CABLETRON SYSTEMS INC - 10-K Annual Report

Back to GetFilings.com

Letter to Our Shareholders:

While this past fiscal year has been disappointing for
Cabletron--especially in comparison to the sustained growth from previous
years--we are confident that recent changes will put the company back on track
heading into the next century. Sales, ending on February 28, 1998, were $1.38
billion, a decrease of two percent over sales of fiscal year 1997 of $1.41
billion. Net loss for fiscal year 1998 was $127.1 million or 80 cents per share
compared to net income of $222.1 million or $1.43 per share for fiscal year
1997. Setting aside the special charge associated with the acquisition of
Digital Equipment Corporation's Network Products Group and the company's
strategic realignment plan, Cabletron had net income of $130.0 million or 82
cents per share.

As you know, my good friend and Cabletron co-founder, Bob Levine, relinquished
the responsibilities of President and Chief Executive Officer in September 1997.
In his place stepped Don Reed, a former senior officer of NYNEX, who spearheaded
a revitalized business strategy for Cabletron. Mr. Reed was instrumental in
formulating the plan that will enable the company to achieve several short- and
long-term business goals. After discussing the implementation of the plan, we
agreed in March that I would assume the day-to-day management role while Mr.
Reed would exercise oversight of the plan from his board seat and as a
consultant to Cabletron. I'm pleased to say the plan set in motion by Mr. Reed
is already showing positive results.

For instance, our acquisition of Digital Equipment Corporation's Network
Products Group answers not only our near-term desire to increase Cabletron's
international and channel presence, but also significantly expands the company's
strength in the enterprise and service provider/telecommunication markets. On
the technology front, our acquisition of YAGO Systems fills an important niche
in Cabletron's product line, positioning us as a major player in the quickly
emerging switch router market.

With these new opportunities, as well as growing partnerships and ongoing
relationships with market leaders such as Nortel, MCI, GTE, Lucent Technologies,
Microsoft and others, Cabletron is able to offer customers intelligent,
scalable, flexible solutions to meet all of their voice, video and data
communications needs. We call it Smart Networking--an intelligent approach to
help customers squeeze the most out of their existing information system and lay
the foundation for a more powerful, more productive network in the future.

Cabletron is indeed turning the corner. It's an exciting time to be part of a
company and an industry that is helping to shape the way the world works and
interacts. With renewed dedication to our shareholders and customers, and a
commitment to carrying forward with these positive changes, Cabletron's success
is assured. We hope you share in our excitement as Cabletron prepares to regain
its market leadership.

Sincerely,

/s/ Craig R. Benson
- -------------------
Craig R. Benson
Chairman, President, Chief Executive Officer and Treasurer

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 1998

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from . . . . to . . . .
Commission File Number 1-10228

CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 04-2797263
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) identification no.)

35 Industrial Way, Rochester, New Hampshire 03867
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (603) 332-9400

Securities registered pursuant to Section 12(b)of the Act:

Title of each class: Common Stock, Name of each exchange on which registered:
$0.01 par value New York Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO

As of May 11, 1998, 164,414,776 shares of the Registrant's common stock were
outstanding. The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of May 11, 1998 was approximately $2.1
billion.

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (229.405) is not contained herein and will not be contained,
to the best of the registrant's knowledge, in definitive proxy for information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

Part III Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 1998 Annual Meeting of Stockholders.

TABLE OF CONTENTS

PART I

Item
Page

1. Business 3
2. Properties 7-8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
4a. Executive Officers of the Registrant 9

PART II

5. Market for the Registrant's Common Equity and
Related Stockholder Matters 10
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
7a. Quantitative and Qualitative Disclosures about Market Risk 19-20
8. Consolidated Financial Statements and Supplementary Data 21-37
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39

PART III

10. Directors and Executive Officers of the Registrant 39
11. Executive Compensation 39
12. Security Ownership of Certain Beneficial Owners
and Management 39
13. Certain Relationships and Related Transactions 39

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 10-K 40

PART I

1. ITEM 1. Business

General

Cabletron develops, manufactures, markets, installs and supports a wide range of
standards-based local area network ("LAN") and wide area network ("WAN")
connectivity hardware and software products including intelligent switches and
hubs, remote access devices, and sophisticated management software. Cabletron
delivers products to address the full range of networking technologies,
including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, fiber
distributed data interface ("FDDI"), asynchronous transfer mode ("ATM"),
integrated services digital network ("ISDN") and frame relay. Cabletron's core
products include the SmartSwitch hardware product family and Spectrum network
management software. The SmartSwitch product family includes the SmartSwitch
9000 product line, Cabletron's enterprise-level backbone switching chassis and
modules, the SmartSwitch 6000 product line, Cabletron's wiring closet-level
solution, the SmartSwitch 2000 product line, Cabletron's standalone,
workgroup-level switches, the SmartSTACK, a desktop Ethernet switch and the
SmartSwitch Router, a switch router obtained in Cabletron's acquisition of Yago
Systems, Inc. Cabletron's hardware products also include the MMAC, a wiring
closet smart hub, and other Ethernet, ISDN, and frame relay products. All of
Cabletron's intelligent networking products are managed by SPECTRUM(R),
Cabletron's sophisticated enterprise-wide network management system. Cabletron
also produces and supports other network products, such as adapter cards, other
interconnection equipment, wiring cables, and file server products, and provides
a wide range of networking services. Cabletron believes that its broad product
line and its ability to provide full service capabilities enable it to offer its
customers "The Complete Networking Solution."

Cabletron is a Delaware corporation organized in 1988. The executive offices of
Cabletron are located at 35 Industrial Way, Rochester, New Hampshire 03867 and
its telephone number is (603) 332-9400.

Recent Acquisitions

On March 17, 1998 Cabletron acquired Yago Systems, Inc. ("Yago"), a
privately held manufacturer of wire speed routing and layer-4 switching products
and solutions. Under the terms of the merger agreement, Cabletron issued 6.1
million shares of Cabletron common stock to the shareholders of Yago in exchange
for all of the outstanding shares of stock of Yago not then owned by Cabletron.
In addition, Cabletron assumed Yago stock options for approximately 2.1 million
shares of Cabletron common stock. Prior to the closing of the acquisition,
Cabletron held approximately twenty-five percent of Yago's capital stock,
calculated on a fully-diluted basis. Cabletron also agreed, pursuant to the
terms of the merger agreement, to issue up to 5.5 million shares of Cabletron
common stock to the former shareholders of Yago in the event the shares
originally issued in the transaction do not attain a market value of $35 per
share eighteen months after the closing of the transaction.

Fiscal 1998 Acquisitions

Effective February 7, 1998, Cabletron consummated the acquisition of certain
assets of the Network Products Group ("NPB") of Digital Equipment Corporation
("Digital") pursuant to an asset purchase agreement (the "Asset Purchase
Agreement") dated November 24, 1997, as amended, by and among Cabletron, Ctron
Acquisition Co., Inc., a wholly owned subsidiary of Cabletron ("Ctron"), and
Digital. The NPB, now known as the "DIGITAL Network Products Group, a Cabletron
Systems, Inc. Company" ("DNPG"), develops and supplies a wide range of data
networking hardware and software, including LAN and WAN products. The NPB's
products span a wide range of networking technologies, including Ethernet, Fast
Ethernet, FDDI and ATM switching technologies. The purchase price for the
acquisition was approximately $439.5 million, before closing adjustments,
consisting of cash, product credits and assumed liabilities as a result of the
acquisition. The acquisition was accounted for by Cabletron under the purchase
method of accounting. The closing on February 7, 1998 extended to the assets and
personnel located in the United States and the inventory worldwide. The
remaining international assets and personnel are expected to be transferred as
issues in individual countries are resolved.

Cabletron and Digital have also entered into the Reseller Agreement dated as of
November 24, 1997 (the "Reseller Agreement") pursuant to which Digital
designated Cabletron as its Strategic Network Products Partner and was appointed
by Cabletron as a reseller of certain Cabletron products (including the products
previously sold by the NPB), Cabletron designated Digital as its Strategic
Network Services Partner, and Cabletron agreed to sell and Digital agreed to
purchase, for internal use and resale, certain minimum volumes of products
during the term of the Reseller Agreement, which extends through June 30, 2001.
The minimum volumes are subject to downward or upward adjustment in certain
instances.

Fiscal 1997 Acquisitions

In July 1996, Cabletron acquired ZeitNet Inc. ("ZeitNet"), a privately held
manufacturer and a leader in providing high-quality, low-cost solutions for
connecting applications, servers and workgroups to high-performance ATM
networks. Under the terms of the agreement, Cabletron issued approximately 3.3
million shares of common stock for all of the outstanding shares of ZeitNet (as
well as all shares to be issued pursuant to ZeitNet options assumed by
Cabletron) in a transaction accounted for as a pooling of interests.

In August 1996, Cabletron acquired Network Express, Inc. ("Network Express"), a
publicly held manufacturer and a provider of ISDN high-speed LAN switched access
solutions. Under the terms of the agreement, Cabletron issued approximately 2.9
million shares of common stock for all of the outstanding shares of Network
Express (as well as all shares to be issued pursuant to Network Express options
assumed by Cabletron) in a transaction accounted for as a pooling of interests.

In December 1996, Cabletron acquired Netlink, Inc. ("Netlink"), a privately held
manufacturer and supplier of frame relay access solutions for multi-protocol,
mission-critical networks. Under the terms of the agreement, Cabletron issued
approximately 3.8 million shares of common stock for all of the outstanding
shares of Netlink (as well as all shares to be issued pursuant to Netlink
options assumed by Cabletron) in a transaction accounted for as a pooling of
interests.

In February 1997, Cabletron acquired The OASys Group, Inc. ("OASys"), a
privately-held developer of software used to manage telecommunications devices
and connections in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
of OASys (as well as all shares to be issued pursuant to OASys options assumed
by Cabletron) in a transaction accounted for as a purchase.

Fiscal 1996 Acquisitions

In order to broaden the range of switching products offered by the Company, in
January 1996 Cabletron acquired the Enterprise Networks Business Unit ("ENBU")
of Standard Microsystems Corporation for $85.7 million. The products acquired
from the ENBU include standalone Fast Ethernet switches, as well as a modular
chassis offering several networking technologies. The transaction was accounted
for as a purchase.

Products and Services

Cabletron's products and services are grouped into the areas discussed below.

SmartSwitches and Hubs, and Related Products

SmartSwitch 9000 (formerly known as the MMAC Plus). The SmartSwitch 9000 is an
enterprise-level backbone switching chassis. The SmartSwitch 9000, with its high
bandwidth (aggregate bandwidth 60 Gbps), switching rate (aggregate switching
rate of 10 million packets/cells per second) and modularity (up to 14 interface
modules), is designed to operate as the central switching hub for networks
containing large numbers of nodes and multiple disparate networking
technologies. Each SmartSwitch 9000 module supports one or more of the following
technologies: ATM Cell Switching, SecureFast Packet Switching (Cabletron's own
standards-based switching technology), SecureFast Virtual Networking and network
layer routing or standard MAC layer bridging. In addition to accommodating the
latest networking technologies, the SmartSwitch 9000 is designed to integrate
customers' legacy systems. The SmartSwitch 9000, like all members of the
SmartSwitch family, is designed to be highly fault tolerant.

SmartSwitch 6000. The SmartSwitch 6000, based upon Cabletron's SmartSwitch
architecture, is a switch intended primarily for the wiring closet environment.
The SmartSwitch 6000, which principally provides interconnectivity between Fast
Ethernet, ATM or FDDI backbone connections and local Ethernet connections,
accepts up to five SmartSwitch modules, including a thirteen port 10 Mbps
Ethernet module, a two port 100 Mbps Fast Ethernet module, a single port FDDI
module and an ATM module. By allowing virtually any combination of these
modules, the SmartSwitch 6000 provides customers with substantial flexibility.

SmartSwitch 2200. The SmartSwitch 2200 is a standalone switch that provides
twenty-four 10 Mbps switch ports and two 100 Mbps switch ports and has been
designed specifically for use at the workgroup or desktop level of the
enterprise. The SmartSwitch 2200 offers both high-performance Ethernet switching
and also high-speed backbone connections through either Fast Ethernet, FDDI, or
ATM.

SmartSTACK. The SmartSTACK Ethernet switch is a standalone desktop switch that
provides twenty-five ports of 10Base-T Ethernet connectivity with a fixed
100Base-TX and a modular 100Base-X uplink capacity. The SmartSTACK Fast Ethernet
switch provides sixteen ports of 10/100 Mbps Fast Ethernet switching with two
uplink ports for 100Base-X connections.

Smart Switch Router. Cabletron recently began shipping in volume the eight port
SmartSwitch Router (SSR-8), the first product being shipped that Yago developed.
The SSR-8 is a switching router that was designed as a high-capacity, Layer-2,
Layer-3 and Layer-4 switching device that provides multi-layer switching on
10/100 megabits per second Ethernet in a compact, redundant 8-slot chassis. The
SSR-8's sixteen gigabits per second of total backplane capacity permits network
managers to deliver up to fifteen million packets per second of switched
throughput in a Gigabit Ethernet configuration using all available ports. The
SmartSwitch Router family of switching routers was built for the enterprise and
ISP backbones. The SmartSwitch Router products are intended to offer large table
capacity, a multi-gigabit non-blocking backplane, low latency and seamless
scaling. Cabletron believes that the SmartSwitch Router products will be
interoperable with other standard-based routers and switches. Finally, the
SmartSwitch Router products are designed to provide strong network management
capabilities and to support application-level control intended to facilitate
capacity planning and service-level requirements.

MMAC. First introduced in 1988, the Multi Media Access Center ("MMAC") provides
centralized management and connectivity for any standard LAN or WAN through a
variety of networking technologies. The MMAC supports both previously existing
networking technologies such as Ethernet, Token Ring, FDDI and Systems Network
Architecture ("SNA") as well as emerging advancements including ATM and
Cabletron's own SecureFast Switching. With more than one hundred MMAC interface
modules available, customers can custom configure a network according to their
particular needs. As requirements change, the MMAC can be reconfigured to
provide a smooth migration to higher bandwidth technologies.

ATX. Cabletron's ATX provides high-performance, multiprotocol LAN solutions for
high-capacity backbone or departmental networks. The ATX permits high-bandwidth
switching between Ethernet, Fast Ethernet, Token Ring and FDDI, with full
connectivity to ATM.

Wide Area Networking Products

Cabletron's CyberSWITCH family of products include small office/home office
connectivity, remote solutions, high-density central site platforms and frame
relay solutions. These products have been developed both internally and through
the acquisitions of Network Express and Netlink.

Network Management Software

As enterprise networks grow in number, become more diverse and complex and
incorporate increasing bandwidth capacity, organizations require more
sophisticated network management systems. SPECTRUM, Cabletron's enterprise-wide
network management software, allows network administrators to monitor and
control all of the physical layer components making up a worldwide network.
SPECTRUM, which integrates a graphical user interface and a UNIX-based
client/server architecture, provides powerful network management tools in an
easy-to-use, scaleable and distributed environment. SPECTRUM incorporates
Induction Modeling Technology ("IMT"), a form of artificial intelligence that
provides SPECTRUM with the ability to model every element of the network,
including physical cables, network devices, and applications. SPECTRUM is
designed to enable network administrators to view worldwide enterprise networks
and diagnose, actively anticipate and correct problems at many levels, including
the individual node level. Cabletron has developed SPECTRUM modules for a wide
range of network products, including over 110 applications for third-party
products. Cabletron plans to continue to develop SPECTRUM system enhancements
and modules to increase the number of third-party network products for which
SPECTRUM is applicable.

Cabletron believes that SPECTRUM has helped to establish Cabletron as a leader
in the field of network management software and contributes to the market
acceptance of its interconnectivity hardware. SPECTRUM is sold both to
purchasers of Cabletron's LAN and WAN products and on a stand-alone basis as a
network management platform.

