CABLETRON SYSTEMS INC - 10-K Annual Report

Back to GetFilings.com

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, 1999

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. Employer
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of 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. [ ]

As of May 17, 1999, 173,000,986 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 17, 1999 was approximately $1.9
billion.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

Certain portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 1999 Annual Meeting of Stockholders
is incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

PART I

Item Page(s)
- ---- ------

1. Business 3
2. Properties 7
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
Executive Officers of the Registrant 9 - 10

PART II

5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
6. Selected Financial Data 12 - 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 28
7a. Quantitative and Qualitative Disclosures about Market Risk 28 - 29
8. Consolidated Financial Statements and Supplementary Data 30 - 49
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 51

PART III

10. Directors and Executive Officers of the Registrant 51
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and Management 51
13. Certain Relationships and Related Transactions 51

PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 10-K 52

PART I

This Annual Report on Form 10-K contains forward-looking statements (statements
which are not historical facts) including, without limitation, statements
containing the words "anticipates," "believes," "estimates," "expects," "plans,"
and words of similar import, which constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including the risks and uncertainties detailed below, and actual
results may differ significantly from those in any forward-looking statements.

Some of the factors that could cause future results to materially differ from
the Company's recent results or those projected in the forward-looking
statements include, but are not limited to, significant increases or decreases
in demand for the Company's products; increased competition; lower prices and
margins; failure to successfully develop or acquire and market new products and
technologies; competitors introducing superior products; continued industry
consolidation; failure to effectively integrate acquired companies and products;
failure to effectively manage sales of the Company's products through
distributors, resellers and original equipment manufacturers ("OEMs"); failure
to manage the amount of product in distributors' and resellers' inventories;
failure to secure supply of key component parts; instability and currency
fluctuations in international markets; failure to fulfill product orders in a
timely and effective manner; product defects; failure to secure intellectual
property rights; results of litigation; failure to retain and recruit key
employees; and failure to adequately take Year 2000 corrective activities. The
Company assumes no obligation to update any forward-looking statements contained
herein, after the date of this Form 10-K.

1. ITEM 1. Business

General

Founded in 1983, Cabletron Systems, Inc. ("the Company" or "Cabletron")
develops, manufacturers, markets, installs and support standards-based Ethernet,
Fast Ethernet, Gigabit Ethernet, Token Ring, fiber distributed data interface
("FDDI"), asynchronous transfer mode ("ATM") and wide area networks ("WAN")
networking solutions. Enhancing the Company's award-winning networking products
solutions, Cabletron's professional services team offers their expertise to
improve performance, productivity and profitability for all phases of the
enterprise network life cycle. Through its intelligent switching and enterprise
management products, the Company provides the foundation for a smarter network
that ties together existing equipment with newer products and applications for a
strategic enterprise that's more in line with the short- and long-term goals of
an organization. The Company provides its leading edge business solutions to
global customers for enterprise connectivity, service provider infrastructures,
software and professional services. The Company maintains significant operations
in the United States, Europe, Pacific Rim and in other industrialized areas of
the world. With flexible and scalable products designed for Fortune 1000
enterprise networks, service providers and small businesses, Cabletron is a
business communications specialist that provides intelligent, reliable, and
cost-effective business solutions for the information age.

Cabletron's solutions are deployed in a variety of organizations, including
global financial institutions, federal and state agencies, industrial and
manufacturing companies, telecommunications companies, internet service
providers, health care facilities and academic institutions around the world.
Focusing on the convergence of technologies, Cabletron provides customers with
business-focused solutions in the form of Smart Networks that consolidate voice,
video and data resources into one seamless, easily managed platform. Through
strategic partnerships, acquisitions and focus on research and development,
Cabletron has attempted to meet customer demands for a diverse and balanced
offering of products, software, service and global support. Cabletron believes
that its broad product line and its ability to provide full service capabilities
enables 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. Its website is located at
http://www.cabletron.com.

Fiscal 1999 Acquisitions

On September 25, 1998, Cabletron acquired NetVantage, Inc., a publicly held
manufacturer of Ethernet workgroup switches. Under the terms of the Merger
Agreement, Cabletron issued 6.4 million shares of Cabletron common stock to the
shareholders of NetVantage in exchange for all of the outstanding shares of
stock of NetVantage. In addition, Cabletron assumed 1,309,000 options, valued at
approximately $4.8 million. Cabletron recorded the cost of the acquisition at
approximately $77.8 million, including direct costs of $4.2 million. This
acquisition has been accounted for under the purchase method of accounting.

