ATSC) for nonsatellite and Digital Video Broadcast (DVB) for satellite broadcast applications. These standards are based on the MPEG-2 standard that includes both standard definition television (SDTV) and high definition television (HDTV). These standards lend themselves to utilizing technologies currently utilized by the data communications industry. The broadband networking protocols that will be predominately used are Asynchronous Transfer Mode (ATM) and Internet Protocol (IP). These broadband networks are currently used to distribute both Internet services and normal telephony services and can easily include television distribution.

Both AT&T and Paul Allen, founder of Microsoft, have recognized this market potential. AT&T has recently acquired TCI and MediaOne. AT&T is spending approximately $2,000 per home for access. Paul Allen, through his Vulcan Ventures, has acquired twelve cable companies since 1998 valued at an estimated $18B. Mr. Allen’s acquisitions have been folded into Charter Communications. The acquisitions by AT&T, makes it the largest cable company in the U.S. Allen’s recent acquisitions with 5.5 million subscribers makes Charter the fourth largest cable company behind AT&T with 15.1 million subscribers, Time Warner with 12.9 Million and Comcast with 8 million.

AT&T’s acquisition now provides it with connectivity to every residence that TCI and MediaOne currently have cable TV subscribers giving AT&T the ability to offer standard telephony and Internet access to these subscribers thereby bypassing the delaying tactics of the RBOCs in giving them access to local customers. The COMPANY believes this is the intent of Allen’s recent acquisition.

The power utility companies are also a potential major player in the market. They like the telephone companies have more right-ofway access to residences than any other potential customer. As they lay new gas lines or replace older gas lines, they are also including conduit with fiber cable. Some are already becoming CLECs and are competing with the local telephone companies.

5.2

The Broadband Video Networking Market

The broadband video networking market is in a high growth phase and we believe the Regional Bell Operating Companies (RBOCs), cable companies, Competitive Local Exchange Carriers (CLECs) and the international telephone companies are eager to get their share of this market. This is especially true with the advent of digital subscriber line (DSL) networks. DSL, in the form of very-high digital subscriber line (VDSL), allows a multitude of services to be distributed to the subscriber including television, high-speed Internet access and standard telephone service all provided by one company. BroadBand Networks Corporation is ideally positioned

to be a major player in this new and exciting market with its video and broadband networking products.

The COMPANY plans to capture its share of the market in various ways: • Strategic alliances with marketing partners with a strong market presence • Signing systems integrators/VARs that have relationships with potential customers and are knowledgeable in broadband networking and video markets • Development of leading edge products that meet customer requirements • Advertising and exhibiting at the major industry trade shows 5.3

Market Size

Both the Telecommunications Industry Association (TIA) and its subsidiary, the MultiMedia Telecommunications Association (MMTA), have predicted a telecommunications industry boom through year 2000. These organizations announced their findings in the jointly produced 1998 Multimedia Telecommunications Market Review and Forecast. While this report covers all market segments of the multimedia telecommunications market, this business plan will only cover the markets the COMPANY will address.

Based on the MMTA report the following market growth had been projected from 1997 through the year 2001: 5.3.1

1997 Growth

The report states that the market “grew by than 11 percent in 1997, generating revenues of $406.7 billion. Spending on telecom equipment grew 13 percent to $106.4 billion, while services, accounting for about 75 percent of the 1997 revenue total, posted an 11 percent increase to $300.3 billion. The fastest growing equipment categories in 1997 were in emerging technology (up 60 percent over 1996)”. The COMPANY’s products are in the emerging technology sector.

As published in the report, “spending on fiber optic equipment reached $9 billion in 1997, a 19 percent increase over 1996. The report predicts that spending on fiber equipment will reach $11.7 billion by 2001”. This growth in fiber optic cable installations is a major requirement before multimedia networks can be deployed.

The driving force for this increase in fiber optic cable installations is the growing demand for increased bandwidth. Multimedia applications such as videoconferencing, interactive television and video-on-demand are among the multimedia applications requiring this increased bandwidth.

5.3.2

Market Outlook

The Market Review and Forecast highlights the following outlook for the fiber market: • “1997, for the first time, fiber installation by cable system operators (CATV) exceeded that of the regional Bell operating companies (RBOCs). Fiber installation by CATV was up 13.5 percent and is expected to continue to grow at healthy rates through 2000;” • “Interexchange carriers (IXCs) continue to step up their fiber base in anticipation of future demand. Fiber spending by IXCs in 1997 was up 65.6 percent;” • “For RBOCs, fiber installation rates are expected to increase into the new century, primarily driven by the demand for fiber-inthe-local loop capability. RBOCs are projected to install 2.7 million miles of fiber by 2001; and” • “Growth in the fiber market occurred even though there was no significant increase in new facilities-based competition.”

The report also states “Spending on collaborative technologies totaled $5.6 billion in 1996, an increase of nearly 30 percent over 1995 and more than double 1993’s total of $2.3 billion. In the case of videoconferencing, the acceptance of standards and the introduction of new products, particularly desktop applications propelled the market. As videoconferencing migrates to the desktop and as prices continue to decline, usage will expand.” The study authors also believe “with the introduction of MMX technology by Intel will quadruple the capacity to handle audio- and video-conferences, thereby improving the quality of transmission. The MMX chip will make videoconferencing technology more useful to upper-end users thereby stimulating usage”.

Video conferencing includes the Telemedicine and Distance Learning markets. With higher bandwidth, the MPEG solution becomes more viable than H.320 and h.323 because of the higher video quality MPEG provides.

• Videoconferencing – The use of Internet hypertext and e-mail provide less expensive, and increasingly more viable, alternatives to conferencing. On the other hand, the need for give and take and the ability to read body language and voice nuances make videoconferencing a unique solution if the price is right.

• Telemedicine - As the costs of health care continue to be driven down, the need to consult specialists at medical centers by family practitioners and remote clinics will increase. Also, the military is now using lower performance video to allow consulting physicians and surgeons in the U.S. to consult in diagnostics and with surgery theaters in countries where the U.S. military is providing support such as Bosnia. The military is currently planning to upgrade to MPEG-2 video for all telemedicine applications worldwide. The COMPANY believes with its product offering, it will be a major player in this market.

• Distance Learning - The use of the Internet and private networks will allow students in remote classrooms, distant cities and

in remote parts of the world the ability to attend classes at secondary schools, colleges and universities. This application is also ideal for both industry and the military to provide training on demand to all employees and service personnel worldwide. This could be one of the big hitters in the COMPANY's success. Schools and universities are the big markets here because of the amount of installed fiber networks on their campuses.

The report also states, “As prices come down and as quality improves, this solution will be viable to more and more companies.