Network Interconnection Equipment

Cabletron manufactures a line of a dual-port and multiport stand-alone
repeaters, which are designed to connect up to eight Ethernet/IEEE 802.3
segments together or to an Ethernet backbone. Cabletron also produces Desktop
Network Interface ("DNI") cards, which enable the user to connect directly to
10BASE-T unshielded twisted pair, fiber optic or coaxial cabling via a built-in
transceiver on the card, and provide high-speed Ethernet and Token Ring data
connections for various personal computer platforms.

Service and Support

In addition to manufacturing a broad line of network equipment, Cabletron also
offers a wide range of services for networks, including service maintenance;
consulting, design and configuration; product planning; project management;
training; testing, certification and documentation; and performance analysis.
Cabletron offers comprehensive training programs to ensure that customers
receive the maximum benefit from their networks. Cabletron's service group forms
an integral part of Cabletron's marketing strategy, as it constitutes a key
element of the complete networking solution offered by Cabletron. Cabletron
believes that the combination of its broad line of networking products, its
emphasis on service, and its close acquaintance with customers' needs enable it
to compete effectively.

Other Products

Cabletron's other products include test equipment designed to analyze networks
and protocols and to verify proper installation and operation of the network,
cabling, transceivers, repeaters and other devices. Cabletron also sells
electronically-tested Ethernet coaxial cable, shielded twisted pair (IBM-type)
wire, unshielded twisted-pair wire and optical fiber cut to specific lengths.

Distribution and Marketing

Cabletron distributes its products through a substantial direct sales force that
is supplemented by several distributors and other resellers through the Synergy
Plus Program. Cabletron's direct sales are made by approximately 230-plus sales
representatives located in 43 countries around the world. This direct sales
force is supplemented by more than 3,000-plus employees located at Cabletron's
headquarters and regional in-house technical services and sales support staff.
With the acquisition of DNPG, Cabletron has secured a larger reseller channel
for the Company's products. Cabletron established relationships with
approximately 40 new distributors and resellers as a result of its acquisition
of the DNPG. Cabletron believes that its ratio of in-house sales, marketing and
technical services and sales support staff to field sales force is among the
highest in the industry and contributes significantly to the effectiveness of
its field sales force. Cabletron's international locations use various sales
strategies tailored to the preferred channels of distribution for each country.
Such strategies include a direct sales presence, a direct sales force working
with local distributors or a combination of the two. The Synergy Plus Program is
a blueprint for resellers that outlines the building blocks of a business
relationship with Cabletron. The blueprint sets forth the principles of the
relationship, including level of information and training, business support and
services, pricing structure, and levels of organization. Synergy Plus offers a
comprehensive, well-defined business strategy, a clear pricing policy, and
effective support in sales and marketing.

Cabletron employs several methods to market its products, including regular
participation in trade shows as both a vendor and networker, frequent
advertisement in trade journals, regular attendance by corporate officers at
press briefings and trade seminars, submission of demonstration products to
selected customers for evaluation, and direct mailings and telemarketing
efforts.

Customers

Cabletron's end-user customers include commercial, industrial and manufacturing
companies; federal, state and local government agencies; brokerage and
investment banking firms; multinational and international companies; insurance
companies and other financial institutions; universities; and leading accounting
and law firms.

In fiscal 1998, no single customer represented more than 4% of Cabletron's net
sales, and Cabletron's top ten customers represented, in the aggregate,
approximately 15% of its net sales. Net sales to the federal government
accounted for approximately 13% of Cabletron's sales during the last fiscal
year. Most of Cabletron's contracts with the federal government are on a
fixed-price basis. The books and records of Cabletron are subject to audit by
the General Services Administration, the Department of Labor and other
government agencies.

Research and Development

During fiscal years 1998, 1997 and 1996, research and development expenses were
$181.8 million, $161.7 million, and $127.3 million, respectively. Cabletron
believes that as networks grow larger and more complex, end-user's evaluation of
network technology will increasingly be based on the software component of
products, particularly in the area of network control management. As of February
28, 1998 approximately 60% of the personnel in Cabletron's research and
development department consisted of software development personnel. The
remaining personnel were involved in hardware development.

Supply of Components

Cabletron's products include certain components, including ASICs, that are
currently available from single or limited sources, some of which require long
order lead times. In addition, certain of Cabletron's products and
sub-assemblies are manufactured by single source third parties. With the
increasing technological sophistication of new products and the associated
design and manufacturing complexities, Cabletron anticipates that it may need to
rely on additional single source or limited suppliers for components or
manufacture of products and subassemblies. Any reduction in supply, interruption
or extended delay in timely supply, variances in actual needs from forecasts for
long order lead time components, or change in costs of components could affect
Cabletron's ability to deliver its products in a timely and cost-effective
manner and may adversely impact Cabletron's operating results and supplier
relationships.

Manufacturing

Since Cabletron manufactures and assembles virtually all of its current products
(excluding the DNPG products), it maintains direct control over production,
quality and product availability. By controlling its manufacturing process,
Cabletron is able to maintain a strict quality control program, respond to
changes in market demand and offer its customers modified or customized
products. To date, the DNPG products have been manufactured by Digital and a
third-party contract manufacturer. Cabletron is in the process of transitioning
the manufacturing of some DNPG products from Digital to Cabletron

Intellectual Property

Cabletron's success depends in part on its proprietary technology. Cabletron
attempts to protect its proprietary technology through patents, copyrights,
trademarks, trade secrets and license agreements. Cabletron believes, however,
that its success will depend to a greater extent upon innovation, technological
expertise and distribution strength. There can be no assurance that the steps
taken by Cabletron in this regard will be adequate to prevent misappropriation
of its technology or that Cabletron's competitors will not independently develop
technologies that are substantially equivalent or superior to Cabletron's
technology. In addition, the laws of some foreign countries do not protect
Cabletron's proprietary rights to the same extent as do the laws of the United
States. No assurance can be given that any patents issued to Cabletron will not
be challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages.

Backlog

Cabletron's backlog at February 28, 1998 was approximately $165.0 million,
compared with backlog at February 28, 1997 of approximately $125.0 million. In
general, orders included in backlog may be canceled or rescheduled by the
customer without significant penalty. Therefore, backlog as of any particular
date may not be indicative of Cabletron's actual sales for any succeeding fiscal
period.

Inventory and working capital

Cabletron's policy is to maintain a sufficient inventory of products to permit
the shipping of most customer orders that require rapid delivery within 24 to 48
hours of receipt. This delivery policy requires higher levels of inventory than
those of other companies in the networking industry.

Employees

As of February 28, 1998, the Company had 6,887 full-time employees. The
Company's employees are not represented by a union or other collective
bargaining agent and the Company considers its relations with its employees to
be good.

Domestic and Foreign Financial Information

Financial information concerning foreign and domestic operations is contained in
Note 16 of "Notes to the Consolidated Financial Statements" included at page 36
of this document.

ITEM 2. Properties

Cabletron owns and occupies a number of buildings in Rochester, New Hampshire,
including a 206,000 square-foot manufacturing facility which also accommodates a
portion of corporate engineering, buildings totaling 122,000 square-feet which
accommodate sales, marketing, administration and technical support personnel,
and a warehousing and distribution facility, totaling 221,000 square-feet.
Cabletron owns a 114,000 square-foot engineering building in Merrimack, New
Hampshire. Cabletron acquired two facilities (totaling 119,372 square-feet) in
Acton, Massachusetts in connection with its acquisition of the NPB. Cabletron
expects to move the DNPG personnel from Digital's Littleton, Massachusetts
facility to a new Andover facility during the next four to six months.

Cabletron leases one manufacturing building totaling 120,000 square feet in
Ironton, Ohio, a 120,000 square-foot manufacturing facility in Limerick,
Ireland, and a 50,000 square-foot distribution center in Shannon, Ireland, to
support its European sales activities. Cabletron also leases a 78,000
square-foot research and development facility in Durham, New Hampshire and a
48,000 square-foot engineering office in Nashua, New Hampshire. Cabletron also
occupies facilities in Newington and Nashua, New Hampshire, Andover, Littleton
and Framingham, Massachusetts, Ann Arbor, Michigan and Santa Clara, California.
Cabletron also leases sales and technical support offices that range from 1,000
to 20,000 square feet at various locations throughout the world.

Cabletron believes that its facilities are adequate to support anticipated sales
growth over the next 12 to 18 months. Such growth, however, will require
additional production employees and capital equipment. Cabletron believes that
adequate supplies of labor are available in the areas where Cabletron's
manufacturing operations are located.

Financial information regarding leases and lease commitments are contained in
Note 10 of "Notes to the Consolidated Financial Statements" included at page
31 of this document.

ITEM 3. Legal Proceedings

Since October 24, 1997, nine stockholder class action lawsuits have been filed
against Cabletron and certain officers and directors of Cabletron in the United
States District Court for the District of New Hampshire. The complaints allege
that Cabletron and several of its officers and directors disseminated materially
false and misleading information about Cabletron's operations and acted in
violation of Section 10(b) and Rule 10b-5 of the Exchange Act during the period
between March 3, 1997 and December 2, 1997. The complaints further allege that
certain officers and directors profited from the dissemination of such
misleading information by selling shares of Cabletron Common Stock during this
period. The complaints do not specify the amount of damages sought on behalf of
the class. On March 3, 1998, the United States District Court for the District
of New Hampshire granted the motion to consolidate the nine class action
complaints against Cabletron and its officers and directors into one class
action. The legal costs incurred by Cabletron in defending itself and its
officers and directors against this litigation, whether or not it prevails,
could be substantial, and in the event that the plaintiffs prevail, Cabletron
could be required to pay substantial damages. This litigation may be protracted
and may result in a diversion of management and other resources of Cabletron.
The payment of substantial legal costs or damages, or the diversion of
management and other resources, could have a material adverse effect on
Cabletron's business, financial condition or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of the Company's security holders.

ITEM 4a. Executive Officers of the Registrant

The executive officers of the Company are as follows:

Name Age Position

Craig R. Benson 43 Chairman, President, Chief Executive
Officer, Treasurer and Director

John d'Auguste 47 President of Operations

Christopher J. Oliver 37 Executive Vice President Worldwide
Engineering and Chief Technology Officer

David J. Kirkpatrick 46 Corporate Executive Vice President of
Finance and Chief Financial Officer

Allen L. Finch 37 Senior Vice President, Worldwide
Marketing and Corporate Strategy

Guilio M. Gianturco 42 President, DNPG and Channels

Linda H. Pepin 45 Senior Vice President, Human Resources

Craig R. Benson was Director of Operations of Cabletron from November 1984 until
April of 1989 and Chairman, Chief Operating Officer and Treasurer of Cabletron
from April of 1989 until September 1, 1997. On March 30, 1998 Mr. Benson became
President and Chief Executive Officer.

John d'Auguste joined Cabletron in December 1997 as the President of the
Enterprise Business Unit and on March 30, 1998 became President of Operations.
Before joining Cabletron, Mr. d'Auguste worked for Gateway 2000 as the Vice
President of Direct Sales, having previously held the position of Vice President
of Operations. Prior to Gateway 2000 he served as the Vice President of Product
Business Unit for General Railway Signal.

Christopher J. Oliver has been Executive Vice President Worldwide Engineering
and Chief Technology Officer since January 1998. He was Director of Engineering
and Manufacturing of the Company from February 1985 until January 1998.

David J. Kirkpatrick has been Corporate Executive Vice President of Finance
since March 1998. He has been Director of Finance and Chief Financial Officer of
the Company from August 1990 until March 1998. From 1986 to 1990 he was the Vice
President of Zenith Data Systems, a subsidiary of Zenith Electronics
Corporation.

Allen L. Finch has been Senior Vice President of Worldwide Marketing and
Corporate Strategy since March 1998. From June 1997 to March 1998 he was
Director, Public Relations. From 1991 to 1997 he was a strategic and
communications consultant in Washington, D.C.

Guilio M. Gianturco has been President of the Digital Network Products Group and
Channels since February 1998. Prior to joining Cabletron he worked for the last
fifteen years in various senior level positions in Digital and AT&T.

Linda H. Pepin has been Senior Vice President of Human Resources since March
1998. From 1989 to 1998 she was Director of Human Resources. Prior to joining
Cabletron she has held various positions in personnel management.

Key Personnel

On September 1, 1997, S. Robert Levine resigned as President, Chief Executive
Officer and director of Cabletron and Donald B. Reed was appointed to the
positions of President, Chief Executive Officer and director of Cabletron. On
the same date, Craig R. Benson resigned as Chief Operating Officer of Cabletron
but remained as Treasurer and the Chairman of the Board of Directors of
Cabletron. On March 30, 1998, Mr. Reed resigned as President, Chief Executive
Officer, but remains a director of Cabletron and Mr. Benson assumed the role as
President and Chief Executive Officer and continues as Treasurer and Chairman of
the Board of Directors of Cabletron. The Company's success is dependent in large
part on Mr. Benson and other key technical, sales and management personnel, the
loss of one or more of whom would adversely affect Cabletron's business.

PART II

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

STOCK PRICE HISTORY

The following table sets forth the high and low sale prices for the Company's
Common Stock as reported on the New York Stock Exchange (symbol - CS) during the
last three fiscal years. As of February 28, 1998, the Company had approximately
3,604 stockholders of record. The Company has paid no dividends on its Common
Stock and anticipates it will continue to reinvest earnings to finance future
growth.

Fiscal 1998 High Low

First quarter $46.50 $27.50
Second quarter 46.13 27.88
Third quarter 36.25 22.94
Fourth quarter $23.50 $12.63

Fiscal 1997 High Low

First quarter $43.56 $31.63
Second quarter 36.06 26.50
Third quarter 41.50 27.56
Fourth quarter $42.50 $28.00

Fiscal 1996 High Low

First quarter $27.88 $19.44
Second quarter 29.81 24.31
Third quarter 43.88 26.00
Fourth quarter $41.63 $32.94

CABLETRON SYSTEMS, INC.

Statement of Operations Data: FISCAL YEAR ENDED

-----------------------------------------------------------------------
(in thousands, except per share data)
February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------

Net sales ................................ $1,377,330 $1,406,552 $1,100,349 $833,218 $602,486
Cost of sales ............................ 645,790 575,107 340,424 448,699 246,154
Research and development ................. 181,777 161,674 127,289 89,129 61,456
Selling, general and administrative ...... 371,159 286,469 223,083 166,649 118,373
Special charges .......................... 417,685 63,024 94,343 --- ---
---------- ---------- ---------- -------- --------
Income (loss) from operations ........... (239,081) 320,278 206,935 237,016 176,503
Interest income .......................... 18,578 19,422 17,891 5,572 5,948
---------- ---------- ---------- -------- --------
Income (loss) before taxes ............... (220,503) 339,700 224,826 242,588 182,451
Income tax expense (benefit) ............. (93,441) 117,575 80,341 86,014 64,130
---------- ---------- ---------- -------- --------
Net income (loss) ($ 127,062) $ 222,125 $ 144,485 $156,574 $118,321
=========== ========== ========== ======== ========
Net income (loss) per share - basic ...... ($ 0.81) $ 1.43 $ 0.95 $ 1.08 $ 0.82
=========== ========== ========== ======== ========
Weighted average number of shares
outstanding - basic .................. 157,686 155,207 151,525 145,125 143,692
========== ========== ========== ======== ========
Net income (loss) per share - diluted .... ($ 0.81) $ 1.40 $ 0.93 $ 1.07 $ 0.81
========== ========== ========== ======== ========
Weighted average number of shares
outstanding - diluted ................. 157,686 158,933 155,171 147,017 146,567
========== ========== ========== ======= =======

Note: Included in fiscal 1998 results are special charges related to the
acquisition of Digital's Network Products Group and the implementation of a
strategic realignment plan consisting of $235.2 million and $21.5 million,
respectively (net of tax). Included in fiscal 1997 and fiscal 1996 results are
$39.2 million and $60.8 million (net of tax) of special charges items related to
all acquisitions for each fiscal year, respectively. Excluding these one-time
charges, pro forma net income and diluted net income per share are as follows:

FISCAL YEAR ENDED
-----------------------------------------

(in thousands, except per share data) February 28, February 28, February 29,
1998 1997 1996
----------- ------------ -----------

Pro forma net income ...................... $129,963 $261,325 $205,285
Pro forma diluted net income per share .... $ 0.82 $ 1.64 $ 1.35

FISCAL YEAR ENDED
---------------------------------------------------------------------

Balance Sheet Data:
(in thousands) February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------

Working capital ........................... $ 561,400 $ 675,102 $485,152 $381,758 $258,463
Total assets .............................. 1,606,327 1,306,855 996,908 702,200 502,377
Stockholders' equity ...................... 989,020 1,081,498 809,886 593,942 425,719

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

The following discussion provides an analysis of Cabletron's financial condition
and results of operations and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report on Form 10-K. The discussion below contains certain
forward-looking statements relating to, among other things, estimates of
economic and industry conditions, sales trends, expense levels and capital
expenditures. Actual results may vary from those contained in such
forward-looking statements. See "Business Environment and Risk Factors" below.