On September 9, 1998, Cabletron acquired all of the outstanding stock of
FlowPoint Corp., a privately held manufacturer of digital subscriber line router
networking products. Prior to the agreement, Cabletron owned 42.8% of the
outstanding shares of stock. Pursuant to the terms of the agreement, $20.6
million is to be paid in 4 installments, within 9 months after the merger date.
Each installment may be paid in either cash or Cabletron common stock, as
determined by Cabletron management at the time of distribution. In addition,
Cabletron assumed 494,000 options, valued at approximately $2.7 million.

On September 1, 1998, Cabletron acquired the assets and assumed certain
liabilities of the DSLAM division of Ariel Corporation ("Ariel"), a privately
held designer and manufacturer of digital subscriber line access multiplexor
products. Cabletron recorded the cost of the acquisition at approximately $45.1
million, including fees and expenses of $1.1 million related to the acquisition,
which consisted of cash payments of $33.5 million and other assumed liabilities.
This acquisition has been accounted for under the purchase method of accounting.

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 6.0 million
shares of Cabletron common stock to the shareholders of Yago in exchange for all
of the outstanding shares of Yago, not then owned by Cabletron. 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.
Cabletron recorded the cost of the acquisition at approximately $165.7 million,
including direct costs of $2.6 million. This acquisition has been accounted for
under the purchase method of accounting.

Fiscal 1998 Acquisitions

Effective February 7, 1998, Cabletron consummated the acquisition of certain
assets of the Network Products Group ("NPG") 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 NPG, now known as the "DIGITAL Network Products Group" ("DNPG"),
develops and supplies a wide range of data networking hardware and software,
including local area network ("LAN") and WAN products. DNPG'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 were transferred as issues in individual
countries were resolved.

Cabletron and Digital also entered into a Reseller Agreement dated 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 NPG). 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. In April 1998, Digital
was acquired by Compaq Corporation ("Compaq") and Compaq has assumed all of
Digital's obligations to Cabletron.

Fiscal 1997 Acquisitions

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.

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 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 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.

Products and Services

Cabletron's "smart networking" solutions, comprised of high-speed,
fault-tolerant SmartSwitches; full-function, wire-speed SmartSwitch routers; and
the fully distributed, multivendor SPECTRUM Enterprise Management platform, work
together to create an enterprise solution that is designed to meet the demands
of today's business environments. The Company's products maximize reliability
through features such as fully redundant power systems, distributed switching,
scalability and superior manageability.

Cabletron's products and services are grouped into two main categories, Core
Products and Ancillary Products; the core products are discussed below. All of
these products are backed by the Company's award-winning global Service and
Support Staff.

Core Products

Cabletron's family of "smart products", including SmartSwitches, SmartSwitch
Routers, SmartSTACKs, wireless RoamAbout solutions, and SPECTRUM Enterprise
Management, enable users to maximize performance while cost-effectively
migrating to next-generation technologies. This comprehensive family of
solutions is meant to be implemented in both legacy or newer network
environments with minimal disruption while preserving existing investments and
providing genuine scalability for future networking requirements.

The SmartSwitch Router, Cabletron's best-of-breed gigabit switch router,
combines the speed of a switch with the efficiency and security of a router. The
SmartSwitch Router delivers more than 100 times the performance of traditional
routers at a rate of 30 million packets/cells per second (pps) with zero packet
loss and no degradation in performance when value-added services are fully
enabled. These products were designed to integrate the customers' legacy systems
and deliver highly fault tolerant performance, all at a fraction of the cost of
comparable solutions.

Cabletron's SmartSwitches combine inherent scalability and manageability with
cost-effectiveness to provide high-end switching capabilities for all
environments, from the workgroup (SmartSTACK and SmartSwitch 2000/2500), to the
wiring closet (SmartSwitch 6000/6500) or to the data center (SmartSwitch
9000/9500) environments. The Company utilizes standards-based ASIC chips that
are designed to be fully manageable and interoperable with preexisting
equipment. These products are available as modular-based chassis systems or in
standalone capacity.

Cabletron's full line of ATM SmartSwitches provides high-speed uplinks of LAN
workgroups, interconnects data centers, supports bandwidth-heavy multimedia
applications and allows access to public ATM services. A SmartSwitch ATM
Administrator is designed to improve network performance, reduce operational
complexity and cut network ownership costs.