Spending on videoconferencing equipment is expected to increase to $12 billion in 2000, up from $3.7 billion in 1996”.

5.3.3

Projections

The report authors believe “The U.S. telecommunications industry is projected to increase by more than $200 billion by the year 2001.

Equipment spending increases were most dramatic for emerging technology (ATM, Frame Relay) equipment and videoconferencing.

Spending on data communications and internetworking equipment will continue to grow nearly 15% over the 1997-2001 period.”

5.4

Market Segments •

•

LAN/WAN Internetworking Technologies - With the success of the personal computer in industry, the need for networking the multitude of computers within a company, drove the development of the local area network (LAN). LAN interconnection and access to the Internet is now nearly universal in the business marketplace. The industry focus now is on providing highspeed transmission for high volumes of data. ATM, Frame Relay, T1/T3, fiber optics, SMDS, and Ethernet, Fast Ethernet, xDSL and fast modems are among the equipment and technologies enhancing the needs of LAN users. The Internet has been a principal driver of growth as companies build private networks to give workers easy and speedy access to the Internet. The requirement to have streaming video, training videos, meeting and other multimedia sources sent to the desktop is getting greater. One solution being championed is ATM to the desktop. The main reasoning behind proponents of ATM to the desktop vs. gigabit Ethernet is ATM provides quality of service (QoS) where gigabit Ethernet does not.

Emerging Technologies: The reports states “The rapidly growing demand for emerging services − asynchronous transfer mode (ATM), frame relay, and switched multi-megabit data service (SMDS) − propelled spending by nearly 60 percent for these services, and by nearly 30 percent for equipment”. Frame relay, a technology that can accommodate large bursts of data, is the most widely used data network service as an alternative after leased lines. Its simplicity and cost advantages with respect to other alternatives have accounted for its rapid growth. ATM, once considered a competitor to frame relay, is now viewed as a complementary technology for high-speed transmissions and has benefited from the increase in the use of frame relay. The backbone of the Internet is an ATM network. ATM networks are still the preferred networks for full motion MPEG-2 video

distribution.

The fiber optic equipment market has also expanded rapidly in recent years. Spending was fueled by the demand for increased capacity, particularly for video transmissions. Because of the labor-intensive nature of fiber deployment, companies wanted to limit future redeployment by installing fiber to account for future demand. The fiber optic market is affected by countervailing forces. On the one hand, the demand for broadband video services is growing. On the other hand, advances in video compression technologies make hybrid fiber/copper solutions viable. Solutions such as xDSL may also substitute for fiber.

On balance, spending on fiber optic equipment should continue to expand, albeit at slower rates.

•

5.4.1

The authors state, “Increasing penetration of ATM, Frame Relay and xDSL is generating growth in service revenues as the installed base expands. Spending on these emerging services will continue to grow rapidly, with the total more than tripling from $2.5 billion in 1996 to $9.1 billion in 2000. Equipment spending will rise to an estimated $15.7 billion from $9.5 billion in 1996. It should be noted, that recently there has been an acceleration in the installation of xDSL services by RBOCs and ISPs in an effort to capture their share of customers in anticipation of the move to broadcast television services to the home and office”.

Internetworking Equipment: Fast Ethernet, virtual LANs, improvements in modems, routers, and the overall expansion in the use of LANs have boosted spending on Internetworking equipment. The authors state “Spending on Internetworking equipment totaled $31.4 billion in 1996, an increase of 16.4 percent. Double-digit annual increases are expected over the remainder of the decade with the total rising to $56.4 billion by 2000”.

Vertical Markets

The following vertical markets lend themselves to MPEG-2 video.

• Broadcast Video Distribution – This market is being driven by the FCC’s requirement for all broadcast TV stations to convert to digital by 2003. The new regulation defining Open Video Systems (OVS) is an alternative to cable television. The COMPANY currently has a customer in California who was awarded the first OVS license. This customer, DBOVS, is currently preparing a trial to demonstrate distance learning on demand and will later provide broadcast to residences. DBOVS has a license to transmit up to 500 digital TV channels anywhere in California. The initial plans are for the Distance learning application in five counties in the Los Angeles area, San Diego and the San Francisco Bay Area county offices of education.

They also have a license for OVS Puerto Rico, which is the gateway to the Caribbean and Latin America. The COMPANY has been selected as the vendor of choice for their requirements.

•

•

•

•

• • 5.5

Video On Demand/Near Video On Demand (VOD/NVOD) – This application will be based on MPEG-2 encoded video being stored on a server(s), thereby giving the subscriber what is known as the virtual VCR. The viewer will be able to select a program stored on a server, record, play, pause, rewind, and fast-forward the program just like it was a tape in heir VCR. Distance Learning – This will be a fairly large market. It is basically distance learning on demand. It will allow students (grammar, middle, high, college/university or corporate students) to view a subject at any time and anywhere. With xDSL, the training can be interactive so the student must successfully complete a lesson before being allowed to move onto the next.

Telemedicine – As the requirement for reduced health care costs are continue to be demanded by insurance companies, the family care physician need a solution that will help them utilize specialists to assist or confirm a diagnosis. Telemedicine for example, will allow a heart specialist review an echocardiogram in their office while the patient is located at a primary cars physician’s office or at a radiology lab in the area where the patient is located. An example of this application took place with NASA using the COMPANY's products. The patient was located at Cleveland Clinic in Cleveland, Ohio while the cardiologist was located at Moffett Air Field, California. The cardiologist was able to make a diagnosis of the patient’s medical problem using the real-time video being captured from the echocardiogram whose output fed the COMPANY’s MPEG-2 encoder/ATM multiplexer. The MPEG-2 signal was sent over NASA’s network to Moffett where the signal was demultiplexed and decoded and then displayed on a video monitor.

Law Enforcement – The budget to transfer prisoners to court for arraignment is significant. By utilizing MPEG-2 video at the jail with the judge at the courthouse, the budget can be reduced significantly. Those law enforcement agencies using video are currently using low bit rate video conferencing systems based on H.320 technology.

Transportation – full motion video surveillance cameras can be used to monitor traffic on freeways and major thoroughfares.

Hospitality – The hospitality industry market will be mainly hotels, motels, cruise ships and resort properties where they will provide both broadcast video and video on demand.

Market Opportunities

The COMPANY has identified the following sales opportunities based on discussions with the customers listed below: • Bell South - Bell South has projected their requirements for the next 12 months at 15 to 17 encoders and 70 decoders with accessories for projected revenue of between $454,500 to $487,100.

• DBOVS - DBOVS is in the test stage with their customer and their projections for implementation in the next 12 months is 150 encoder channel systems at a average price of approximately $12,000 per channel for a total of $1,800,000. DBOVS has selected the COMPANY is their vendor of choice for encoder systems.