Results of Operations

This table sets forth Cabletron's net sales, cost of sales, expenses by
category, income (loss) from operations, interest income, income (loss) before
income taxes and net income (loss) expressed as percentages of net sales, for
the fiscal years ended February 28, 1998 and 1997 and February 29, 1996:

1998 1997 1996
----- ----- -----

Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales ..................... 46.9 40.9 40.8
----- ----- -----
Gross profit ...................... 53.1 59.1 59.2
Research and development .......... 13.2 11.5 11.6
Selling, general and administrative 26.9 20.4 20.3
Special charges ................... 30.3 4.5 8.6
----- ----- -----
Income (loss) from operations ..... (17.3) 22.7 18.7
Interest income ................... 1.3 1.4 1.6
----- ----- -----
Income (loss) before income taxes . (16.0) 24.1 20.3
----- ----- -----
Net income (loss) ................. (9.2%) 15.8% 13.1%
===== ===== =====

Acquisitions

During fiscal 1998 the Company acquired the Network Products Business (NPB)
from Digital Equipment Corporation in February 1998. The NPB (now known as the
DIGITAL Network Products Group, a Cabletron Systems, Inc. Company (the "DNPG"))
develops and supplies a wide range of data networking hardware and software,
including LAN and WAN products. The DNPG products span a wide range of
networking technologies, including Ethernet, Fast Ethernet, FDDI and ATM
switching technologies.

During fiscal 1997 the Company augmented its product line by acquiring: (1)
ZeitNet Inc., a manufacturer of ATM products, in July 1996; (2) Network Express,
Inc., a manufacturer of remote access equipment, in August 1996; (3) Netlink,
Inc., a manufacturer of frame relay products, in December 1996; and (4) The
OASys Group, Inc., a software developer, in February 1997.

During fiscal 1996 the Company acquired the Enterprise Networks Business Unit
(ENBU) from Standard Microsystems Corporation in January 1996. The acquisition
added a line of Fast Ethernet products, as well as switching products for token
ring, Ethernet and FDDI.

Revenues

Net sales in fiscal 1998 decreased by 2.1% to $1,377.3 million from $1,406.6
million in fiscal 1997. The slight decrease in fiscal 1998 revenue compared to
fiscal 1997 revenue was largely a result of a decrease in sales of the Company's
shared media products (comprised primarily of the MMAC). Sales of the Company's
shared media products decreased 56.6% to $317.6 million in fiscal 1998 compared
to sales of $717.8 million in fiscal 1997. The decline in revenue of shared
media products was a result of both declining unit shipments and lower prices
per product. The Company expects the decrease in sales of its shared media
products to continue in fiscal 1999 as customers continue the migration from
shared media products to switched products. The decrease in sales of shared
media products was offset somewhat by an increase in sales of the Company's
switched products (comprised primarily of the SmartSwitch 9000, 6000 and 2200
products). Sales of switched products increased 129.4% to $686.7 million in
fiscal 1998 compared to sales of $299.3 million in fiscal 1997. The increase in
revenue of switched products was a result of increasing unit sales. Prices per
product decreased slightly for switched products during fiscal 1998, but the
increase in unit shipments offset this slight price decline.

Sales of diagnostic test instruments, installation and maintenance services, and
other products were $379.1 million or 27.5% of total revenues in fiscal 1998,
compared to $389.5 million or 27.7% of total revenues in fiscal 1997 and $354.4
million or 28.4% of net sales in fiscal 1996. As part of the Company's
acquisition of the DNPG, the Company agreed to appoint Digital as the service
provider for Cabletron products in certain smaller countries. This appointment
may have the effect of limiting the growth of Cabletron's own service and
support organization.

The Company acquired the DNPG on February 7, 1998 and thus the division
contributed to the Company's fiscal 1998 revenues for less than one month. The
Company expects the DNPG to contribute materially towards revenues in fiscal
1999.

The increase in revenue in fiscal 1997 compared to fiscal 1996 was primarily the
result of increased sales of the SmartSwitch product lines. Sales of switched
products increased 566.8% to $299.3 million in fiscal 1997 compared to sales of
$44.9 million in fiscal 1996. This offset the decreased sales of shared media
products. Sales of the Company's shared media products decreased 3.4% to $717.8
million in fiscal 1997 compared to sales of $742.7 million in fiscal 1996.
Finally, increased sales of service and support products and services (as
discussed above) contributed to the increase in overall revenue from fiscal 1997
compared to fiscal 1996.

Net sales outside the United States in fiscal 1998 were $454.1 million, or 33.0%
of net sales, compared to $408.2 million or 29.0% of net sales in fiscal 1997
and $329.2 million or 29.9% of net sales in fiscal 1996. In addition to its
direct international sales force, the Company sells its products through several
international distributors. The increase in international revenue in fiscal 1998
compared to fiscal 1997 reflects the Company's focus on expansion in growth
areas, such as Latin America. This increase was offset by weaker economic
conditions in the Asia/Pacific region. The increase in international revenue in
fiscal 1997 compared to fiscal 1996 was primarily due to the expansion and
growth of the Latin American markets. The Company's international revenue is
primarily denominated in U.S. dollars. The effect of foreign exchange rate
fluctuations did not have a significant impact on the Company's operating
results in the periods presented.

Costs, Expenses and Interest Income

Cost of sales was $645.8 million or 46.9% of net sales in fiscal 1998,
compared to $575.1 million or 40.9% of net sales in fiscal 1997 and $448.7
million or 40.8% of net sales in fiscal 1996. The increase in cost of sales as a
percentage of net sales is primarily to (i) presessures on the Company's
products, especially in foreign markets which traditonally carried a higher
margin, which resulted in a lower selling price per product and (ii) effects
from inventory write-offs, which increase the cost of sales as a percentage of
net sales. The Company was able to maintain its gross margins in fiscal 199 and
1996 by introducing and selling products with improved functionality, further
developing its service maintenance program and improving purchasing and
manufacturing efficiencies.

Research and development ("R&D") expenses in fiscal 1998 increased to $181.8
million or 13.2% of net sales, compared to $161.7 million or 11.5% of net sales
in fiscal 1997. In fiscal 1996, R&D expenses were $127.3 million or 11.6% of net
sales. The increased R&D spending in fiscal 1998 reflected the Company's ongoing
research and development efforts, including the further development of the
SMARTSwitch family of products, SPECTRUM management software as well as the
increase in the hiring of additional software and hardware engineers and
associated costs related to development of new products. R&D spending increased
as a percentage of net sales in fiscal 1998 compared to fiscal 1997 primarily
because net sales were lower than the Company expected in fiscal 1998. The
Company plans to continue to increase R&D spending in absolute dollars in order
to develop new products on a timely basis. The level of increase in R&D spending
may slow, depending on the growth in total revenues, if necessary to reduce R&D
spending as a percentage of net sales more towards the percentage levels in
fiscal 1997 and fiscal 1996.

Selling, general and administrative ("SG&A") expenses were $371.2 million or
26.9% of net sales in fiscal 1998, compared to $286.5 million or 20.4% of net
sales in fiscal 1997 and $223.1 million or 20.3% of net sales in fiscal 1996.
Increases in SG&A spending resulted from expanding the sales and support
workforce, establishing additional office locations domestically and
internationally, the addition of administrative personnel as a result of
acquisitions and increased administrative spending primarily due to anticipated
increases in volume. SG&A expenses increased as a percentage of net sales in
fiscal 1998 primarily as a result of lower than expected sales.

In fiscal 1998 the Company had special charges of $417.7 million, consisting of
(i) in process research and development of $325 million ($200.0 million net of
tax) in connection with the acquisition of the DNPG, (ii) one-time acquisition
related expenses of $57.7 million ($35.5 million net of tax) in connection with
the acquisition of the DNPG, and (iii) charges relating to the Company's
realignment of $35.0 million ($21.5 million net of tax).For fiscal 1997 a $63.0
million special charge was taken for the acquisitions of ZeitNet, Network
Express, Netlink and The OASys Group. In fiscal 1996 a $94.3 million special
charge was taken for the purchase of the ENBU of SMC and Fivemere Limited
(purchased by Network Express in fiscal 1996).

Interest income in fiscal 1998 was $18.5 million compared to $19.4 million in
fiscal 1997 and $17.9 million in fiscal 1996. The slight decrease is primarily
the result of lower interest rates in fiscal 1998 than in fiscal 1997.

Realignment

The Company announced on December 16, 1997 a global initiative to better
align the Company's business strategy with its focus in the enterprise and
service provider markets. The realignment is intended to better position the
Company to provide more solutions-oriented products and service; to increase its
distribution of products through third-party distributors and resellers; to
improve its position internationally, and to aggressively develop partnership
and acquisition opportunities. The Company incurred a pre-tax charge in the
fourth quarter of fiscal 1998 of $35.0 million ($21.5 million net of tax)
related to the realignment. The realignment included general expense reduction
through the reallocation of resources, including the elimination of certain
existing projects, personnel reduction, the eilimination of duplicate facilities
and the consolidation of related operations. Included in accrued liabilities at
February 28, 1998 is $4.8 million relating to severence costs associated with
350 eliminated positions. The Company has completed most of these reductions.
The expense reductions associated with the realignment are intended to yield
approximately $40 million in total annualized savings, beginning in the fourth
quarter of fiscal 1998.

Income (Loss)

Loss before income taxes was $220.5 million or 6.0% of net sales in fiscal
1998, compared to income before income taxes of $339.7 million or 24.1% of net
sales in fiscal 1997 and $224.8 million or 20.3% of net sales in fiscal 1996. In
fiscal 1998 the Company had special charges of $417.7 million, compared to $63.0
million in fiscal 1997 and $94.3 million in fiscal 1996. The decrease in income
before income taxes in fiscal 1998 was due in part to the increase of $354.7
million in special charges. The increase in income before income taxes in fiscal
1997 was due in part to the $31.3 million decrease in these special charges.
Excluding special charges, income before income taxes was $197.2 million in
fiscal 1998, $402.7 million in fiscal 1997 and $319.2 million in fiscal 1996. In
addition to the special charges, the decrease in income before income taxes in
fiscal 1998 was also due to lower revenues and the higher cost of sales. The
factors affecting revenues and cost of sales are discussed above. The tax
(benefit) rate for fiscal 1998 was (42.4%) compared to a tax rate of 34.6% in
fiscal 1997. The decrease was because the Company had a loss before income
taxes. during the year. Loss after taxes was $127.1 million compared to income
after taxes of $222.1 million in fiscal 1997.

Liquidity and Capital Resources

Accounts receivable, net of allowance for doubtful accounts, were $241.2 million
at February 28, 1998 or 78 days of sales outstanding, compared to $219.9 million
or 52 days of sales outstanding in accounts receivable at February 28, 1997.
This increase in receivables reflects timing on shipments and collections. These
trends are expected to continue for the intermediate term.

The Company has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories were $309.7 million at February 28, 1998 or 157 days of
inventory, compared to $197.4 million or 109 days of inventory at the end of the
preceding fiscal year. The increase of days in inventory was the result of lower
sales and the introduction of a new product line, the SmartSwitch family of
products.

Net cash provided by operating activities was $49.5 million in fiscal 1998,
compared to $188.8 million in fiscal 1997 and $81.1 million in fiscal 1996. The
decrease was primarily a result of higher accounts receivable and inventory. In
the Company's acquisition of the DNPG, part of the purchase price was paid in
$302.5 million of product credits which Digital can use through February 7, 2000
to purchase certain Cabletron products that are ordered under the Reseller
Agreement. As a result of these products credits, net cash provided by operating
activities will not increase at the same rate of growth as net sales through
February 7, 2000. The use of products credits by Digital will not affect the
Company's income statement because the Company will recognize revenue as Digital
uses product credits. See Note 9 (Notes to the Consolidated Financial
Statements) included at page 30 of this document for additional details
regarding the product credits.

During fiscal 1998 capital expenditures were $74.2 million, which included $34.9
million in software and hardware products. Capital expenditures for fiscal 1997
of $94.4 million included $58.9 million for engineering computer hardware and
software and $3.3 million for leasehold improvements. During fiscal 1996, $67.8
million of capital expenditures included $9.8 million for building costs of
which $3.4 million was for the purchase of an engineering building, $21.4
million for engineering computer hardware and software, $5.5 million for
manufacturing and related equipment and $19.0 million for expanding global sales
operations.

Cash, cash equivalents, marketable securities and long-term investments
decreased during fiscal 1998 to $447.3 million, from $568.3 million in the prior
fiscal year. This decrease in fiscal 1998 reflects the cash used in the
acquisition of DNPG. State and local municipal bonds and bond funds of
approximately $373.2 million, maturing in three years or less, were being held
by the Company at February 28, 1998.

On March 7, 1997 the Company obtained a $250 million revolving credit facility
with Chase Manhattan Bank, First National Bank of Chicago and several other
lenders. The facility has a term of three years but the Company has the option
to extend the facility for an additional two years. As of February 28, 1998 the
Company had not drawn down any money under the facility.

In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and marketable securities will be adequate to
support the Company's working capital and capital expenditure requirements for
both short and long term needs.

Business Environment and Risk Factors

THE FOLLOWING ARE CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Company may occasionally make forward-looking statements and estimates such
as forecasts and projections of the Company's future performance or statements
of management's plans and objectives. These forward-looking statements may be
contained in, among other things, SEC filings and press releases made by the
Company and in oral statements made by the officers of the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among others, the factors mentioned below.

Competition. The data networking industry is intensely competitive and subject
to increasing consolidation. Competition in the data networking industry has
increased in recent periods, and Cabletron expects competition to continue to
increase significantly in the future from its current competitors, as well as
from potential competitors that may enter Cabletron's existing or future
markets. Cabletron's competitors include many large domestic and foreign
companies, as well as emerging companies attempting to sell products to
specialized markets such as those addressed by Cabletron. Cabletron's primary
competitors in the data networking industry are Cisco Systems, Inc., Bay
Networks, Inc. and 3Com Corporation. Several large telecommunications equipment
companies, including Lucent Technologies, Inc., Nokia Corp. and Northern Telecom
Ltd, have begun to compete in the data networking industry and have recently
made investments in or acquired several smaller data networking companies.
Companies in the data networking industry compete upon the basis of price,
technology, and brand recognition. Increased competition could result in price
reductions, reduced margins and loss of market share, any or all of which could
materially and adversely affect Cabletron's business, financial condition, and
operating results and increase fluctuations in operating results. Competitors
may introduce new or enhanced products that offer greater performance or
functionality than Cabletron's products. There can be no assurance that
Cabletron will be successful in selecting, developing, manufacturing and
marketing new products or enhancing its existing products or that Cabletron will
be able to respond effectively to technological changes, new standards or
product announcements by competitors. Any failure to do so may have a material
adverse effect on Cabletron's business, financial condition and results of
operations. As the data networking industry has grown and matured, customers
purchasing decisions have been increasingly influenced by brand recognition. If
Cabletron is unable to develop competitive brand recognition, Cabletron's
business may be adversely affected.