WAN Products are designed to allow the customer to scale, plan and manage their
central-site solutions to meet specific remote access/WAN requirements while
managing and controlling these remote sites (including a small office or home
office environment) - all from a single location.

Spectrum Enterprise Manager is the industry's only fully distributed,
multivendor enterprise management platform. It is one of the most flexible and
scalable management solutions available. SPECTRUM understands relationships
among segments, systems, applications and business processes and is designed to
provide the detailed information network managers need to make more informed
strategic decisions. SPECTRUM proactively corrects potential failures before
they occur.

Security Solutions programs provide a line of products for Internet security
applications. Cabletron has established an agreement with Nokia that combines
Cabletron's world-class routing capabilities with Nokia's IPSOTM routing
operating system and Check PointFireWall-1TM, best-of-breed firewall software,
to provide an unprecedented security solution for Internet access and Virtual
Private Networking ("VPN").

Service and Support

In addition to its broad line of network equipment, the Company also offers a
wide range of support services, including maintenance; consulting; design and
configuration; product planning; project management; training; testing;
certification and documentation; and performance analysis. The Company offers
comprehensive training programs to ensure that customers receive the maximum
benefit from their networks. Cabletron's Professional Service group forms an
integral part of the Company's marketing strategy, as it constitutes a key
element of the complete networking solution offered by Cabletron. With more than
100 sales and support offices worldwide, Cabletron offers one of the industry's
strongest Service and Support organizations.

Distribution and Marketing

The Company has strengthened and expanded its relationship with distributors and
resellers. The Company remains focused on securing relationships with
distributors and resellers that will provide quality professional service
support to the end-user in addition to carrying the Company's line of products.
The Company extends limited product return and price protection rights to
certain distributors and resellers. Such rights are generally limited to a
certain percentage of sales over primarily a three month period. In addition to
the Company's use of distributors and resellers, the Company maintains its own
direct sales force with representatives located around the world. The direct
sales force is supplemented by employees located at Cabletron's headquarters and
regional in-house technical services and sales support staff. The Company
believes that its ratio of in-house sales, marketing and technical services and
sales support staff to field sales force contributes significantly to the
effectiveness of its field sales force. The Company'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
Company continues to enhance its Synergy Plus Program. The Synergy Plus Program
sets forth the principles of the relationship between the Company and the
reseller, 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.

The Company employs several methods to market its products, including regular
participation in trade shows, frequent advertisements 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.

The Company operates in one industry segment throughout four geographical
regions (United States, Europe, Pacific Rim ("Pac Rim") and Other).

Customers

The Company's end-user customers include brokerage, investment banking firms and
other financial institutions; federal, state and local government agencies;
commercial, industrial and manufacturing companies; multinational and
international companies; telecommunications companies; internet service
providers; health care facilities; insurance companies; universities; and
leading accounting and law firms.

During the year ended February 28, 1999, the Company had one customer, Compaq,
which accounted for 11 percent of total sales and 7 percent of total accounts
receivable, and the United States federal government accounted for approximately
15% of net sales. During the year ended February 28, 1998, no single customer
represented more than 4 percent of Cabletron's net sales; however, sales to the
United States federal government accounted for approximately 13 percent of net
sales. Cabletron's top ten customers, excluding the United States federal
government, represented, in the aggregate, approximately 22 percent and 15
percent of its net sales for the fiscal years ended February 28, 1999 and
February 28, 1998, respectively. Most of the Company's contracts with the
federal government are on a fixed-price basis. The books and records of the
Company are subject to audit by the General Services Administration, the
Department of Labor and other government agencies.

Research and Development

During the years ended February 28, 1999, 1998 and 1997, research and
development expenses were $210.4 million, $181.8 million, and $161.7 million,
respectively. The Company has consistently increased its R&D efforts, because it
believes its future success will be largely dependent on new product
development. The Company believes that as customers place more reliance on their
networks and those 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; thus the
Company has continued to emphasize its R&D efforts in the software arena.

During the year ended February 28, 1999, the Company expanded the number of
software and hardware engineers focused on research and development efforts; and
the Company increased its potential product technologies through mergers and
acquisitions of public and private companies. In March 1998, the Company
acquired Yago Systems, Inc., a privately held manufacturer of wire speed routing
and Layer-4 switching products and solutions. In September 1998, the Company
acquired the DSLAM division of Ariel Corporation, a privately held manufacturer
of digital subscriber line access multiplexor products; FlowPoint Corp., a
privately held manufacturer of digital subscriber line router networking
products; and NetVantage, Inc., a publicly held manufacturer of ethernet
workgroup switches.