• Sprint – We are currently in discussions with Sprint Atlanta, Burlingame and Kansas City. Sprint will resell the COMPANY’S

• •

• • •

• 5.6

products in the U.S. NASA – NASA has various opportunities in Kennedy Space Center and we have been recommended by NASA Glenn Research Center.

Bosch – Bosch is currently in the planning stage for an installation in their test lab. Bosch will use COMPANY equipment to verify interactive set top boxes for deployment worldwide. Bosch has not defined whether they will resell the COMPANY’S products as an OEM or as a system integrator.

Los Angeles International Airport – This is a proof-of-concept project for a high quality surveillance system.

Telus/BCTel – Canada – Telus/BCTel are in the planning stage for a major installation in the Provinces of Calgary, Saskatchewan and British Columbia starting in 2000.

Samsung – Korea – Samsung has contacted the COMPANY regarding upgrading their systems, and for training their technical employees. The Korean economy is starting to rebound and Korea Telecom is starting to revisit the implementation of interactive video for Korea.

Korea Telecom – Korea – See Samsung above.

Competitors

The major competitors in the broadcast quality MPEG-2 encoders are: •DiviCom – A division of C-Cube, the pioneer in the development of MPEG chips, is the leading supplier to the direct satellite broadcast industry. DiviCom currently has a HDTV encoder in beta form only. They only manufacture single channel systems that are not fault tolerant. Their prices are expensive compared the COMPANY’s.

•NDS – A UK company owned by Rupert Murdock. They are strong in the European broadcast market and they are trying to market their products into the U.S. and Asian markets. They use C-Cube encoder chips and their encoders are broadcast quality, their prices are very expensive compared the COMPANY’s.

•Lucent – introduced their encoder into the market in 1996. They have a broadcast quality encoder based on the IBM chip-set available in a single channel configuration only and have an ATM multiplexer. Their prices are also expensive compared the COMPANY’s.

•ECI – An Israeli company, they introduced their encoder in 1998. They make a single channel encoder and claim to have an ATM multiplexer, however we have not seen their products deployed in the U.S. Their prices are expensive compared the COMPANY’s.

6

MARKETING STRATEGY

The COMPANY's marketing strategy with its current and planned video networking products: • Target vertical markets where a leadership role can be taken.

• Target potential OEM customers.

• Develop strategic alliances with those vendors that have complementary products.

• Provide product differentiation.

6.1

Products

The COMPANY’s product strategy is to develop products based on industry standards with no proprietary modifications as relating to interfacing with other vendor products. This will allow the COMPANY’s products to be seamlessly integrated into existing networks and into new networks where a variety of vendor products are used. In cases where a leading competitor has a proprietary interface, the COMPANY will develop an interface that will convert the proprietary interface to the COMPANY’s interface.

6.2

Pricing

Product pricing is targeted to provide significant gross margins and will be based on model, volume and options. The COMPANY will offer an extended warranty to customers after the initial warranty period expires. Initial warranty will be 1 year. In addition, the COMPANY will offer service contracts and software maintenance agreements/ 6.3

Sales Channels

The COMPANY will sell products via the following channels: • Direct – This will be with domestic large end users • Distribution – Both domestic and international • Value Added Resellers/Systems Integrators – Both domestic and international • OEM Customers • Sales Agents internationally 6.3.1

Domestic

The COMPANY has divided the U.S. into two sales regions. The COMPANY has a Director of sales for the Eastern region that consists of that part of the U.S. that is east of the Mississippi. The Vice President of Sales currently covers the Western region. The

regional sales team will also manage OEMs, distributors, value added resellers (VARs) and system integrators.

6.3.2

International

To effectively market in a foreign country, the COMPANY must be represented by a national of that country. The COMPANY currently has agents in Canada, Hong Kong, Taiwan, Singapore, New Zealand and Argentina. In addition, the COMPANY also is in discussions with potential distributors in Chile, Korea and Europe. All international agents are capable of providing systems integration and first level maintenance of the COMPANY’s products.

6.4

Promotion

The following defines the COMPANY's sales and promotion strategy and includes product launch, advertising, development of data sheets and the budget required to accomplish these tasks.

6.4.1

Product Launch

The COMPANY announced it’s new IBM based encoder at NAB ’99 trade show in April 1999. This product known as the BNC-2100E is targeted to go into production in August if funding is secured. It plans to announce it’s new single chip encoder at the NAB 2000 show in April 2000. All major product announcements will be made at national or international trade shows.

6.4.2

Advertising

The COMPANY’s advertising campaign will consist of some advertising in major industry trade publications. The COMPANY will also rely on its World Wide Web site to generate product interest. In addition, the COMPANY will work with writers and key customers to create solution articles for publication in major trade publications.

6.4.3

Literature

The COMPANY’s current product literature is two-color, however it is planning on developing four-page, four-color product literature when additional funding is secured. There will be a literature folder holding brochures, ad reprints, press releases, etc. Press kits will be available at all press announcements and trade shows.

6.4.4

Marketing and Sales Promotion Budget

The marketing and sales promotion budget for fiscal year 2000 is projected to be • Trade Shows ~$150,000 • AD Creation* $15,000

• Literature Creation* • Advertising • Literature Printing • Press Kit Photos Total

$20,000 $60,000 $15,000 $5,000 ~$265,000

Costs for ad and literature creation a one-time expense and will be used for the life of the ad and literature.

7 7.1

PRODUCTION AND OPERATIONS Requirements

Production and Operations are currently located at the corporate headquarters in Santa Clara, CA. Space available is approximately 3,500 sq. ft. consisting of production, purchasing, stockroom, shipping/Receiving and the run-in area.

7.2

Policies

Production will utilize all existing workmanship standards developed for military contractors by the U.S. Government Contractors Office. Quality Assurance procedures will be following standard industry practices. All contract manufacturers the COMPANY selects will be ISO-9000 certified.

7.3

Procedures

Each functional organization will generate their policies and procedures based on a common format.

7.4

Labor

The COMPANY plans to subcontract all product subassemblies by turnkey contract manufacturers. This will reduce the amount of money required to fund a complete manufacturing operation. All final assembly and testing will be done in house. This policy will be reviewed and revised as determined fiscally necessary.

7.5

Technologies

Production and Operations will utilize and also select subcontractors that utilize the most current state of the art technologies for assembly, inspection and test equipment to produce high quality products.

8 8.1

RESEARCH AND DEVELOPMENT Product development

The COMPANY has developed a functional specification for the next generation encoder. This product will be scaleable in that with the addition of a daughter board it will encode both SDTV and HDTV video. The encoder will be based on the IBM single chip encoder. This new encoder will also have on-board video networking capability.