Cabletron's current and potential competitors have pursued and are continuing to
pursue a strategy of acquiring data networking companies possessing advanced
networking technologies. The acquisition of these companies allows Cabletron's
competitors to offer new products without the lengthy time delays associated
with internal product development. As a consequence, competitors are able to
more quickly meet the demand for advanced networking capabilities, as well as
for so-called "end-to-end" networking solutions. These acquisitions also permit
potential competitors, such as telecommunications companies, who lack data
networking products and technologies, to more quickly enter data networking
markets. The greater resources of the competitors engaged in these acquisitions
may permit them to accelerate the development and commercialization of new
competitive products and the marketing of existing competitive products to their
larger installed bases. There is significant competition among Cabletron and its
competitors for the acquisition of data networking companies possessing advanced
technologies. As a consequence of this competition, as well as other factors,
the prices paid to acquire such companies is typically extremely high relative
to the assets and sales of such companies. The greater resources of Cabletron's
current and potential competitors will enable them to compete more effectively
for the acquisition of such companies. In addition to acquiring other companies,
Cabletron's competitors frequently invest in early-stage data networking
companies in order to secure access to advanced technologies under development
by such companies, to enhance the ability to subsequently acquire such companies
and to deter other competitors from obtaining such access or performing such
acquisitions. Cabletron expects that competition will increase substantially as
a result of the continuing industry consolidations.

In the past, Cabletron has relied upon a combination of internal product
development and partnerships with other networking vendors to broaden its
product line to meet the demand for "end-to-end" enterprise-wide solutions.
Acquisitions of or investments in other data networking companies by Cabletron's
competitors may limit Cabletron's access to commercially significant
technologies, and thus its ability to offer products that meet its customers
needs.

In addition to the effects of competition, Cabletron's margins may also decrease
as a result of a shift in product mix toward lower margin products, increased
sales through lower margin reseller sales channels, increased component costs
and increased expenses, including increased research and development and sales,
general and administrative costs, which may be necessary in future periods to
meet the demands of greater competition. For example, as a result of the
acquisition of the NPB, Cabletron expects a higher percentage of its sales to be
made through resellers, which may have the effect of reducing Cabletron's margin
on those sales, as well as, to a lesser extent, Cabletron's overall margins.
Margins in any given period may be adversely affected by additional factors. See
"Business Environment and Risk Factors--Fluctuations in Operating Results."

Fluctuations in Operating Results. A variety of factors may cause
period-to-period fluctuations in the operating results of Cabletron. Such
factors include, but are not limited to: (i) the rate of growth of the markets
for Cabletron's products, (ii) competitive pressures, including pricing, brand
and technological competition, (iii) availability of components, including
unique integrated circuits, (iv) adverse effects of delays in the establishment
of industry standards, including delays or reductions in customer orders, delays
in new product introductions and increased expenses associated with standards
compliance, (v) delays by Cabletron in the introduction of new or enhanced
products, (vi) changes in product mix, (vii) delays or reductions in customer
purchases in anticipation of the introduction of new products by Cabletron or
its competitors and (viii) instability of the international markets in which
Cabletron sells its products. For example, Cabletron has been experiencing
decreased sales for its older line of so-called "shared media" products. The
period-to-period rate of decrease has been greater in certain periods than in
others and has been difficult to predict. Backlog as of any particular date is
not indicative of future revenue due, in part, to the possibility of order
cancellations, customer requested delivery delays, shifting purchasing patterns
and inventory level variability. In particular, Cabletron has been experiencing
longer sales cycles for its core products as a result of the increasing dollar
amount of customer orders and longer customer planning cycles. Also, in the
recent past, Cabletron has experienced backend loading of its quarterly sales,
making the predictability of the quarterly results highly speculative. These
factors, together with increased competition, have led to an increase in sales
variability and a decrease in Cabletron's ability to predict aggregate sales
demand for any given period. These factors have increased the possibility that
the operating results for a quarter could be materially adversely affected by
the failure to obtain or delays in obtaining a limited number of large customer
orders, due, for example, to cancellations, delays or deferrals by customers.
Cabletron plans to continue to invest in research and development, sales and
marketing and technical support staff in anticipation of future revenue growth.
If growth in Cabletron's revenues in any quarter fails to match Cabletron's
expense levels, its earnings and margins would be materially adversely affected.
In the fourth quarter of fiscal 1998, the three month period ended February 28,
1998, a shortfall in orders resulted in a substantial decline in Cabletron's
earnings from the fourth quarter of fiscal 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." There can be no
assurance that net sales will not decrease in future quarters. Any decrease in
net sales could have a material adverse affect on Cabletron's business,
financial condition and results of operations. As expenses are relatively fixed
in the near term, Cabletron may not be able to adjust expense levels to match
any shortfall in revenues. As the industry becomes more competitive and
standards-based, Cabletron is facing greater price competition from its
competitors. If Cabletron does not respond with lower production costs, pricing
pressures could adversely affect future earnings. Accordingly, past results may
not be indicative of future results. There can be no assurance that the
announcement or introduction of new products by Cabletron or its competitors, or
a change in industry standards, will not cause customers to defer or cancel
purchases of Cabletron's existing products, which could have a material adverse
effect on Cabletron's business, financial condition or results of operations.
The market for Cabletron's products is evolving. The rate of growth of the
market and the resulting demand for Cabletron's recently introduced products is
subject to a high level of uncertainty. If the market fails to grow or grows
more slowly than anticipated, Cabletron's business, financial condition or
results of operations would be materially adversely affected.

Realignment. Cabletron has announced that it is seeking to better align its
business strategy with its target markets. The company has incurred a pre-tax
charge in the fourth quarter of fiscal 1998 of $35.0 million ($21.5 million,
after-tax) related to the realignment. The realignment includes general expense
reductions through the elimination of duplicate facilities, consolidation of
related operations, reallocation of resources, including the elimination of
certain existing projects, and personnel reduction. Cabletron may encounter
difficulties in achieving the expense reductions intended as a result of the
realignment due to, among other factors, additional costs associated with, for
example, relocations and employee severance, the need to maintain certain
essential, but underutilized, facilities, and delays in implementing planned
reductions. Any such difficulties in achieving expense reductions may result in
a failure to realize the full amount of the annualized cost savings which is

intended to be achieved through the realignment. Any such additional costs may
result in charges related to Cabletron's realignment in future quarters.

In addition to the realignment, Cabletron has defined and is currently
implementing a new management structure. The new management structure includes
the creation of certain new senior officer positions and the realignment of
certain management structures. The implementation of the new management
structures, the realignment referred to above and Cabletron's recent
acquisitions have required the dedication of the Company's existing management
resources, which has resulted in a temporary disruption of Cabletron's business
activities. There can be no assurance that such disruption will not continue in
future quarters. Any such disruption could have a material adverse effect on
Cabletron's business, operating results or financial condition. Over time, the
loss of the personnel, facilities and other resources eliminated through the
expense reductions may adversely impact Cabletron's ability to generate expected
revenue levels.

Acquisition Strategy. Cabletron has addressed the need to develop new products,
in part, through the acquisition of other companies and businesses.
Acquisitions, such as the acquisition of the NPB from Digital and the
acquisition of Yago, involve numerous risks including difficulties in
assimilating the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which competitors have established market
positions, and the potential loss of key employees of the acquired company.
Achieving the anticipated benefits of an acquisition will depend in part upon
whether the integration of the companies' businesses is accomplished in an
efficient and effective manner, and there can be no assurance that this will
occur. The successful combination of companies in the high technology industry
may be more difficult to accomplish than in other industries. The combination of
such companies will require, among other things, integration of the companies'
respective product offerings and coordination of their sales and marketing and
research and development efforts. There can be no assurance that such
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be exacerbated by the necessity of coordinating
geographically separated organizations. The efforts required to successfully
integrate acquired companies require the dedication of management resources that
may temporarily distract attention from the day-to-day business of Cabletron.
The inability of management to successfully integrate the operations of acquired
companies could have a material adverse effect on the business and results of
operations of Cabletron. The acquisition of early stage companies, such as Yago,
poses risks in addition to those identified above. Such companies often have
limited operating histories, limited or no prior sales, and may not yet have
achieved profitability. In addition, the technologies possessed by such
companies are often unproven. The development and marketing of products based
upon such technologies may require the investment of substantial time and
resources and, despite such investment, may not result in commercially saleable
products or may not yield revenues sufficient to justify Cabletron's investment.
Further, aggressive competitors often undertake initiatives to attract customers
and to recruit key employees of acquired companies through various incentives.
In addition to DNPG and Yago, Cabletron has stated that it will continue to
explore other possible acquisitions in the future. Multiple acquisitions during
a period increases the risks identified above, including in particular the
difficulty of integrating the acquired businesses and the distraction of
management from the day-to-day business activities of Cabletron.

Cabletron has recently acquired several product lines previously marketed by
Digital's NPB pursuant to Cabletron's acquisition of the NPB. Cabletron's sales
of the NPB products are subject to numerous risks. Cabletron's success will be
dependent upon its continued development of products that are compatible with
and meet the needs of the NPB's installed base of end-user customers, many of
whom have made a substantial investment in existing Digital's NPB network
infrastructure. Substantially all of the NPB's revenues have historically been
derived from sales by Digital's worldwide sales force and certain major third
party resellers. Under Digital, the NPB had no direct sales force to end users
(Digital's direct sales force resides in an independent business unit), and
Cabletron is not acquiring any portion of Digital's sales force. Under the
Reseller and Services Agreement dated as of November 24, 1997 between Cabletron
and Digital, Digital has agreed to resell certain Cabletron products, including
the NPB products, and has contractually committed to purchase certain minimum
volumes of Cabletron products for resale and internal use. Based on historical
revenues of Cabletron, it is expected that Digital will account for
substantially in excess of ten percent (10%) of Cabletron's revenues for fiscal
1999. Any failure by Digital to purchase the committed product volumes would
have a material adverse impact on Cabletron's business, results of operations
and financial condition. In addition, a substantial portion of the NPB's
revenues have historically been derived from sales through third party
resellers. Cabletron has traditionally derived a smaller portion of its revenues
from sales through resellers and, as a consequence, has less experience managing
reseller relationships. There can be no assurance that the NPB's resellers will
continue to purchase the NPB products from Cabletron or, if they do, that the
volume of such purchases will not decline significantly. The products to be sold
by Cabletron through Digital's sales force and the NPB's resellers, including
the NPB products and certain Cabletron products, may be sold under the Digital
brand name and, in many cases, will be specifically adapted for use in existing
Digital hardware platforms. Cabletron has limited experience managing the
marketing and distribution of a line of products under a brand name or for
hardware platforms other than its own. There exists no alternative market for
such products. A higher than expected rate of return from resellers, the
Company's failure to adequately manage the marketing and distribution of such
products, or the loss of material resellers or a material decline in sales
volume through the NPB resellers, could have a material adverse effect on
Cabletron's business, results of operations or financial condition.

Volatility of Stock Price. As is frequently the case with the stocks of high
technology companies, the market price of Cabletron's stock has been, and may
continue to be, volatile. Factors such as quarterly fluctuations in results of
operations, increased competition, the introduction of new products by Cabletron
or its competitors, expenses or other difficulties associated with assimilating
the NPB, the business of Yago and other companies or businesses that have been
or may in the future be acquired by Cabletron, changes in the mix of sales
channels, the timing of significant customer orders (the average dollar amount
of customer orders has increased in recent periods), and macroeconomic
conditions generally, may have a significant impact on the market price of the
stock of Cabletron. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations, which have particularly
affected the market price for many high-technology companies and which, on
occasion, have appeared to be unrelated to the operating performance of such
companies. Past financial performance should not be considered a reliable
indicator of future performance and investors should not use historical trends
to anticipate results or trends in future periods. Any shortfall in revenue or
earnings from the levels anticipated by securities analysts could have an
immediate and significant adverse effect on the market price of Cabletron's
stock in any given period.

Technological Changes. The market for networking products is subject to rapid
technological change, evolving industry standards and frequent new product
introductions, and therefore requires a high level of expenditures for research
and development. Cabletron may be required to make significant expenditures to
develop such new integrated product offerings. There can be no assurance that
customer demand for products integrating routing, switching, hub, network
management and remote access technologies will grow at the rate expected by
Cabletron, that Cabletron will be successful in developing, manufacturing and
marketing new products or product enhancements that respond to these customer
demands or to evolving industry standards and technological change, that
Cabletron will not experience difficulties that could delay or prevent the
successful development, introduction, manufacture and marketing of these
products (especially in light of the increasing design and manufacturing
complexities associated with the integration of technologies), or that its new
product and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Cabletron's business, operating
results and financial condition may be materially and adversely affected if
Cabletron encounters delays in developing or introducing new products or product
enhancements or if such product enhancements do not gain market acceptance. In
order to maintain a competitive position, Cabletron must also continue to
enhance its existing products and there is no assurance that it will be able to
do so. In addition, the demand for traditional "shared media" hubs such as
Cabletron's basic MMAC product have been experiencing declines over the last few
years, and there can be no assurance that such decline will not accelerate. A
portion of future revenues will come from new products and services. Cabletron
cannot determine the ultimate effect that new products will have on its
revenues, earnings or stock price.

Product Protection and Intellectual Property. Cabletron's success depends in
part on its proprietary technology. Cabletron attempts to protect its
proprietary technology through patents, copyrights, trademarks, trade secrets
and license agreements. Cabletron believes, however, that its success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. There can be no assurance that the steps taken by
Cabletron in this regard will be adequate to prevent misappropriation of its
technology or that Cabletron's competitors will not independently develop
technologies that are substantially equivalent or superior to Cabletron's
technology. In addition, the laws of some foreign countries do not protect
Cabletron's proprietary rights to the same extent as do the laws of the United
States. No assurance can be given that any patents issued to Cabletron will not
be challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages.

Although Cabletron does not believe that its products infringe the proprietary
rights of any third parties, third parties have asserted infringement and other
claims against Cabletron, and there can be no assurance that such claims will
not be successful or that third parties will not assert such claims against
Cabletron in the future. Patents have been granted recently on fundamental
technologies incorporated in Cabletron's products. Since patent applications in
the United States are not publicly disclosed until the patent issues,
applications may have been filed by third parties which, if issued as patents,
could relate to Cabletron's products. In addition, participants in Cabletron's
industry also rely upon trade secret law. Cabletron could incur substantial
costs and diversion of management resources with respect to the defense of any
claims relating to proprietary rights which could have a material adverse effect
on Cabletron's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which could
effectively block Cabletron's ability to license its products in the United
States or abroad. Such a judgment could have a material adverse effect on
Cabletron's business, financial condition and results of operations.

Dependence on Suppliers. Cabletron's products include certain components,
including application specific integrated circuits ("ASICs"), that are currently
available from single or limited sources, some of which require long order lead
times. In addition, certain of Cabletron's products and sub-assemblies are
manufactured by single source third parties. With the increasing technological
sophistication of new products and the associated design and manufacturing
complexities, Cabletron anticipates that it may need to rely on additional
single source or limited suppliers for components or manufacture of products and
subassemblies. Any reduction in supply, interruption or extended delay in timely
supply, variances in actual needs from forecasts for long order lead time
components, or change in costs of components could affect Cabletron's ability to
deliver its products in a timely and cost-effective manner and may adversely
impact Cabletron's operating results and supplier relationships. The NPB
products will initially be manufactured by Digital and a third-party contract
manufacturer, SCI Technologies, Inc. The failure of either party to continue to
manufacture the NPB products or to deliver the NPB products in time for
Cabletron to meet its delivery requirements could have a material adverse effect
on Cabletron's business, financial condition and results of operations.

Year 2000-compliance. Historically, certain computer programs have been written
using two digits rather than four digits to define year. This could result in
computers recognizing a date using "00" as the year 1900 rather than the year
2000, resulting in potential major system failures or miscalculations.

To address the above-mentioned Year 2000 issues and concerns, Cabletron has
established a "Year 2000 Task Force" to lead and coordinate all of its global
Year 2000 activities. This task force is accountable to provide the necessary
leadership, tools and knowledge required by all operating units to become Year
2000 compliant. The task force is currently testing all hardware, firmware and
software developed and sold by the Company for Year 2000 Compliance in
accordance with Cabletron's Year 2000 Policy Statement.

In addition, the Year 2000 Task Force is conducting a global assessment of
Cabletron's essential computer systems and is making reasonable efforts to
ensure that Cabletron's information technology infrastructure will not be
adversely affected by the turn of the century.

Currently, Cabletron has no reasonable estimate of the amount of out-of-pocket
costs which may be incurred to address Year 2000 issues for our products and
internal infrastructure. At this time, the company cannot reasonably estimate
the potential impact on its financial position and operations if key suppliers,
customers and other constituents do not become Year 2000-compliant on a timely
basis.

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Under this concept, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending February 28, 1999, is not expected to have a material
impact on the consolidated financial statements of the Company. The only
additional item to be included in comprehensive income is the Company's
cumulative translation adjustment.

In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement,
becomes effective for the Company in its fiscal year ending February 28, 1999.
The Company is in the process of determining the impact of SFAS 131 on its
footnote disclosures.

In February 1998, the Company adopted the Financial Accounting Standards Board
Statement No. 128, "Earnings per Share," (SFAS 128). All previously reported net
income (loss) per share data have been restated to conform to the provisions of
SFAS 128. Under SFAS 128, basic net income (loss) per share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares or the period. Diluted net income (loss) per
reflect the maximum diluted that would have resulted from the assumed exercise
and share repurchased related to dilutive stock options and are computed by
dividing net income (loss) by the weighted average number of common shares and
all dilutive securities outstanding.

In fiscal 1998, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. Under SOP 98-1, certain payroll and related costs
for Company employees working on the application of development stage projects
as defined in the SOP for internal use computer software must be capitalized and
amortized over the expected useful life of the software. This is substantially
consistent with the Company's previous treatment, and accordingly, the adoption
of SOP 98-1 did not have a material impact on the Company's results of
operations in fiscal 1998.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN EXCHANGE RISK MANAGEMENT

As the Company's international sales grow as a percentage of total sales,
exposure to volatility in exchange rates could have a material impact on the
Company's financial results.

The Company uses foreign currency forward and option contracts to manage the
risk of exchange fluctuations. The Company uses these derivative instruments to
reduce its exchange risk by essentially creating offsetting market exposures.
The instruments are not held for trading or speculative purposes.

Based on the Company's overall currency rate exposure at February 28, 1998
including derivative and other foreign currency sensitive instruments, a
near-term change in currency rates based on historic currency rate movements,
would not materially affect the consolidated financial position, results of
operations, or cash flows of the Company.

The success of the hedging program depends on forecasts of transaction activity
in various currencies. To the extent that these forecasts of are over or
understated during periods of currency volatility, the Company could experience
unanticipated currency gains or losses.

INTEREST RATE RISK

The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. A portion
of the investments are classified as available for sale. These instruments are
not held for purposes of trading. The securities are recorded at amortized cost
which approximates market value. Unrealized gains or losses associated with
these securities are not material. Due to the average maturity and conservative
nature of the investment portfolio, a sudden change in interest rates would not
have a material effect on the value of the portfolio.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CABLETRON SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
February 28, 1998 and 1997
(in thousands, except per share amounts)

Assets 1998 1997
---------- ----------

Current assets:
Cash and cash equivalents ......................... $ 207,078 $ 214,828
Short-term investments (note 4) ................... 116,979 165,396
Accounts receivable, net of allowance for
doubtful accounts ($21,043 and $15,476 in 1998
and 1997, respectively) ......................... 241,181 219,896
Inventories (note 5) .............................. 309,667 197,438
Deferred income taxes (note 11) ................... 81,161 57,107
Prepaid expenses and other assets ................. 78,084 34,691
---------- ----------
Total current assets ......................... 1,034,150 889,356
---------- ----------
Long-term investments (note 4) ....................... 123,272 188,081
Long-term deferred income taxes (note 11) ............ 167,308 29,627
Property, plant and equipment, net (note 6) .......... 244,730 198,557
Intangible assets, net (note7) ....................... 36,867 1,234
---------- ----------
Total assets ................................. $1,606,327 $1,306,855
========== ==========

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable .................................. $ 79,969 $ 68,604
Current portion of long-term obligation (note 9) .. 157,719 ---
Accrued expenses (note 8) ......................... 235,062 135,208
Income taxes payable .............................. --- 10,442
---------- ----------
Total current liabilities .................... 472,750 214,254
Long-term obligation (note 9) ..................... 132,500 ---
Long-term deferred income taxes (note 11) ......... 12,057 11,103
---------- ----------
Total liabilities ............................ 617,307 225,357
---------- ----------

Commitments and contingencies (notes 10, 12 and 13)

Stockholders' equity (note 14):
Preferred stock, $1.00 par value. Authorized
2,000 shares; none issued
--- ---
Common stock, $0.01 par value. Authorized
240,000 shares; issued and outstanding 158,267
and 156,305 shares in 1998 and 1997, respectively 1,583 1,563
Additional paid-in capital ........................ 300,834 266,829
Retained earnings ................................. 685,823 812,885
---------- ----------
988,240 1,081,277
Cumulative translation adjustment ................. 780 221
---------- ----------
Total stockholders' equity ................... 989,020 1,081,498
---------- ----------
Total liabilities and stockholders' equity ... $1,606,327 $1,306,855
========== ==========

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands, except per share amounts)

1998 1997 1996
---------- ---------- ----------

Net sales ............................................. $1,377,330 $1,406,552 $1,100,349
Cost of sales ......................................... 645,790 575,107 448,699
---------- ---------- ----------
Gross profit ..................................... 731,540 831,445 651,650
Operating expenses:
Research and development ......................... 181,777 161,674 127,289
Selling, general and administrative .............. 371,159 286,469 223,083
Special charges (note 3) ......................... 417,685 63,024 94,343
---------- ---------- ----------
Income (loss) from operations ................ (239,081) 320,278 206,935
Interest income ....................................... 18,578 19,422 17,891
---------- ---------- ----------
Income (loss) before income taxes ............. (220,503) 339,700 224,826
Income tax expense (benefit) (note 11) ................ (93,441) 117,575 80,341
---------- ---------- ----------
Net income (loss) ............................. ($ 127,062) $ 222,125 $ 144,485
========== ========== ==========
Net income (loss) per share - basic ................... ($ 0.81) $ 1.43 $ 0.95
========== ========== ==========
Weighted average number of shares outstanding - basic . 157,686 155,207 151,525
========== ========== ==========
Net income (loss) per share - diluted ................. ($ 0.81) $ 1.40 $ 0.93
========== ========== ==========
Weighted average number of shares outstanding - diluted 157,686 158,933 155,171
========== ========== ==========

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended February 28, 1998 and 1997 and February 29, 1996

- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) ADDITIONAL CUMULATIVE NOTES TOTAL
COMMON PAID-IN RETAINED TRANSLATION RECEIVABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT STOCKHOLDERS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1995 ............... $757 $147,885 $447,033 ($1,364) ($369) $593,942

Repayments of notes receivable,
stockholders ........................... -- -- -- -- 218 218
Issuance of common stock, net ............... 9 41,765 -- -- -- 41,774
Issuance of common stock for
Fivemere acquisition ................... 1 2,564 -- -- -- 2,565
Exercise of options for 1,453
shares of common stock ................. 8 17,214 -- -- -- 17,222
Tax benefit for options exercised ........... -- 7,215 -- -- -- 7,215
Issuance of 154 shares under
employee
stock purchase plan .................... 1 3,322 -- -- -- 3,323
Stock repurchased and retired ............... -- (1,173) -- -- -- (1,173)
Effect of foreign currency .................. -- -- -- 315 -- 315
translation
Net income .................................. -- -- 144,485 -- -- 144,485
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996 ................ 776 218,792 591,518 (1,049) (151) 809,886
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net ............... 15 8,562 -- -- -- 8,577
Exercise of options for 1,345
shares of common stock ................. 10 18,012 -- -- -- 18,022
Repayment of notes receivable ............... -- -- -- -- 151 151
Issuance of common stock for The
OASys Group acquisition ................ 2 6,955 -- -- -- 6,957
Tax benefit for options exercised ........... -- 8,302 -- -- -- 8,302
Stock split ................................. 758 -- (758) -- -- --
Issuance of 197 shares under
employee
stock purchase plan .................... 2 6,206 -- -- -- 6,208
Effect of foreign currency .................. -- -- -- 1,270 -- 1,270
translation
Net income .................................. -- -- 222,125 -- -- 222,125
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997 ................ 1,563 266,829 812,885 221 -- 1,081,498
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of options for 1,751
shares of common stock ................. 18 18,196 -- -- -- 18,214
Tax benefit for options exercised ........... -- 9,564 -- -- -- 9,564
Issuance of 231 shares under
employee
stock purchase plan .................... 2 6,245 -- -- -- 6,247
Effect of foreign currency .................. -- -- -- 559 -- 559
translation
Net loss .................................... -- -- (127,062) -- -- (127,062)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998 ................ $1,583 $300,834 $685,823 $780 -- $989,020
- ------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28, 1998 and 1997 and February 29, 1996
(in thousands)

1998 1997 1996
-------- -------- --------

Cash flows from operating activities:
Net income (loss) .......................................................... ($127,062) $222,125 $144,485
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ........................................... 65,281 49,704 32,739
Provision for losses on accounts receivable ............................. 5,668 9,140 435
Loss (gain) on disposal of property, plant and equipment ................ (285) 87 93
Purchased research and development from acquisitions .................... 325,000 --- 67,750

Deferred income taxes ................................................... (160,868) (22,933) (38,766)
Changes in assets and liabilities:
Accounts receivable ................................................. (31,847) (74,925) (55,795)
Inventories ......................................................... (74,491) (37,669) (46,500)
Prepaid expenses and other assets ................................... 1,213 (1,709) (17,508)
Accounts payable and accrued expenses ............................... 83,471 52,661 60,688
Income taxes payable ................................................ (36,591) (7,653) 3,705
-------- -------- --------
Net cash provided by operating activities ........................ 49,489 188,828 151,326
-------- -------- --------

Cash flows from investing activities:
Capital expenditures .................................................... (74,264) (94,368) (63,322)
Cash portion of business acquisition .................................... (129,107) --- (74,645)

Purchase of available-for-sale securities ............................... (118,919) (203,667) (124,968)
Purchase of held-to-maturity securities ................................. (37,228) (247,855) (205,852)
Sales/maturities of marketable securities ............................... 269,344 424,308 236,393
-------- -------- --------
Net cash used in investing activities ............................ (90,174) (121,582) (232,394)
-------- -------- --------

Cash flows from financing activities:
Repayment of notes receivable from stockholders ......................... --- 151 218

Repurchase of common stock .............................................. --- --- (1,173)

Tax benefit of options exercised ........................................ 10,469 8,302 7,215
Proceeds from sale of common stock ...................................... --- 8,577 41,774

Common stock issued to employee stock purchase plan ..................... 6,247 6,208 3,323
Proceeds from exercise of stock options ................................. 17,309 18,022 17,222
-------- -------- --------
Net cash provided by financing activities ........................ 34,025 41,260 68,579
-------- -------- --------

Effect of exchange rate changes on cash .................................... (1,090) 220 159
-------- -------- --------

Net (decrease) increase in cash and cash equivalents ....................... (7,750) 108,726 (12,330)
Cash and cash equivalents, beginning of year ............................... 214,828 106,102 118,433
-------- -------- --------
Cash and cash equivalents, end of year ..................................... $207,078 $214,828 $106,103
======== ======== ========

Cash paid during the year for:
Income taxes ............................................................ $ 57,941 $132,291 $142,733
======== ======== ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note (1) Business Operations

The Company develops, manufactures, markets, designs, installs and supports a
broad range of standards-based local and wide area network connectivity hardware
and software products.

Note (2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts of Cabletron Systems,
Inc. (the "Company") and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

(b) Investments

Held-to-maturity securities are those investments which the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for amortization of premiums and discounts,
which approximates market value. Available-for-sale securities are also recorded
at amortized cost, adjusted for amortization of premiums and discounts. Due to
the nature of the Company's investments and the resulting low volatility, the
difference between fair value and amortized cost is not material.

(c) Inventories

Inventories are stated at the lower of cost or market. Costs are determined at
standard which approximates the first-in, first-out (FIFO) method.

(d) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided on
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the lives of
the related assets or the term of the lease. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If it is determined that
the carrying amount of an asset cannot be fully recovered, an impairment loss is
recognized.

(e) Income Taxes

The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

The Company has reinvested earnings of its foreign subsidiaries and, therefore,
has not provided income taxes which could result from the remittance of such
earnings. The unremitted earnings at February 28, 1998 amounted to approximately
$152.2 million. Furthermore, any taxes paid to foreign governments on those
earnings may be used, in whole for in part, as credits against the US tax on any
dividends distributed from such earnings. It is not practicable to estimate the
amount unrecognized deferred US taxes on these undistributed earnings.

(f) Net Income (Loss) Per Share

In February 1998, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share," (FAS 128). All previously reported
earnings per share information presented has been restated to reflect the impact
of adopting FAS 128.

Under SFAS 128, basic net income (loss) per common share is computed by dividing
net income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income (loss) per
common share reflect the maximum dilution that would have resulted from the
assumed exercise and share repurchase related to dilutive stock options and is
computed by dividing net income (loss) by the weighted average number of common
shares and all dilutive securities outstanding.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The reconciliation of the denominators of the basic and diluted net income
(loss) per common share computations for the Company's reported net income
(loss) is as follows:

1998 1997 1996
---- ---- ----
Weighted average number of
shares outstanding - basic 157,686 157,207 151,525

Incremental shares from the
assumed exercise of stock options --- 3,726 3,646
-------- -------- --------

Weighted average number of
shares outstanding - diluted 157,686 158,933 155,171
======== ======== ========

(g) Foreign Currency Translation and Transaction Gains and Losses

The Company's international revenues are denominated in either U.S. dollars or
local currencies. For those international subsidiaries which use their local
currency as their functional currency, assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Where the U.S. dollar is the functional currency, amounts are recorded
at the exchange rates in effect at the time of the transaction, any resulting
translation adjustments, which were not material, are recorded in income.

(h) Statements of Cash Flows

Cash and cash equivalents consist of cash in banks and short-term investments
with original maturities of three months or less.

(i) Revenue Recognition

Sales are recognized upon shipment of products and software. In the case of
design, consulting, installation, support services and evaluations, revenues are
recognized upon completion and acceptance of such products and services.
Revenues from service contracts are recognized ratably over the period the
services are performed. Warranty costs and sales returns and allowances are
accrued at the time of shipment.

(j) Derivatives

The Company utilizes derivative financial instruments to reduce financial
market risks. These instruments are used to hedge foreign currency exposures of
underlying assets, liabilities and other obligations. The Company does not use
derivative financial instruments for speculative or trading purposes. The
Company's accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. Gains and losses on
currency forward contracts and options are recognized in income as incurred.
Gains on option contracts are recognized in income when the contract matures, is
terminated or is sold.

(k) Reclassifications

Prior year financial statements have been reclassified to conform to the 1998
presentation.

(l) Use of Estimates

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(m) New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Under this concept, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending February 28, 1999, is not expected to have a material
impact on the consolidated financial statements of the Company. The only
additional item to be included in comprehensive income is the Company's
cumulative translation adjustment.