The COMPANY also will develop a decoder that will decoder both SDTV and HDTV for network monitoring.

The COMPANY also has plans to port its current software from the C++ programming language to JAVA. This will make the software capable of operating on any platform as opposed to current software that will only operate on a SUN Microsystems workstations and X-Windows terminals.

8.2

Outside R&D Relationships

The COMPANY will attempt to establish R&D relationships where justified. Discussions are currently under way with two potential companies where a joint development project is a possibility.

9

PLANS

9.1

Strategic - Goals

9.1.1 • • • • • • 9.2

Corporate Become a leader in the video networking market Provide a solution that meets customer needs Provide our customers with a high quality reliable product Achieve positive cash flow in less that two years Ensure a stable competitive position Initial public offering (IPO) Tactical - Implementation

9.2.1 • • • • • • 9.2.2 • • • • • 9.2.3

Marketing Analyze market needs, size and competition Create detailed product requirements/descriptions Promote market awareness through advertising, articles and tradeshows Develop strategic alliances Identify potential acquisitions of product lines or companies Develop product pricing strategies that return a 65% to 70% gross margin Sales Establish distribution/sales channels Meet or exceed sales forecasts Following pricing strategies Provide realistic sales forecasts Maintain a professional ethical attitude Engineering

• • • • 9.2.4 • • • • •

Design high quality products that meet marketing requirements Design products with a high mean time between failures (MTBF) Design products that require little or no special manufacturing process Provide designs that are technology leaders Production Build high quality products Strive to achieve maximum efficiency required to build product Minimize waste of time and materials Develop with engineering test procedures and automatic test fixtures Implement an MRP program to ensure proper material availability & work flow

10 REQUEST The Company, a Santa Clara, California based Corporation is seeking funding to bring to market a series of digital video networking products. These products consist of professional grade, broadcast quality MPEG-2 encoders, decoders, ATM multiplexers and ATM demultiplexers. Total investment requirement is requested to be in three phases. The phases and the current status of these is: • Phase 1 Year 1 $500,000 Amount raised $660,000 • Phase 2 Year 1 $5,000,000 In Process • Phase 3 Year 2 $2,000,000 Open It is anticipated that the COMPANY will be profitable in the 3rd Quarter of 2000.

10.1 Key to the Investor Conservative revenue projections indicate the COMPANY being profitable in the third quarter of year two. Revenue growth from year one through year 5 is projected to be 67.2%, 49.7%, 38.3%, and 33.3%, per year respectively. This growth will be due to new improved MPEG-2 encoder and decoder chips. This projected revenue increase will be due to the deployment of new broadband networks. This is especially true in the international market. Europe, Latin America and Asia are either in the planning stage or are currently deploying broadband networks based on ATM and SONET/SDH technology. As network bandwidth capability increases, other protocols such as IP will be used. This is especially true when broadband networks become available to the home and Internet service providers (ISPs) start streaming broadcast quality video over the Internet.

These components significantly reduce manufacturing costs allowing quantity discount pricing, smaller size and higher margins. This will increase the potential of the Company’s products as a viable OEM product allowing the COMPANY to address the high volume Internet market.

11 USE OF FUNDS The COMPANY’s use of funds is broken down based on the following annual requirements.

11.1 Year 1 – Phase 1 Amount Raised $660,000 The COMPANY has raised $660,000 in private placement investment. These monies have and are currently being used for the following: • Staffing • Wages/benefits/etc.

• Rent facilities/utilities/taxes/etc.

• Asset acquisition payment • Develop and purchase Marketing and Sales promotional material • Purchase production component inventory • Manufacture products for resale, to support warranty and out of warranty repairs • Trade show participation • Travel 11.2 Year 1 – Phase 2 will require $5,000,000 for the following The COMPANY intends to raise $5,000,000 in this round of investment. These monies will be used for the following: • Staffing • Wages/benefits/etc.

• Rent facilities/utilities/taxes/etc.

• Rent/Lease/Purchase of capital equipment • Develop prototype and proof of concept products • Develop and purchase Marketing and Sales promotional material • Purchase production component inventory • Manufacture products for resale to support warranty and out of warranty repairs • Advertising and trade show participation • Travel 11.3 Year 2 – Phase 3 may require an additional $2,000,000:

While the plans show an additional round of funding in the amount of $2,000,000, the COMPANY believes it will not have to raise this additional based on projected revenues and profits.

• Staffing • Wages/benefits/etc.

• Rent facilities/utilities/taxes/etc.

• Rent/Lease/Purchase of capital equipment • Develop prototype and proof of concept products • Develop and purchase Marketing and Sales promotional material • Purchase production component inventory • Manufacture products for resale to support warranty and out of warranty repairs • Advertising and trade show participation • Travel 11.4 Repayments Repayment of funds will be in the form of equity in the COMPANY based on current COMPANY valuation.

11.5 OTHER 11.5.1 Potential Risks and Pitfalls The following are the identified risks, potential solutions and potential pitfalls: • Risk: - Insufficient funding to achieve milestones in plan o Solution - Seek additional investors o Pitfall - Increased dilution • Risk - Hiring delays o Solution – Be more aggressive in salaries and stock options o Pitfall - Increase fixed costs • Risk - Design delays o Solution - Hire consultants to help improve schedule o Pitfall - Increased development costs • Risk - Delay in product certification for regulatory certification for safety and emissions

•

o Solution – Design for the various agency certifications by working with test lab to reduce risk o Pitfall – None identified.

Risk - Manufacturing costs higher than projected o Solution - Negotiate better discounts, Engineering look for alternate solutions for parts in question, Sales to provide more accurate product forecast o Pitfall - If higher cost parts are not identified soon enough, product release may either be delayed or margins may have to be reduced if higher list price makes product uncompetitive

11.6 Trademarks, Patents and Copyrights • • •

Trademarks - The COMPANY is applying for trademark of the name BroadBand Networks Corporation, the COMPANY logo, product model names and numbers, and any graphics that are used to identify the COMPANY and it’s products.

Patents - The COMPANY currently has two patents pending on its proprietary algorithms used in the ATM Mux. Copyrights - The COMPANY has copyrights on all its software, product literature and manuals.

11.7 Legal and Accounting •

•

Legal - The COMPANY has retained the legal services Mr. Stephen M. Wurzburg, Vice President with Rosenblum Parish and Isaacs, a law firm with offices located in San Jose. Mr. Wurzburg is the COMPANY’s corporate attorney and also serves on the Board of Directors as corporate secretary.

Accounting – The Company has retained the services of Mr. Lynn G. Wubbles, CPA of Lynn Wubbles & Company as corporate CPA.

11.8 Administrative • • • •

Corporate policy - the COMPANY will develop a company policy and procedures manual consistent with other companies of comparable size in the Silicon Valley.