In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement,
becomes effective for the Company in its fiscal year ending February 28, 1999.
The Company is in the process of determining the impact of SFAS 131 on its
footnote disclosures.

In fiscal 1998, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1) which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. Under SOP 98-1, certain payroll and related costs
for Company employees working on the application of development stage projects
as defined in the SOP for internal use computer software must be capitalized and
amortized over the expected useful life of the software. This is substantially
consistent with the Company's previous treatment, and accordingly, the adoption
of SOP 98-1 did not have a material impact on the Company's results of
operations in fiscal 1998.

Note (3) Business Combinations

For acquisitions accounted for under the pooling-of-interests method, all
financial data of Cabletron has been restated to include the historical
financial data of these acquired companies. For acquisitions accounted for as
purchases, Cabletron's consolidated results of operations include the operating
results of the acquired companies from their acquisition dates. Acquired assets
and liabilities were recorded at their estimated fair market values at the
acquisition date and the aggregate purchase price plus costs directly
attributable to the completion of acquisitions has been allocated to the assets
and liabilities acquired.

On July 26, 1996, the Company acquired ZeitNet Inc., a privately held
manufacturer of ATM products. Under the terms of the agreement, Cabletron issued
approximately 3.3 million shares of common stock for all of the outstanding
shares (and all shares issuable upon exercise of options) of ZeitNet in a
transaction accounted for as a pooling of interests. In connection with the
acquisition, the Company recorded special charges of $23.0 million.

On August 1, 1996, the Company acquired Network Express, Inc., a publicly held
manufacturer of ISDN LAN switched access solutions. Under the terms of the
agreement, Cabletron issued approximately 2.9 million shares of common stock for
all of the outstanding shares (and all shares issuable upon exercise of options)
of Network Express in a transaction accounted for as a pooling of interests. In
connection with the acquisition, the Company recorded special charges of $20.0
million.

On December 11, 1996, the Company acquired Netlink Inc., a privately held
manufacturer of frame relay products. Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of the
outstanding shares (and all shares issuable upon exercise of options) of Netlink
in a transaction accounted for as a pooling of interests. In connection with the
acquisition, the Company recorded special charges of $13.0 million.

On January 12, 1996, the Company acquired the Enterprise Networks Business Unit
(ENBU) from Standard Microsystems Corporation. The acquisition was accounted for
as a purchase and, accordingly, the acquired assets and liabilities were
recorded at their estimated fair market values at the date of the acquisition.
The cash portion of the purchase price was $74.6 million. In connection, with
the acquisition, the Company recorded special charges of $85.7 million,
consisting of the write-off of $67.8 million of in-process research and
development and $17.9 million of other special charges which included
adjustments to conform the ENBU accounting policies with the Company's
accounting policies. The Company's consolidated results of operations include
the operating results of the acquired business from its acquisition date. Pro
forma financial information is not presented as it is not material to the
consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (3) Business Combinations (continued)

On February 7, 1997, the Company acquired The OASys Group, Inc., a privately
held developer of software targeted at managing telecommunications devices and
connections used in high-speed, fiber-optic networks. Cabletron issued
approximately 226,000 shares of common stock for all of the outstanding shares
(and all shares issuable upon exercise of options) of OASys in a transaction
accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the date of
acquisition. The total purchase price of $7.0 million included $6.7 million for
in-process research and development and $0.3 million for special charges which
included adjustments to conform the OASys accounting policies with the Company's
accounting policies. The Company's consolidated results of operations include
the operating results of the acquired business from its acquisition date. Pro
forma financial information is not presented as it is not material to the
consolidated financial statements.

On February 7, 1998, the Company acquired certain assets of the Network Products
Group of Digital Equipment Corporation. Under the terms of the agreement, the
purchase price was approximately $439.5 million, consisting of cash, product
credits and liabilities resulting from the acquisition. In connection with the
acquisition, the Company recorded special charges of $382.7 million ($325.0
million for in-process research and development and $57.7 million for
integration costs). The Company's consolidated results of operations include the
operating results of the acquired business from its acquisition date. The
following unaudited pro forma combined results of operations for fiscal 1998 and
fiscal 1997 have been prepared by combining the operational results of the two
separate business units for these entire years. Accordingly, the special
expenses totaling $382.7 million are not included in the results as these are
unusual and not indicative of normal operating results. The following unaudited
pro forma financial information is not necessarily indicative of results of
operations that would have occurred had the transaction taken place at the
beginning each fiscal year or of the future results of the combined companies.

(in thousands) 1998 1997
---- ----

Net Sales $1,859,715 $2,004,586
Operating income 199,916 344,696

The purchase price has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of acquisition. The purchase price is
summarized as follows:

Cash paid for acquisition $129,107
Product credits granted 302,500
Discount on product credits (11,691)
Accrued acquisition costs 19,581
--------
Purchase price $439,497
========

The following are supplemental disclosures of noncash transactions in
connection with the DNPG acquisition.

Fair value of assets acquired $126,188
In-process research and development 325,000
Accrued acquisition costs (19,581)
Product credits (302,500)
--------
Cash portion of acquisition $129,107
========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (4) Investments

Investments are summarized as follows at February 28, 1998 and 1997:

(in thousands) 1998 1997
---------------------------- ----------------------------
Long Long
Current Term Total Current Term Total
-------- -------- ------- -------- -------- --------

Held-to-maturity $ 57,506 $ 14,896 $ 72,402 $ 84,261 $115,209 $199,470
Available-for-sale 59,473 108,376 167,849 81,135 72,872 154,007
-------- -------- -------- -------- -------- --------
Total $116,979 $123,272 $240,251 $165,396 $188,081 $353,477
======== ======== ======== ======== ======== ========

The contractual maturities for the above securities are less than three years.

Note (5) Inventories

Inventories consist of the following at February 28, 1998 and 1997:

(in thousands) 1998 1997
---- ----

Raw materials $105,099 $ 64,685
Work-in-process 34,247 57,070
Finished goods 170,321 75,683
-------- --------
Total $309,667 $197,438
======== ========

Note (6) Property, Plant and Equipment

Property, plant and equipment consist of the following at February 28, 1998 and
1997:
Estimated useful
(in thousands) 1998 1997 lives
---- ---- ----------------

Land and land improvements $ 3,093 $ 1,751 15 years
Buildings and building
improvements 61,699 38,015 30-40 years
Construction in progress 236 305 ---
Equipment 357,216 284,621 3-5 years
Furniture and fixtures 18,261 11,711 5-7 years
Leasehold improvements 15,030 9,448 3-5 years
Motor vehicles 4,751 4,690 3-5 years

-------- --------
460,286 350,541
Less accumulated depreciation
and amortization 215,556 151,984
-------- --------
$244,730 $198,557
======== ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (7) Intangible Assets

Intangible assets consist of the following at February 28, 1998 and 1997.

Estimated
(in thousands) 1998 1997 Useful Lives
---- ---- ------------

Goodwill $ 6,060 $1,439 7 - 10 years
Assembled work force acquired
in business acquisition 6,500 --- 7 - 10 years
Patents and technologies acquired
in business acquisition 25,000 --- 3 - 5 years
------- ------
37,560 1,439
Less accumulated amortization 693 205
------- ------
$36,867 $1,234
======= ======

Note (8) Accrued Expenses

Accrued expenses consist of the following at February 28, 1998 and 1997:

(in thousands) 1998 1997
---- ----

Salaries and benefits $ 25,152 $ 15,527
Deferred revenue 74,414 50,041
Warranty 18,669 19,315
Other 116,827 50,325
--------- --------
Total $235,062 $135,208
======== ========

Note (9) Long-Term Obligation

Long-term obligation consists of the following at February 28, 1998:

(in thousands)

Unused product credits $290,219
less current portion (157,719)
--------
Long-term obligation $132,500
========

As a term of the Asset Purchase Agreement between the Company and Digital
Equipment Corp., Digital received product credits of $302.5 million. These
product credits may be used by Digital to purchase products that are ordered
under the Reseller Agreement. First year product credits, of $170 million, may
be used during the period beginning on the closing date (February 7, 1998) and
ending on the first anniversary of the closing date (February 7, 1999). A total
of $12.3 million of the first year product credits were used from closing date
of the acquisition to the end of the fiscal year. The remaining $157.7 million
must be used before February 7, 1999. Any first year product credits not
expended in accordance with the preceding shall automatically expire and be of
no further force or effect. Second year product credits of $132.5 million, may
be used during the period beginning on the first anniversary of the closing date
(February 7, 1999) and ending on the second anniversary of the closing date
(February 7, 2000) requesting delivery at any time until thirty days after the
end of the second year. Any second year product credits not expended shall
automatically expire and be of no further force or effect immediately following
the end of the second year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (10) Leases

The Company leases manufacturing and office facilities under noncancelable
operating leases expiring through the year 2020. The leases provide for
increases based on the consumer price index and increases in real estate taxes.
Rent expense associated with operating leases was approximately $14,568,000,
$12,179,000 and $10,265,000 for the years ended February 28, 1998 and 1997 and
February 29, 1996, respectively.

Total future minimum lease payments under all noncancelable operating leases as
of February 28, 1998, are as follows:

(in thousands) Year

1999 $ 8,108
2000 5,163
2001 3,538
2002 2,720
2003 1,853
Thereafter 7,825
-------
$29,207
=======

Note (11) Income Taxes

Income (loss) before income taxes is summarized as follows:

(in thousands) 1998 1997 1996
---- ---- ----

Total US domestic income (loss) ($186,612) $313,017 $173,515
Total foreign subsidiaries income (loss) (33,891) 26,683 51,311
-------- -------- --------
Total income (loss) before income taxes ($220,503) $339,700 $224,826
======== ======== ========

Tax expense (benefit) is summarized as follows:

Currently payable:
Federal $ 55,782 $117,546 $92,109
State 10,689 21,962 20,807
Foreign 956 1,000 11,519
Deferred tax benefit (160,868) (22,933) (44,094)
-------- -------- -------
Tax expense (benefit) ($ 93,441) $117,575 $80,341
======== ======== =======

The following is a reconciliation of the effective tax rates to the statutory
federal tax rate:

1998 1997 1996
---- ---- ----

Statutory federal income tax rate (35.0%) 35.0% 35.0%
State income tax, net of federal tax benefit (3.7) 3.6 3.8
Exempt income of foreign sales corporation,
net of tax (1.2) (0.7) (1.1)
Research and experimentation credit (1.9) (0.7) ---
Foreign operations 4.4 (2.7) (1.6)
Other (5.0) 0.1 (0.4)
----- ----- -----
(42.4%) 34.6% 35.7%
===== ===== =====

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (11) Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at February 28, 1998 and
1997 are presented below:

(in thousands) 1998 1997
---- ----
Deferred tax assets:
Accounts receivable $ 6,166 $ 4,996
Inventories 37,415 33,859
Property, plant and equipment 200 ---
Other reserves and accruals 34,382 24,149
Acquired research and development 165,292 29,262
Domestic net operating loss carryforwards 27,213 27,213
Foreign net operating loss carryforwards 23,715 5,636
-------- --------
Total gross deferred tax assets 294,383 125,115
Less valuation allowance (45,914) (38,381)
-------- --------
Net deferred tax assets 248,469 86,734
-------- --------
Deferred tax liabilities:
Property, plant and equipment (12,057) (11,103)
-------- --------
Total gross deferred liabilities (12,057) (11,103)
-------- --------
Net deferred tax assets $236,412 $75,631
======== ========

At February 28, 1998, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $63,775,000 and tax credit carryforwards of
$1,219,000 expiring in fiscal 1999 through fiscal 2010. The NOL and credit
carryforwards were acquired in the acquisitions of ZeitNet Inc., Network
Express, Inc., Netlink, Inc. and The OASys Group, Inc. Approximately $28,200,000
of the above stated NOL amount is subject to a 382 limitation due to a
prior ownership change and it is management's estimation that $24,800,000 will
expire unused.

The net change in the total valuation allowance for the year ended February 28,
1998 was an increase of $7,533,000. The net change in total valuation allowance
for the year ended February 28, 1997 was an increase of $4,619,000. In assessing
the realizability of net deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowance at February 28, 1998.

Note (12) Financial Instruments and Concentration of Credit Risk

The Company uses derivative financial instruments, principally forward exchange
contracts and options, in its management of foreign currency exposures arising
from its international operations. These contracts primarily require the Company
to purchase or sell certain foreign currencies either with or for US dollars at
contractual rates. The Company's foreign currency hedging activities are used to
minimize adverse foreign exchange movements on the eventual dollar net cash
inflows of its foreign denominated net assets. The Company does not hold or
issue derivative financial instruments for trading purposes.

At February 28, 1998 and 1997, the Company had forward exchange contracts and
purchased option contracts, all having maturities less than two years, in the
contractual amount of $43 million (forward contracts $14 million and option
contracts $29 million) and $69 million (forward contracts $31 million and option
contracts $38 million), respectively.

The estimated fair value of the Company's option and forward contracts reflects
the estimated amounts the Company would receive or pay to terminate the
contracts at the reporting dates, thereby taking into account the current
unrealized gains and losses on open contracts. These contracts did not have a
material fair value at February 28, 1998 and 1997.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (12) Financial Instruments and Concentration of Credit Risk (continued)

Several major international financial institutions are counterparties to the
Company's financial instruments. It is Company practice to monitor the financial
standing of the counterparties and limit the amount of exposure with any one
institution. The Company may be exposed to credit loss in the event of
nonperformance by the counterparties to these contracts, but believes that the
risk of such loss is remote and that it would not be material to its financial
position and results of operations.

The carrying amounts of cash, cash equivalents, short-term investments, trade
receivables, and current liabilities approximate fair value because of the short
maturity of these financial instruments. Other assets include investments in
other companies which are carried at the lower of cost or net realizable value.

For the year ended February 28, 1998, no single customer represented more
than 4% of net sales. However, sales to the federal government accounted for
approximately 13% of net sales for the year ended February 28, 1998. For fiscal
1997 and fiscal 1996 no single customer represented more than 3% and 4% net of
sales,respectively. Net sales to the federal government in fiscal 1997 and
fiscal 1996 accounted for approximately 12% and 15% net of sales, respectively.

Note (13) Legal Proceedings

Since October 24, 1997, nine stockholder class action lawsuits have been
filed against Cabletron and certain officers and directors of Cabletron in the
United States District Court for the District of New Hampshire. The complaints
allege that Cabletron and several of its officers and directors disseminated
materially false and misleading information about Cabletron's operations and
acted in violation of the Exchange Act during the period between March 3, 1997
and December 2, 1997. The complaints do not specify the amount of damages sought
on behalf of the class. On March 3, 1998, the United States District Court for
the District of New Hampshire granted the motion to consolidate the nine class
action complaints against Cabletron and its officers and directors into one
class action. Currently the Company does not have any estimate of the amount of
damages or legal costs or damages (if any) that could be incurred in connection
with this case.
Note (14) Stock Plans

(a) Equity Incentive and Directors Plans

The Company has an Equity Incentive Plan which provides for the availability of
25,000,000 shares of common stock for the granting of a variety of incentive
awards to eligible employees. As of February 28, 1998, the Company had issued
23,363,254 stock options under the Equity Incentive Plan, which were granted at
fair market value at the date of grant, vest over a three to five year period
and expire within six to ten years from the date of grant.