Wages & Benefits - Employee benefits will be competitive with those offered by other companies in the Silicon Valley so that it can attract highly qualified candidates for employment.

Stock options - the COMPANY believes employee ownership in the company, via stock options, is vital in its ability to attract highly qualified employees. Stock options also instill pride of ownership and promote a stable work force.

Business Ethics - the COMPANY will be developing a Formal Statement of Business Ethics that will be used to guide all employees in their dealings with customers, vendors and other employees.

12 FINANCE 12.1 Financial Statement Projections The following pages, 28 through 34, are the actual and projected financials covering the periods of FYE June 1999 through FYE June 2004. The Company’s fiscal year starts 1 July and ends 30 June.

Pages 35 and 36 are the Assumptions for the Financial Statement Projections.

13 EXHIBITS 13.1 Management Biographies RALPH P. MANFREDO SUMMARY

EXPERIENCE 04/98 to Present

8/96 to 11/97

Over 15 successful years of product planning, strategic planning, product marketing and product line management experience: •%LDeveloped products for worldwide markets •%LEnd user and OEM contract negotiation •%LBroad technical knowledge •%LSmall company start-up experience •%LTeam player with entrepreneurial work ethic

President & CEO – BroadBand Networks Corporation – Founder of BroadBand Networks Corporation, which manufactures, sells and integrates digital video encoders used in the distribution of broadcast quality video over ATM and satellite networks. Set the business direction of the company from a product and business strategy point of view. Present the company to the investment community, including private, corporate and venture capitalist.

Negotiated the asset acquisition of intellectual property and inventory valued at over $45M. IP includes all hardware, software and firmware designs, patents, patents pending, trademarks and copyrights, finished goods inventory and raw materials and test equipment.

Product Line Manager, NUKO Information Systems, Inc. - Product Line Manager of NUKO'S flagship Highlander family of single- and multi-channel MPEG-2 encoder systems. The product line consists of the industry's first MPEG-2 encoder products designed using open systems architecture. Besides the single- and multi-channel encoders, the product line consisted of the following products: an Asynchronous Transfer Mode (ATM) Multiplexer, Asynchronous Transfer Mode (ATM) Demultiplexer, audio/video/data router/switch, monitor decoder, a multi-channel decoder system and a network decoder capable of decoding multiple MPEG-2 streams from various backbone networks such as SDH SONET, wireless Multi-channel Multipoint Distribution System (MMDS), coaxial and fiber ATM networks, etc. Direct the business development activities for international

markets including, Pacific Rim, Europe and Latin America. Functions include developing Marketing Requirements Documents, Product Requirements Documents, Sales Plans, Marketing Plans, Collateral, and Training Plans for Sales and Customer Support staff, pricing strategies, Market Introduction Plans and competitive analysis.

10/95 to 8/96

Independent Consultant - Consultant to NUKO Information Systems, an MPEG-2 video networking company performing various tasks including developing product requirements for a ATM Multiplexer and a single channel encoder/decoder, identifying various components and vendors of wireless (MMDS and LMDS) video network products and application engineering functions. This includes working with various customers including Pacific Bell, Nortel, Vyvx, LDDS, etc. Also working with a start-up company developing a marketing plan for a line of wireless networking products. Plan includes product-positioning strategy; new product introduction plans, marketing collateral requirements; advertising and trade show budgets.

12/94 to 9/95

Product Line Manager, Cylink Corporation - Product Line Manager - Managed the existing AirLink product line, which included sub-T1, spread spectrum wireless modems and wireless Ethernet remote bridge products.

The product line accounted for approximately $12M (48%) of 1995 revenues in a worldwide market. Activities included coordinating homologation efforts for licensing AirLink in various countries, developed collateral material, performed market analysis, and provided sales support for existing products. Also, developed the product requirement and specifications for the next generation AirLink. Directed the activities of the Technical Support Department, which provided pre- and post-sales support along with training of customers' technical personnel. Represented the company as its voting representative to the National Electrical Manufacturers Association (NEMA) T3 section and continued working as a member of the NEMA T3 Technical Committee developing the NTCIP (National Traffic Control/ITS Communication Protocol) standard.

1/93 to 12/94

Independent Consultant - Consulted to the President, Sunnyvale Products Division of California Microwave, Inc. Activities included developing product-marketing strategies, product collateral, negotiating agreements with original equipment manufacturers (OEMs), pricing strategies and trade show and advertising budgets. Identified markets where product strengths could be capitalized on. Developed working relationships with various traffic industry consultants that design traffic signal controller networks and specify communications products. Was a member of the NEMA T3 Technical Committee, which developed the NTCIP (National Traffic Control/ITS

Communication Protocol) standard for the next generation traffic control systems.

1/92 to 1/93

SPECTRUM NETWORKS CORPORATION, San Jose, CA - President - Founder of SPECTRUM NETWORKS CORP. a start-up developing spread spectrum wireless products. Performed market research, developed business plan, developed product requirements and business strategy. Company developed a spread spectrum wireless multi-protocol router using code division multiple access (CDMA) technology. Company was sold to Caliber Tech in Foster City, CA.

10/90 to 12/91

CALIFORNIA MICROWAVE INC., Sunnyvale, CA - Sales Manager - Directed the sales and marketing activities of RadioLink, CALIFORNIA MICROWAVE'S new Frequency Hopping Spread Spectrum (FHSS) wireless product line. This included developing pricing strategies, developing advertising and trade shows strategies and budgets, selected manufacturer representatives and developed a distributor network. Developed a marketing and sales plan for the U.S. and international markets. Directed the marketing and sales activities needed to close the sale of a wireless point-of-sale network used in all Marks and Spencer's department stores in the United Kingdom, resulting in revenues of $6.75M. Developed sales collateral material and applications notes.

2/89 to 10/90

FERRANTI DATACOM, INC., Sunnyvale, CA - Director, Marketing & Sales - Directed the worldwide marketing and sales activities of a line of Broadband RF Cable Modems, a RF Distribution System, a Microsoft Windows based Network Management System and a new generation of Direct Sequence Spread Spectrum (DSSS) Wireless Modems. Negotiated the contract that resulted in the sale of RF Modems to the U.S. Air Force Logistics Command, which increased the booking rate from $700k/YR. to $2.8M/YR., a 400 % increase. Sales were either direct or through manufacturer representatives, distribution, VAR and system integrator channels. Sold, designed and installed a broadband network used in a progressive slot machine network linking slot machines in five casinos. Ferranti shut down the division in 1990.

4/87 to 2/89

Independent Consultant - Consulted to various companies that developed products used in the local area network and wide area network applications market. Activities included developing market and sales strategies, developing strategic alliances and working with CEOs and their staffs developing strategic and annual business plans.