The Company has a Directors Option Plan which provides for the availability of
1,250,000 shares of common stock for purchase by nonemployee directors of the
Company. The Directors Option Plan provides for issuance of options at their
fair market value on the date of grant. The options vest over a period of three
years and expire six years from the date of grant. A total of 376,000 stock
options are outstanding under the Directors Option Plan at February 28, 1998.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (14) Stock Plans (continued)

A summary of option transactions under the two plans follows:

Weighted-Average
Shares Exercise Price
---------- ----------------
Options outstanding at February 28, 1995 7,857,226 $15.71
-----------
Granted and assumed 3,898,312 25.61
Exercised (1,453,402) 11.13
Cancelled (464,210) 21.97
-----------
Options outstanding at February 29, 1996 9,837,926 20.02
-----------
Granted and assumed 6,619,763 29.67
Exercised (1,345,415) 12.50
Cancelled (1,516,856) 24.59
-----------
Options outstanding at February 28, 1997 13,595,418 20.02
-----------
Granted and assumed 5,015,000 23.11
Exercised (1,751,391) 10.40
Cancelled (1,979,936) 29.45
-----------
Options outstanding at February 28, 1998 14,879,091 $25.45
===========
Options exercisable at February 28, 1998 4,134,623 $22.99
===========

The following table summarizes information concerning currently outstanding and
exercisable options as of February 28, 1998:

Weighted-
average Weighted- Weighted-
remaining average average
Range of Options contractual exercise Options exercise
exercise prices Outstanding life(years) price exercisable price
--------------- ----------- ------------- -------- ----------- ---------
$0.00 - 6.30 282,555 4.5 $ 2.32 230,563 $ 2.50
6.30 - 12.61 582,424 3.8 9.52 580,754 9.51
12.601 - 18.91 1,827,992 9.6 14.71 30,886 17.97
18.91 - 25.22 2,473,212 5.6 22.51 1,539,323 22.40
25.22 - 31.52 8,703,164 8.2 29.09 1,616,135 30.58
31.52 - 37.82 577,660 8.9 32.99 35,590 34.04
37.82 - 44.13 406,320 8.1 40.43 91,240 40.40
44.13 - 50.43 25,764 7.8 45.93 10,132 46.06
---------- --- ------ --------- ------
14,879,091 7.7 $25.45 4,134,623 $22.99
========== === ====== ========= ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (14) Stock Plans (continued)

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option and employee stock purchase plans, accordingly, no compensation
expense has been recognized in the consolidated financial statements for such
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, "Accounting for
Stock-based Compensation," the Company's net income (loss) would have been
reduced (increased) to the pro forma amounts indicated below:

(in thousands) 1998 1997 1996
---- ---- ----

Net income (loss) As reported ($127,062) 222,125 $144,485
Pro forma ($152,684) 207,109 $121,302

The effect of applying SFAS 123 as shown in the above pro forma disclosure is
not representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions used for
grants in fiscal 1998, 1997 and 1996:

1998 1997 1996
---- ---- ----

Risk-free interest rates 6.13% 6.18% 6.18%
Expected option lives 3.8 years 3.7 years 3.7 years
Expected volatility 60.37% 63.97% 63.97%
Expected dividend yields 6.06% 6.42% 6.42%

In February 1998, employees holding outstanding stock options with a value
exceeding $14.6875 per option were given the right to have their stock options
canceled and repriced to $14.6875 per option. The repriced options will vest
over a period of one to five years from December 4, 1997. At February 28, 1998,
the Company had not received sufficient responses from the option holders to
reasonably estimate the number of options that will be canceled and repriced.

(b) Employee Stock Purchase Plans

The Company has two Employee Stock Purchase Plans (ESPP) which provide for the
combined availability of 4,500,000 shares of common stock to be purchased by
employees who have completed a minimum period of employment. Under the 1989
ESPP, employees must be continuously employed for a period of six months and
under the 1995 ESPP employees must be continuously employed for a period of two
years. Under these plans, options are granted to eligible employees twice yearly
and are exercisable through the accumulation of employee payroll deductions from
two to ten percent of employee compensation as defined in the plan, to a maximum
of $4,068 annually, for each plan, (adjusted to reflect increases in the
consumer price index) which may be used to purchase stock at 85 percent of the
fair market value of the common stock at the beginning or end of the option
period, whichever amount is lower. In fiscal 1998, 231,326 shares were purchased
at a weighted average price of $27.00 (197,262 at $31.47 and 153,768 at $21.43,
for fiscal 1997 and fiscal 1996, respectively). The remaining balance of both
ESPPs for purchase by employees at February 28, 1998 was 3,381,743 shares.

Note (15) Realignment

On December 16, 1997 the Company announced a global initiative to better
align the Company's business strategy with its focus in the enterprise and
service provider markets. The realignment is intended to better position the
Company to provide more solutions-oriented products and service; to increase its
distribution of products through third-party distributors and resellers; to
improve its position internationally, and to aggressively develop partnership
and acquisition opportunities. The Company incurred a charge in the fourth
quarter of fiscal 1998 of $35.0 million ($21.5 million, net of tax) related to
the realignment. The realignment included general expense reduction through the
elimination of duplicate facilities, consolidation of related operations,
reallocation of resources, including the elimination of certain existing
projects, and personnel reduction. The Company has completed most of these
reductions. Accrued liabilities at February 28, 1998 includes $4.8 million
relating to severence costs associated with 350 eliminated positions. The
expense reductions associated with the realignment are intended to yield
approximately $40 million in total annualized savings, beginning the fourth
quarter of fiscal 1998.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (16) Geographic Area Information
(in thousands)

% of % of % of
1998 Total 1997 Total 1996 Total
---- ----- ---- ----- ---- -----
Net Sales:
US .............................. $ 923,251 67.0% $ 998,384 71.0% $ 771,179 70.1%
Direct Foreign Export ........... 59,793 4.3 38,457 2.7 35,378 3.2
---------- ----- ---------- ----- ---------- -----
Total US Source ................. 983,044 71.4 1,036,841 73.7 806,557 73.3
Europe .......................... 281,224 20.4 273,972 19.5 215,796 19.6
Other (1) ....................... 113,062 8.2 95,739 6.8 77,996 7.1
---------- ----- ---------- ----- ---------- -----
Total Sales ................ $1,377,330 100.0% $1,406,552 100.0% $1,100,349 100.0%
========== ===== =========== ===== ========== =====

Income (loss) from Operations:
US .............................. ($207,433) 86.8% $282,480 88.2% $169,103 81.7%
Europe .......................... (5,026) 2.1 29,877 9.3 33,834 16.4
Other (1) ....................... (26,622) 11.1 7,921 2.5 3,998 1.9
--------- ----- -------- ------ -------- -----
Total Income (loss) from
Operations .............. ($239,081) 100.0% $320,278 100.0% $206,935 100.0%
======== ===== ======== ===== ======== =====

Identifiable Assets:
US .............................. $1,335,314 83.0% $1,122,762 85.9% $841,979 84.4%
Europe .......................... 174,829 11.0 119,527 9.2 115,949 11.7
Other(1) ........................ 96,184 6.0 64,566 4.9 38,980 3.9
---------- ----- ---------- ----- -------- -----
Total Assets ............... $1,606,327 100.0% $1,306,855 100.0% $996,908 100.0%
========== ===== ========== ===== ======== =====

(1) Includes Australia, Latin America and the Pacific Rim countries.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note (17) Quarterly Financial Data (unaudited)

(in thousands, except per share amounts)

Income
(Loss)
Net Gross from Net Income (Loss)
Sales Profit Operations Income (Loss) Per Share (a)
1998
First Quarter .....$ 362,688 $209,127 $ 84,596 $ 58,825 $0.37
Second Quarter .... 371,293 212,261 82,434 57,587 0.36
Third Quarter ..... 331,827 167,574 25,500 19,898 0.12
Fourth Quarter .... 311,522 142,578 (431,611) (263,372) (b) (1.66)
---------- -------- -------- --------- -----
Total Year ........$1,377,330 $731,540 ($239,081) ($127,062) ($0.81)
========== ======== ======== ========= =====

1997
First Quarter .....$ 323,499 $190,645 $ 85,672 $ 57,139 $0.37
Second Quarter .... 340,940 202,085 50,141 36,908 (c) 0.24
Third Quarter ..... 361,558 213,959 99,029 67,742 0.44
Fourth Quarter .... 380,555 224,756 85,436 60,336 (d) 0.39
---------- -------- -------- -------- -----
Total Year ........$1,406,552 $831,445 $320,278 $222,125 $1.42
========== ======== ======== ======== =====

(a) Due to rounding some totals will not add.
(b) Includes $417.7 million special charge related to the acquisition of
Digitial's Network Products Group and the strategic alignment plan,
$382.7 million and $35.0 million, respectively.
(c) Includes $43.0 million special charge related to the acquisitions of ZeitNet
and Network Express. (d) Includes $20.0 million special charge related to the
acquisitions of Netlink and OASys.
(d) Includes $20.0 million special charge related to the acquisitions of Netlink
and OASys.

Note (18) Subsequent Event

On March 17, 1998 the Company acquired Yago Systems, Inc. ("Yago"), a
privately held manufacturer of wire speed routing and layer-4 switching products
and solutions. Under the terms of the merger agreement, the Company issued 6.1
million shares of Cabletron common stock to the former shareholders of Yago in
exchange for all of the outstanding shares of stock of Yago not then owned by
the Company. In addition, the Company assumed stock options for approximately
2.1 million shares of its common stock. Prior to the closing of the
acquisition, Cabletron held approximately twenty-five percent of Yago's capital
stock. The Company also agreed, pursuant to the terms of the merger agreement,
to issue up to 5.5 million shares of Cabletron common stock to the former
shareholders of Yago in the event the shares originally issued in the
transaction do not attain a market value of $35 per share eighteen months after
the closing of the transaction.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Cabletron Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Cabletron
Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended February 28, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cabletron Systems,
Inc. and subsidiaries as of February 28, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended February 28, 1998, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Boston, Massachusetts
March 23, 1998

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Information relating to the Directors of the Company is set forth in the section
entitled "Election of Directors," appearing in the Company's Proxy Statement for
its 1998 Annual Meeting of Stockholders ("Proxy Statement"), which is
incorporated herein by reference. Information relating to the executive officers
of the Company is included in Item 4a, "Executive Officers of the Registrant,"
appearing in Part I hereof. Information with respect to directors and executive
officers who failed to timely file reports required by Section 16(a) of the
Securities Exchange Act of 1934 may be found in the Proxy Statement under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance." Such
information is incorporated herein by reference.

ITEM 11. Executive Compensation

See the information set forth in the section entitled "Executive Compensation,"
appearing in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders, which is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

See the information set forth in the section entitled "Election of Directors -
Beneficial Ownership," appearing in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders, which is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions

See the information set forth in the section entitled "Certain Transactions,"
appearing in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders, which is incorporated herein by reference.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K

(a) Documents filed as part of this report:

1. Consolidated financial statements (see item 8)

The consolidated financial statements of Cabletron Systems, Inc.
can be found in this document on the following pages:

page(s)

Independent Auditors' Report 38

Consolidated Balance Sheets at February 28, 1998
and February 28, 1997 21

Consolidated Statements of Operations for fiscal years
1998, 1997 and 1996 22
Consolidated Statements of Stockholders' Equity for
fiscal years 1998, 1997 and 1996 23

Consolidated Statements of Cash Flows for fiscal years
1998, 1997 and 1996 24
Notes to Consolidated Financial Statements 25-37

2. Consolidated financial statement schedule

The consolidated financial statement schedule of Cabletron Systems,
Inc. is included in Part IV of this report:

Independent Auditors' Report 38

Schedule II - Valuation and Qualifying Accounts 44

All other schedules have been omitted since they are not required, not
applicable or the information has been included in the consolidated
financial statements or the notes thereto.

3. Exhibits

The following exhibits unless herein filed are incorporated by
reference.

3.1 Restated Certificate of Incorporation of Cabletron Systems,
Inc., a Delaware corporation, which is incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, No.33-28055, (the First Form S-1).
3.2 Certificate of Correction of the Company's Restated Certificate of
Incorporation, which is incorporated by reference to Exhibit 3.1.2 of
the Company's Registration Statement on Form S-1, No. 33-42534 (the
Third Form S-1). 3.3 Certificate of Amendment of the Restated
Certificate of Incorporation of Cabletron Systems, Inc., incorporated
by reference to Exhibit 4.3 of the Company's Registration Statement on
For S-3, No. 33-54466, (the First Form S-3).
3.4 Amended bylaws of Cabletron Systems, Inc., which is
incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on the Third Form S-1.
4.1 Specimen stock certificate of Cabletron Stock (incorporated by
reference to Exhibit 4.1 of Cabletron's Registration Statement on
Form S-1, No.33-28055.
10.1 1989 Restricted Stock Purchase Plan, which is incorporated by reference
to Exhibit 10.1 of the First Form S-1.
10.2 1989 Restricted Stock Plan, which is incorporated by reference to
Exhibit 10.2 of the First Form S-1.
10.3 1989 Equity Incentive Plan, as amended, which is incorporated by
reference to Exhibit 4 of the Company's Registration Statement on
Form S-8, No. 33-50454.
10.4 1989 Employee Stock Purchase Plan, as amended, which is
incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-8, No. 33-31572.
10.5 1989 Stock Option Plan for Directors, as amended, which is
incorporated by reference to Exhibit 10.5 of the Third Form S-1.
10.6 Agency Agreement between the Registrant and International Cable
Networks Inc., which is incorporated by reference to Exhibit 10.6 of the
First Form S-1.
10.7 Modification dated October 1990, of the Blue, Inc. Lease,
relating to leased premises in Ironton, Ohio, which is incorporated by
reference to Exhibit 10.8 of the First Form S-3.
10.8 Lease dated October 19, 1992 between the Registrant and Heidelberg
Harris, Inc., relating to leased premises in Durham, New Hampshire,
which is incorporated by reference to Exhibit 10.9 of the First
Form S-3.
10.9 Lease dated December 1, 1991 between the Registrant and George
L. Beattie, Ruth V. Blomstedt and Dan A. Wooley, as trustees of
the Execpark Realty Trust, relating to leased premises in
Merrimack, New Hampshire, which is incorporated by reference to
Exhibit 10.10 of the First Form S-3.
10.10 Lease dated July 3, 1992 between the Registrant and Shannon
Free Airport Development Company Limited, relating to leased
premises in Limerick, Ireland, which is incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement on the First Form S-3.
10.11 Lease dated July 15, 1996 between the Registrant and the Lawrence
County Economic Development Corporation, relating to leased premises in
Ironton, Ohio (Incorporated by Reference to Exhibit 10.11 of the
Registrant's Form 10-K of May 30, 1997).
10.12 Credit Agreement dated March 7, 1997, between the Registrant and
the Chase Manhattan Bank, as administrative agent, the First National
Bank of Chicago, as syndication agent and certain other lenders
relating to the Company's $250,000,000 revolving credit facility
(Incorporated by Reference to Exhibit 10.11 of the Registrant's
Form 10-K of May 30, 1997).
10.13 Asset Purchase Agreement among the Registrant, Ctron
Acquisition, Inc. and Digital Equipment Corporation ("Digital")
dated as of November 24, 1997 (the "Asset Purchase Agreement")
(Incorporated by Reference to Exhibit 2.1 of the Registrant's Form
10-Q of January 14, 1998).
10.14 Reseller and Services Agreement dated as of November 24, 1997
between the Registrant and Digital (the "Reseller Agreement")
(Incorporated by Reference to 10.1 of the Registrant's Form 10-Q of
January 14, 1998). 10.15 Employment Agreement between the Registrant
and Donald B. Reed dated as of August 6, 1997
(Incorporated Reference to Exhibit 10.1 of the Registrant's
Form 10-Q of October 15, 1997).
10.16 First Amendment to Asset Purchase Agreement dated as of February 7, 1998
by and among the Registrant, Ctron Acquisition, Inc. and Digital
(Incorporated by Reference to Exhibit 2.2 of the Registrant's Form 8-K/A
of March 4, 1998).
10.17 Amendment No. One to Reseller Agreement dated as of February 7,
1998 by and between the Registrant and Digital (Incorporated by
Reference to Exhibit 10.2 of the Registrant's Form 8-K/A of
March 4, 1998).
10.18 Letter agreement between the Registrant and Donald B. Reed dated
as of March 30, 1998. 11.1 Statement regarding computation of per share
earnings.
22.1 Subsidiaries of Cabletron Systems, Inc.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule

(b) The Registrant filed on form 8-K during the last quarter of the fiscal year
ended February 28, 1998, as follows:

The Company filed this report on form 8-K to disclose certain information
related to its acquisition of Network Products Business Unit of Digital
Equipment Corporation.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Cabletron Systems, Inc.:

Under date of March 23, 1998, we reported on the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended February 28, 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedule as listed in item 14(a)2 of this Form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.

In our opinion, the consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Boston, Massachusetts
March 23, 1998

SCHEDULE II

CABLETRON SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

For Years Ended February 28, 1998 and 1997 and February 29, 1996

(in thousands)

Amounts
attributable
Balance at to changes in Balance
beginning Charged to foreign Amounts at end
Description of period expense currency rates written off of period

Allowance for
doubtful accounts

February 28, 1998 $15,476 $11,615 ($81) ($5,967) $21,043

February 28, 1997 $6,655 $10,698 ($1) ($1,876) $15,476

February 29, 1996 $6,190 $2,725 $1 ($2,261) $6,655

Signatures

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CABLETRON SYSTEMS, Inc.

Date: May 28, 1998 By: /s/ Craig R. Benson
------------ -------------------
Craig R. Benson
Chairman, President, Chief Executive
Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Titles Date

/s/ Craig R. Benson Chairman, President, May 28, 1998
- ------------------------ Chief Executive Officer, ------------
Craig R. Benson Treasurer and Director

/s/ David J. Kirkpatrick Corporate Executive Vice President May 28, 1998
- ------------------------ of Finance and Chief Financial ------------
David J. Kirkpatrick Officer

/s/ Michael D. Myerow Secretary and Director May 28, 1998
- ------------------------ ------------
Michael D. Myerow

/s/ Paul R. Duncan Director May 28, 1998
- ------------------------ ------------
Paul R. Duncan

/s/ Donald F. McGuinness Director May 28, 1998
- ------------------------ ------------
Donald F. McGuinness

/s/ Donald B. Reed Director May 28, 1998
- ------------------------ ------------
Donald B. Reed

EXHIBIT INDEX

Exhibit No. Exhibit
Page No.

10.18 Letter agreement between Registrant and Donald B.
Reed dated march 30, 1998 55

11.1 Statement regarding computation of per share
income (loss) 47

22.1 Subsidiaries of Cabletron Systems, Inc. 48

23.1 Consent of Independent Auditors 49

27 Financial Data Schedule 54

EXHIBIT 11.1

CABLETRON SYSTEMS, INC.

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)

For Years Ended February 28, 1998 and 1997 and February 29, 1996

1998 1997 1996
------- ------- -------
(in thousands, except per share data)

Net Income (Loss) Per Common Share - (basic)

Net income (loss) ($127,062) $222,125 $144,485
======== ======== ========

Weighted average number of common shares
outstanding 157,686 155,207 151,525
========= ======== ========

Net income (loss) per common share ($ 0.81) $ 1.43 $ 0.95
========= ======== ========

Net Income (Loss) Per Common Share - (diluted)

Net income (loss) ($127,062) $222,125 $144,485
======== ======== ========

Weighted average number of common shares
outstanding 157,686 155,207 151,525

Add net additional common shares upon exercise of
common stock options --- 3,726 3,646
------- -------- --------

Adjusted average common shares outstanding 157,686 158,933 155,171
======== ======= ========

Net income (loss) per common share ($ 0.81) $ 1.40 $ 0.93
======== ======= ========

EXHIBIT 22.1

SUBSIDIARIES OF CABLETRON SYSTEMS, INC.

Cabletron Systems de Argentina S.A. (Argentina)
Cabletron Systems Pty. Limited (Australia)
Ctron Acquisition, Inc. dba Digital Network Products Group,
A Cabletron Systems, Inc. Company (Delaware)
Cabletron Systems do Brasil Representacoes Ltda. (Brazil)
Cabletron Systems of Canada Limited (Canada)
Cabletron Systems Chile (Chile)
Cabletron Systems de Colombia Ltda. (Colombia)
Cabletron Systems Inc. - Organizaoni Slozka (Czech Republic)
Cabletron Systems Acquisition, Inc. (Delaware)
Cabletron Systems Government Sales, Inc. (Delaware)
Cabletron Insurance Company (Vermont)
Cabletron Systems Sales & Service, Inc. (Delaware)
Cabletron Systems, Inc. of USA (China)
Cabletron Systems Ltd. (England)
Cabletron Systems S.A. (France)
International Cable Networks, Inc. (Virgin Islands)
Cabletron Systems, GmbH (Germany)
Cabletron Systems Limited (Bermuda)
Cabletron Systems (Distribution) Limited (Ireland)
Cabletron Systems Inc. (Hong Kong)
Cabletron Systems S.r.l. (Italy)
Cabletron Systems, K.K. (Japan)
Cabletron Systems, Pte Ltd (Korea)
Cabletron Systems Sdn Bhd (Malaysia)
Cabletron Systems, S.A. de C. V. (Mexico)
Cabletron Systems Benelux, B.V. (Netherlands)
Netlink, Inc. (Delaware)
Netlink, Ltd (UK)
Network Express, Inc. (Michigan)
Network Express GmbH (Germany)
Network Express K.K. (Japan)
Network Express Europe Limited (UK)
The OASys Group, Inc. (California)
Cabletron Systems, Pte Ltd. (Singapore)
Cabletron Systems S.A. (Spain)
Cabletron Systems, A.B. (Sweden)
Cabletron Systems AG (Switzerland)
Cabletron Systems de Venezuela C.A. (Venezuela)
Fivemere Ltd (UK)
Fivemere Asia-Pacific Singapore Limited
Fivemere Developments Limited
ZeitNet Inc. (California), a Cabletron Systems, Inc Company
ZeitNet India Private Limited (India)
Twister Acquisitions, Inc.
Yago Systems, Inc.

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Cabletron Systems, Inc.:

We consent to incorporation by reference in the registration statements (Nos.
33-50454, 33-31572, 33-50753, 33-21391, 33-17557, 33-09403, 33-09029, 33-96060,
33-96058, 33-33454 and 33-42490) on Form S-8 of Cabletron Systems, Inc. of our
reports dated March 23, 1998, relating to the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows and the related schedule for each of the years in the three-year period
ended February 28, 1998, which reports are included in the February 28, 1998
Annual Report to Stockholders on Form 10-K of Cabletron Systems, Inc.

KPMG Peat Marwick LLP

Boston, Massachusetts
May 29, 1998

DIRECTORS AND OFFICERS

Board of Directors Officers

Craig R. Benson Craig R. Benson
Chairman of the Board, President, Chairman of the Board, President,
Chief Executive Officer and Treasurer Chief Executive Officer and Treasurer
Cabletron Systems, Inc.
John d'Auguste
Michael D. Myerow President of Operations
Partner in law firm of Myerow & Poirier
Christopher J. Oliver
Paul R. Duncan Executive Vice President Worldwide
Executive Vice President Engineering and Chief Technology Officer
Reebok International, Ltd
David J. Kirkpatrick
Donald F. McGuinness Corporate Executive Vice President of
Chairman of the Board, Finance and Chief Financial Officer
Electronic Designs, Inc.
Allen L. Finch
Donald B. Reed Senior Vice President, Marketing and
Consultant Corporate Strategy

Guilio M. Gianturco
President, Digital Network Products
Group and Channels

Linda H. Pepin
Senior Vice President, Human Resources

Michael D. Myerow
Secretary

STOCKHOLDER INFORMATION

Annual Meeting of Stockholders Transfer Agent
The Annual Meeting of Stockholders will State Street Bank and Trust Company is
take place at 10:00 a.m. on Thursday, the Transfer Agent and Registrar of the
July 9, 1998 at the Frank Jones Center, Company's common stock. Inquiries
400 Route One By-Pass, Portsmouth, regarding lost certificates, change of
NH 03801. address, name or ownership should be
addressed to:
Stockholder Inquiries BankBoston, NA
Inquiries relating to financial Boston EquiServe
informationof Cabletron Systems, Inc. P.O. Box 8040
should be addressed to: Boston, MA 02266-8040
Cabletron Systems, Inc.
Investor Relations Independent Auditors
PO Box 5005 KPMG Peat Marwick LLP
Rochester, NH 03866-5005 99 High Street
Telephone: (603) 337-4225 Boston, MA 02110
Facsimile: (603) 332-4004
Legal Counsel
Listing Ropes & Gray
Cabletron Systems, Inc. common stock is One International Place
traded on the New York Stock Exchange - Boston, MA 02110
symbol CS.

WORLDWIDE LOCATIONS

Corporate Headquarters

Cabletron Systems, Inc.
Rochester, NH
Phone: (603) 332-9400

North America

ALABAMA
Birmingham
Phone: (205) 733-1772

ALASKA
Anchorage
Phone: (907) 563-5679

ARIZONA
Phoenix
Phone: (602) 953-8500

CALIFORNIA
Los Angeles
Phone: (310) 966-1918

Irvine
Phone: (714) 852-4126

Los Gatos
Phone: (408) 872-0203

Sacramento
Phone: (916) 449-9622

San Diego
Phone: (619) 497-2546

San Jose
Phone: (408) 383-1550

Santa Clara
Phone: (408) 986-9100

COLORADO
Denver
Phone: (303) 331-0990

CONNECTICUT
Hartford
Phone: (860) 947-7684

FLORIDA
Ft. Lauderdale
Phone: (954) 928-0028

Tallahassee
Phone: (904) 309-0212

Tampa
Phone: (813) 282-1227

GEORGIA
Atlanta
Phone: (770) 395-9909

HAWAII
Honolulu
Phone: (808) 532-9830

IDAHO
Post Falls
Phone: (208) 773-1711

ILLINOIS
Chicago
Phone: (773) 399-6000

INDIANA
Indianapolis
Phone: (317) 587-1600

KANSAS
Overland Park
Phone: (913) 327-1207

LOUISIANA
New Orleans
Phone: (504) 836-5526

MARYLAND
Baltimore
Phone: (410) 385-5224

MICHIGAN
Ann Arbor
Phone: (313) 761-5005

MINNESOTA
Minnetonka
Phone: (612) 449-5214

MISSOURI
St. Louis
Phone:( 314) 542-3142

NEBRASKA
Omaha
Phone: (402) 496-9390

NEVADA
Las Vegas
Phone: (702) 892-3775

NEW YORK
New York
Phone: (212) 643-9560

Albany
Phone: (518) 432-1798

Pittsford
Phone: (16) 249-4604

NORTH CAROLINA
Durham
Phone: (919) 484-8381

Charlotte
Phone: (704) 329-0003

Greensboro
Phone: (910) 299-2928

OHIO
Cincinnati
Phone: (513) 762-7646

Cleveland
Phone: (216) 573-3709

Columbus
Phone: (614) 785-6416

Dayton
Phone: (937) 438-9709

OKLAHOMA
Tulsa
Phone: (918) 492-2895

OREGON
Lake Oswego
Phone: (503) 968-6919

PENNSYLVANIA
Erie
Phone: (814) 454-5755

Philadelphia
Phone: (215) 239-2200

Pittsburgh
Phone: (412) 928-4999

RHODE ISLAND
Lincoln
Phone: (401) 334-1600

SOUTH CAROLINA
Columbia
Phone: (803) 788-0120

TENNESSEE
Nashville
Phone: (615) 859-7797

TEXAS
Austin
Phone: (512) 794-9166

Dallas
Phone: (972) 661-1049

Houston
Phone: (713) 871-3134

San Antonio
Phone: (210) 344-7241

UTAH
Salt Lake City
Phone: (801) 350-9480

WORLDWIDE LOCATIONS CONTINUED

VIRGINIA
Herndon
Phone: (703) 736-9100

Richmond
Phone: (804) 323-0291

WASHINGTON
Bellevue
Phone: (206) 637-2977

WISCONSIN
Milwaukee
Phone: (414) 221-0475

Madison
Phone: (608) 273-9192

PUERTO RICO
Guaynabo
Phone: (787) 273-6770

Canada

CALGARY
Calgary
Phone: (403) 231-2802

VANCOUVER
Vancouver
Phone: (604) 688-2550

OTTAWA
Ottawa
Phone: (613) 782-2320

TORONTO
Mississauga
Phone: (905) 673-8807

MONTREAL
Montreal
Phone: (514) 395-4949

EUROPE

BELGIUM
Brussells
Phone: 011-32-2467-3050

CZECH REPUBLIC
Praha
Phone: 011-42-2-2423-8123

ENGLAND
Berkshire
Phone: 011-44-1635-580000

London
Phone: 011-44-171-312-0210

Cheshire
Phone: 011-44-1928-579013

FRANCE
Paris
Phone: 011-33-148-947072

GERMANY
Berlin
Phone: 011-49-30-399-79598

Dusseldorf
Phone: 011-49-211-965-680

Frankfurt
Phone: 011-49-610-39910

Heidelberg
Phone: 011-46-6221-163544

Munich
Phone: 011-46-89-3177450

HUNGARY
Budapest
Phone: 011-36-1226-1803

ITALY
Assago
Phone: 011-39-2-892-2021

NETHERLANDS
Woerden
Phone: 011-31-348-486777

POLAND
Warsaw
Phone: 011-48-22644-0618

RUSSIA
Moscow
Phone: 011-7501-258-7673

SCOTLAND
Sterling
Phone: 011-44-1786-449-264

SPAIN
Madrid
Phone: 011-34-1326-4320

SWEDEN
Taby
Phone: 011-46-8792-6040

SWITZERLAND
Zurich
Phone: 011-41-1308-3610

TURKEY
Istanbul
Phone: 011-90-212-213-1690

Latin America

ARGENTINA
Buenos Aires
Phone: 011-54-13-42777

BRASIL
Sao Paulo
Phone: 011-55-11-5506-2888

Rio de Janeiro
Phone: 011-55-21-532-1504

Curitiba
Phone: 011-55-41-232-7154

Centro Empresarial
Phone: 011-55-61-314-1371

CHILE
Santiago
Phone: 011-56-2203-3733

COLUMBIA
Santa fe de Bogata
Phone: 011-571-623-7272

MEXICO
Mexico City
Phone: 011-525-490-3400

Monterrey
Phone: 011-528-335-9230

VENEZUELA
Caracas
Phone: 011-582-793-8385

Pacific Rim

AUSTRALIA
Melbourne
Phone: 011-61-3526-3639

Milton
Phone: 011-61-7367-1750

Turner
Phone: 011-61-6-257-2422

Sydney
Phone: 011-61-29950-5900

CHINA
Beijing
Phone: 011-86-10-6849-2748

Shanghai
Phone: 011-86-21-6248-1120

WORLDWIDE LOCATIONS CONTINUED

HONG KONG
Wanchai
Phone: 011-852-539-6882

INDIA
Bangalore
Phone: 011-91-80-2273130

Bombay
Phone: 011-91-22-835-2124

New Delhi
Phone: 011-91-11-462-1586

JAPAN
Tokyo
Phone: 011-81-3-3240-1981

KOREA
Seoul
Phone: 011-822-649-0700

MALAYSIA
Penang
Phone: 011-604-657-4937

Selangor
Phone: 011-60-3754-4388

NEW ZEALAND
Auckland
Phone: 011-649-273-5060

Wellington
Phone: 011-644-384-5186

SINGAPORE
The Cavendish
Phone: 011-65-775-5355

TAIWAN
Taipei Hsien
Phone: 011-886-2-648-7641

THAILAND
Bangkok
Phone: 011-662-661-9238

Middle East

SAUDI ARABIA
Phone: 011-9661-462-0101

Africa

SOUTH AFRICA
Johannesburg
Phone: 011-27-11-706-8480