Assisted the sales department with their recruiting new sales personnel.

2/84 to 4/87

GE CALMA COMPANY, Milpitas, CA - Corporate Platform Manager - Managed the Apollo platform systems marketing activities, directed the hardware, system software and diagnostic engineering department responsible for evaluation, integration and release of Apollo workstations into Calma's product offerings.

Managed all Ethernet and token ring product lines offered for the Apollo product line including interface cards, local and remote bridges and gateways. Interfaced with Finance, Applications Software Marketing, Sales, etc. to answer all RFIs and RFQs requiring Apollo-based hardware/software to determine cost of goods sold and recommended pricing. Participated in OEM contract negotiations. GE sold off the product lines and shut down Calma in 1987.

1/81 to 2/84

RICOH CORPORATION, San Jose, CA - Product line Manager - Strategic Planning Division - Evaluated market trends in the computer related facsimile markets. Developed product line business plans. Coordinated the efforts of the various contributing departments to ensure their input resulted in the preparation of a concise and balanced business plan. Introduced various new products into the facsimile marketplace. Resigned from Ricoh due to job offer from GE Calma.

EDUCATION

B.S.E.E. major - Syracuse University, Utica College Campus

PUBLICATIONS Researched and authored a report titled - Electronic Transformers and Inductors: Opportunities in Magnetics 1993-1998 Analysis, published by World Information Technologies, Inc. Researched, authored and published a report titled - A Financial Analysis of Group 3 Facsimile Transceivers.

MEMBERSHIPS Member of the National Association of Broadcasters Member of the Society of Motion Picture and Television Engineers Wireless Communications Alliance

Kit Sakamoto Vice President, Sales HIGHLIGHTS OF QUALIFICATION • Over 25 years of technical sales and marketing experience. The last 12 years have been in sales and marketing management, developing tactical/strategic sales and marketing plans, and managing teams for world wide sales channels.

• The last 4 years have been in the Digital Video Networking marketplace.

• Developed sales channels for the Americas and Pacific Rim marketplace.

EMPLOYMENT HISTORY 4/98 to Present Broadband Networks Corporation – V. P. Sales - BBNC is a worldwide provider of video networking products for the Broadcast, Distance Learning and Telemedicine market. Have developed the sales strategy of selling the recently acquired assets of NUKO, and the strategic strategy for the future generation systems. Staffing and budget requirements are based upon future outside investments.

9/97 to 3/98

InnovaCom Inc. - Director, Worldwide Sales - InnovaCom Inc. was developing MPEG chip technology and build systems for the video networking, distance learning, telemedicine, video server and DVD market.

Developed tactical and strategic sales/marketing strategy for worldwide sales of soon to be delivered videonetworking systems. These products were very late and were 7-9 months away from possible completion when I left InnovaCom.

4/96 to 9/97

NUKO Information Systems - Associate VP of OEM Sales - NUKO sold video-networking products for major worldwide corporations. My responsibility was to develop major worldwide OEM partners for NUKO. One major partner was buying a major portion of the NUKO inventory and offered to fund NUKO $12 million to grow the partnership, and guarantee delivery, but NUKO declined and was running out of funds when I departed.

3/94 to 4/96

FutureTel, Inc. - Channel Sales Manager - FutureTel manufactured MPEG compression systems for the digital video marketplace. I developed a sales channel for the networking market in North America and Asia. My sales team sold the largest implementation of MPEG technology for networking at the time. The sales channels that we

developed for the networking product were the largest integrators and OEMs for FutureTel. 3/87 to 3/94

LS 2, Inc. - Director of Business Development - LS 2 was a software developer that successfully completed and distributed “very friendly” network interfaces for enterprise databases. I recruited an 8-person software development and support team. I also recruited and trained a 2 man sales and marketing team. This ten-person team provided all the development, marketing/sales, and support for all the designs, GUIs, programs and network interfaces to manage multiple databases and workstations over LAN and WAN systems. LS 2 provided advocacyselling support for major VARs and Systems Integrators in North America and Asia. I had P & L responsibility and grew the networking business from $ 0 to over $ 20 million before the total operation was moved to Japan.

8/85 to 2/87

Lisp Machines Inc. (LMI) - Western Sales Manager - Increased revenue 300%, and managed the LMI District Sales/Service office in a complete turn around. My team sold expert systems to FORTUNE 100 corporations in the western states. My district generated 150% of revenue goals, and I became the top sales manager in the company, but LMI filed for bankruptcy.

1/84 to 6/85

Synapse Computer Corporation - District Sales Manager- My District sold the first systems for Synapse in the Western States. These were $ 1M fault tolerant mainframes for networking and intra-network communication. In competition with IBM and Tandem, we sold large networking systems to Fortune 100 and major VARs and Integrators. We achieved 150% of revenue goals in the West before Synapse filed for bankruptcy.

7/80 to 1/84

Data General Corporation (DGC) - OEM Sales Manager - Closed the first Fortune 500 accounts in San Francisco. Increased sales 300% over prior salesmen by selling to telephone companies and communication resellers. My systems integrators provided total support for complex communication networks. Attained the 100% Club in the last 2 of my 3 years, and was the top salesman (of 5) in Northern California.

1976 to 7/80

Northern Telecom (Sycor) – Salesman - We sold very large communication networks that communicated with major networks and host mainframes. Attained the 100% Club in the last 2 of my 3 years, and was top salesman (of 4) in Northern California.

1971 to 1976

Burroughs Corporation - Account Manager - I was a programmer for my first 2 years. Began selling micro-

based applications to small businesses, and then sold mainframes to the Fortune 1000 in Northern California.

Attained the 100% Club in 3 of my 4 selling years.

EDUCATION:

BS Business - San Jose State University, 1971

Jeffrey O. Kraft Vice President, Operations Summary of Qualifications: Results oriented sales and marketing executive with a business, technical and manufacturing background. Extensive experience in new product development and market introduction of new products and product enhancements. Demonstrated successful entry into new and profitable markets. Effective writing, training and presentation skills. Aggressive sales professional who achieves results through being a team player. Consistently met or exceeded forecasts. Extensive Channel and OEM account experience. Helped to develop and launch an Internet based business. More than 20 years management experience in diverse and complex organizations.

Professional Experience: 1/98 to 1/99 Artificial, Inc. - Marco Island, FL - President 6/97 to 12/99 J-Soft, - Scotts Valley, CA - Manufacturers Representative 1/90 to 6/97 DiagSoft, Inc. - Scotts Valley, CA (Sykes Enterprises, Inc.) - Vice President, Channel Markets Group 1/95 to 6/96 MAST, Inc., Kehei, Hawaii - (subsidiary of DiagSoft, Inc.) – President 4/86 to 1/90 DSC Communications, Inc. San Jose, CA - Materials Manager, Local Area Network Division.

Professional Highlights: • Instrumental in selling into key markets.

• Achieved significant sales of new revolutionary products.

• Created product marketing and product introduction plans for Retail, Government, Corporate Third Party Service Providers and Educational markets.

• Managed distinctly different departments simultaneously.

• President of scientific software applications subsidiary, which received Readers Choice award for its product.

• Established large network of OEM accounts.

• Planned, coordinated and managed successful trade-show presentations including COMDEX. • Created marketing literature including Data Sheets, Brochures, and Press Releases.

• Created new product specifications, which directed the design, development of new software solutions.

• Significantly cost reduced product packaging while improving the structural life of the product.

• • • •

Instrumental in successful product introductions.

Created a “Family Look” package design, which is unique and inspirational.

Extensive knowledge of ISO and TQM philosophy and practices.

Key executive responsible for the growth and expansion of a major software publisher.

Education:

AS Management, San Jose City College, San Jose CA

Personal:

Military; US Army 1968 to 1970, Honorable Discharge, Viet Nam Veteran.

13.2 Reference Material: The following reference material was used to define market size, growth and segments in Section: •Solomon Smith Barney •Multimedia Telecommunications Association 13.2.1 Solomon Smith Barney Market Research information To quote Solomon Smith Barney in their Technology Quarterly of April 1999 section on Telecommunications Equipment and Data Networking: ‘Infinite Demand For Bandwidth ‘We believe that the demand for bandwidth is a key driver of future telecommunications spending. With equipment spending forecasted to grow from $333 billion in 1998 to $500 billion in 2001, investing in the telecommunications equipment and datacom group is a key way to play in this phenomenon.

‘We believe that the demand for bandwidth is incredibly price- and availability-elastic. In other words, end users constantly find new ways to consume any additional capacity they get. This seemingly insatiable desire for network capacity has led to a problem referred to in the industry as fiber exhaust.

‘Three Drivers of Demand ‘An increase in competition among worldwide carriers is critical to our overall investment thesis. This increase creates an environment where demand for equipment rises. Specifically, we see three drivers of this increased demand: 1. Incumbent carriers increasing the efficiency and cost-effectiveness of their existing networks. RBOCs are finding themselves competing against the “leaner and meaner” competitive local exchange carriers.

2. New services being offered by the carriers in an effort to break into the market. Increased competition should lower unit prices, leading to significant increases in network usage. Users have shown that demand for communications equipment is extremely elastic.

3. New carriers such as MCI WorldCom, Qwest and Williams Cos. have been building new networks to compete with the longhaul carriers such as AT&T.

‘With Internet traffic doubling every 100 days, the demand for faster interconnections and IP services continues to grow. Much of the Internet traffic still flows over existing telephone lines. This creates a problem, since the network was engineered on the assumption that the average residential call would last about three to five minutes. By contrast, the average online user can tie up a line for hours.

This increased consumption of network resources has forced the telephone companies to increase spending and expansion plans. We believe that this will continue to be a significant driver of future telecom spending.

‘Data Networking: Three Principal Areas of Growth ‘When looking at data networking, there are three principal areas of growth: 1. Enterprise. In 1999, the estimated growth rate for the enterprise sub-sector is 20%, with the most growth driven by faster microprocessors and the need for increased bandwidth availability.

2. Client Access. In 1999, the estimated growth rate for this sub-sector is 10%-15%, with this growth driven largely by nextgeneration modems and telecommuters.

3. Network Service Providers. In 1999, the estimated growth rate for this sub-sector is 30%-35%. Growth will be driven primarily by increased worldwide carrier competition and their related need to upgrade infrastructure; the migration of voice transfer from voice to data networks; and the Internet.

‘Convergence ‘A convergence is taking place within the telecom market. The traditional barriers between the core competencies are breaking down.

As the three telecom markets – voice, data and wireless – converge, companies will be forced to offer products that span the spectrum of telecommunications services. What we are witnessing is a marriage of voice, video and data traffic.

‘The communications industry is segmented into three distinct industries characterized by different technologies and rates of growth.

They are as follows: 1. Wireline telephony 2. Wireless telephony 3. Data communications and the Internet ‘There are approximately 790 million fixed telephone lines, 200 wireless subscribers and 30 million Internet hosts.

1. Telephone line growth has averaged 6% per year over the past several years.

2. Wireless subscriber growth averaged 53% from 1992 to 1997.

3. Growth of Internet host averaged 89% during the years 1992 to 1997.

‘In many parts of the world, wireless has become the dominate medium of telecommunications. The trend in the United States has been the migration of circuit switching to packet switching, in other words, moving voice data onto data networks (i.e., the Internet).

We could see a potential explosion in Internet phone calls over the next few years. In the end, the various transport mediums, wireless, data, and traditional voice networks will merge into a ubiquitous form.

‘This convergent trend is the driving force behind the merger & acquisition activity in the telecom space. We expect this trend to continue. We expect to see more “data players” merge with the traditional “voice players.” In selecting stocks, we look for companies that display “convergent” characters.

13.2.2 Multimedia Telecommunications Association As published by the MMTA, a subsidiary of the Telecommunications Association, in their report titled - 1998 Multimedia Telecommunications Market Review and Forecast, the following market growth projections by market segment were identified: 1997 Growth The market grew by than 11 percent in 1997, generating revenues of $406.7 billion. Spending on telecom equipment grew 13 percent to $106.4 billion, while services, accounting for about 75 percent of the 1997 revenue total, posted an 11 percent increase to $300.3 billion. The fastest growing equipment categories in 1997 were in emerging technology (up 60 percent over 1996), computer telephone integration (CTI) hardware and software (up 49 percent), wireless handsets (up 37 percent) and GroupWare (up 30 percent), although nearly all categories posted healthy increases.

As published in the 1998 Multimedia Telecommunications Market Review and Forecast, spending on fiber optic equipment reached $9 billion in 1997, a 19 percent increase over 1996. The report predicts that spending on fiber equipment will reach $11.7 billion by 2001.

The growth in the fiber market can be attributed to carriers increasing their fiber deployment in order to meet growing bandwidth demand. Additionally, the emergence of multimedia applications such as videoconferencing and prospects for interactive television and video-on-demand are among the developments requiring fiber for increased bandwidth.

Market Outlook The Market Review and Forecast highlights the following outlook for the fiber market: • 1997, for the first time, fiber installation by cable system operators (CATV) exceeded that of the regional Bell operating companies (RBOCs). Fiber installation by CATV was up 13.5 percent and is expected to continue to grow at healthy rates through 2000.

• Interexchange carriers (IXCs) continue to step up their fiber base in anticipation of future demand. Fiber spending by IXCs in 1997 was up 65.6 percent; • For RBOCs, fiber installation rates are expected to increase into the new century, primarily driven by the demand for fiber-inthe-local loop capability. RBOCs are projected to install 2.7 million miles of fiber by 2001; and • Growth in the fiber market occurred even though there was no significant increase in new facilities-based competition.

Spending on collaborative technologies totaled $5.6 billion in 1996, an increase of nearly 30 percent over 1995 and more than double 1993’s total of $2.3 billion. Collaborative technologies help users save on travel time and costs while increasing productivity by making it easier for people to work together. In the case of videoconferencing, the acceptance of standards and the introduction of new products, particularly desktop applications propelled the market. As videoconferencing migrates to the desktop and as prices continue to decline, usage will expand. The anticipated introduction of the MMX technology by Intel will quadruple the capacity to handle audio- and videoconferences, thereby improving the quality of transmission. The MMX chip will thus make videoconferencing technology more useful to upper-end users and should stimulate usage. Video conferencing includes Telemedicine and Distance Learning.

• Videoconferencing - The use of Internet hypertext and e-mail provide less expensive, and increasingly more viable, alternatives to conferencing. On the other hand, the need for give and take and the ability to read body language and voice nuances make videoconferencing a unique solution if the price is right.

• Telemedicine - As the costs of health care continue to be driven down, the need to consult specialists at medical centers by family practitioners and remote clinics will increase. Also, the military is now using lower performance video to allow consulting physicians and surgeons in the U.S. to consult in diagnostics and surgery theaters in countries where the U.S. military is providing support such as Bosnia. The military is currently planning to upgrade to MPEG-2 video for all telemedicine applications worldwide.

• Distance Learning - The use of the Internet and private networks will allow students in remote classrooms, distant cities and in remote parts of the world the ability to attend classes at secondary schools, colleges and universities. This application is also ideal for both industry and the military to provide training on demand to all employees and service personnel worldwide.

As prices come down and as quality improves, this solution will be viable to more and more companies. Spending on videoconferencing equipment is expected to increase to $12 billion in 2000, up from $3.7 billion in 1996 Projections The U.S. telecommunications industry is projected to increase more than $200 billion by the year 2001. Equipment spending increases were most dramatic for emerging technology (ATM, Frame Relay, ISDN) equipment, CTI hardware and software, wireless handsets and videoconferencing. Spending on data communications and Internetworking equipment will continue to grow nearly 15% over the 1997-2001 period.

Market Segments • LAN/WAN Internetworking Technologies: The development of computer networks was one of the major changes in the workplace following the entrance of the personal computer. LAN interconnection and access to the Internet is now nearly universal in the business marketplace. The focus now is on providing high-speed transmission for high volumes of data.

ATM, Frame Relay, T1/T3, fiber optics, ISDN, SMDS, and Ethernet, Fast Ethernet, xDSL and fast modems are among the equipment and technologies enhancing the needs of LAN users. The Internet has been a principal driver of growth as companies build private networks to give workers easy and speedy access to the Internet. The requirement to have streaming video, training videos, meeting and other multimedia sources sent to the desktop is getting greater. One solution being championed is ATM to the desktop. The main reasoning behind proponents of ATM to the desktop vs. gigabit Ethernet is ATM provides quality of service (QoS) where gigabit Ethernet does not. •

ISDN: The ISDN market in particular was boosted by use of the Internet. Bandwidth requirements of the Internet created a demand for ISDN. ISDN is also used by telecommuters to communicate with the office LAN, as well as for slow scan videoconferencing and as a backup for Frame Relay services or private-line failures. Increased availability of ISDN has also been a factor in the resurgence. Spending on ISDN more than doubled in each of the last three years, and totaled $850 million in 1996. The need for bandwidth will not decline in the coming years, while improvements in interoperability should make ISDN an easier solution to implement. On the other hand, fast modems and xDSL will probably siphon off ISDN traffic due to the higher costs associated with ISDN vs. xDSL. The 56.6 kbps modem introduced by U.S. Robotics can transmit at speeds comparable to ISDN or T1 while using existing wiring technology and requiring no rewiring. Standards for 56.6 kbps modems have been released, however while ISDN was the technology of choice in 1997, the aggressive deployment of xDSL has

started erode the projected growth of ISDN due to higher data rates and prices less that one third of ISDN pricing. Spending on ISDN was expected to rise to $3.2 billion by 2000, but the outcome is still open. It should be noted that ISDN is not a viable solution for full motion broadcast quality video transmission.

•

Emerging Technologies: The rapidly growing demand for emerging services − asynchronous transfer mode (ATM), frame relay, and switched multi-megabit data service (SMDS) − propelled spending by nearly 60 percent for these services, and by nearly 30 percent for equipment. Frame relay, a technology that can accommodate large bursts of data, is the most widely used data network service as an alternative after leased lines. Its simplicity and cost advantages with respect to other alternatives have accounted for its rapid growth. ATM, once considered a competitor to frame relay, is now viewed as a complementary technology for high-speed transmissions and has benefited from the increase in the use of frame relay. The backbone of the Internet is an ATM network. ATM networks are still the preferred networks for full motion MPEG-2 video distribution.

The fiber optic equipment market has also expanded rapidly in recent years. Spending was fueled by the demand for increased capacity, particularly for video transmissions. Because of the labor-intensive nature of fiber deployment, companies wanted to limit future redeployment by installing fiber to account for future demand. The fiber optic market is affected by countervailing forces. On the one hand, the demand for broadband video services is growing. On the other hand, advances in video compression technologies make hybrid fiber/copper solutions viable. Solutions such as xDSL may also substitute for fiber.

On balance, spending on fiber optic equipment should continue to expand, albeit at slower rates.

Increasing penetration of ATM, Frame Relay and xDSL is generating growth in service revenues as the installed base expands.

Spending on these emerging services will continue to grow rapidly, with the total more than tripling from $2.5 billion in 1996 to $9.1 billion in 2000. Equipment spending will rise to an estimated $15.7 billion from $9.5 billion in 1996. It should be noted, that recently there has been an acceleration in the installation of xDSL services by RBOCs and ISPs in an effort to capture their share of customers in anticipation of the move to broadcast television services to the home and office.

•

Internetworking Equipment: Fast Ethernet, virtual LANs, improvements in modems, routers, and the overall expansion in the use of LANs have boosted spending on Internetworking equipment. Spending on Internetworking equipment totaled $31.4 billion in 1996, an increase of 16.4 percent. Double-digit annual increases are expected over the remainder of the decade with the total rising to $56.4 billion by 2000.