The Company plans to continue to invest in emerging technologies for use in
existing and future products through both internal efforts and acquisitions.

Supply of Components

The Company'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 the Company's products and
subassemblies are manufactured by single-source third parties. With the
increasing technological sophistication of new products and the associated
design and manufacturing complexities, the Company 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 the Company's operating results and supplier
relationships.

Manufacturing

Since inception, Cabletron has manufactured and assembled most of its current
products. In addition to manufacturing most of its own products, the Company
utilizes a variety of independent third-party manufacturing companies. The
manufacturing process enables the Company to provide customers with customized
hardware and software products that meet the customers' needs.

Recent Developments

Subsequent to the end of fiscal year 1999, the Company developed a more focused
growth strategy that resulted in the Company outsourcing its manufacturing
operations to an independent third-party manufacturing company, Celestica, Inc.
("Celestica"). As part of this long-term supply agreement and other agreements,
Celestica will acquire certain Cabletron employees, manufacturing assets and
inventory during fiscal 2000. The partnership is intended to allow the Company
to continue to improve its time-to-market, quality, competitive pricing
flexibility, and, ultimately, lower its cost of goods sold. Celestica's
manufacturing processes and procedures are ISO 9002 certified.

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 the Company's existing or future markets.
The Company'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., FORE Systems, Inc., Lucent
Technologies, Inc., Northern Telecom Ltd. and 3Com Corporation. Several large
telecommunications equipment companies, including Nokia Corp., Alcatel, Ericcson
and Siemens have begun to compete in the data networking industry and have
recently made investments in or acquired several smaller data networking
companies. Many of the industry's rating agencies have ranked Cabletron as one
of the top four companies in this industry. Companies in the data networking
industry compete upon the basis of price, technology, and brand recognition.
Competitors may introduce new or enhanced products that offer greater
performance or functionality than the Company's products. 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.

Intellectual Property

The Company's success depends in part on its proprietary technology. The Company
attempts to protect its proprietary technology through patents, copyrights,
trademarks, trade secrets and license agreements. The Company 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 the Company in this regard will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, the laws of some foreign countries may not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. The Company has been issued a number of patents and has other
patent applications pending. There is no assurance that patents will be issued
from pending applications, or that claims allowed on any future patents will be
sufficiently broad to protect the Company's technology. No assurance can be
given that any patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages.

Backlog

The Company's backlog at February 28, 1999 was approximately $170.0 million,
compared with backlog at February 28, 1998 of approximately $165.0 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 the Company's actual sales for any succeeding
fiscal period.

Inventory and working capital

The Company has improved its inventory controls which has resulted in lower
inventory levels while maintaining sufficient inventory levels that allow for
shipment of most customer orders, that require rapid delivery, within 24 to 48
hours of receipt. In addition, a portion of the decrease in working capital was
due to the transfer of more cash to long-term investments. As of February 28,
1999, working capital was $370.9 million compared to $593.0 at February 28,
1998.

Employees

As of February 28, 1999, the Company had 5,951 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.

See "Business Environment and Risk Factors" beginning on page 23 for additional
information.

Domestic and Foreign Financial Information

Financial information concerning foreign and domestic operations is contained in
Note 13 of "Notes to the Consolidated Financial Statements" included at page 45
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. Other buildings, totaling 122,000 square-feet,
accommodate sales, marketing, administration and technical support personnel.
Another building, totaling 221,000 square feet, is used as a warehousing and
distribution facility. Cabletron owns a 114,000 square-foot building in
Merrimack, New Hampshire which accommodates additional engineering personnel.

In addition to owning numerous buildings, the Company's management has made the
strategic decision to lease other facilities. Cabletron leases a manufacturing
building, totaling 120,000 square feet, in Ironton, Ohio. Cabletron also leases
a 78,000 square-foot research and development facility in Durham, New Hampshire.
Cabletron leases a 152,000 square-foot building to accommodate engineering, in
Andover, Massachusetts. The Company has entered into various leases in Ireland
to support its international sales activities. Cabletron occupies a 100,000
square-foot manufacturing facility in Limerick, Ireland, and a 75,000
square-foot distribution center in Shannon, Ireland. Cabletron is renovating a
129,000 square-foot facility in Santa Clara, California; this facility will
accommodate a central west coast sales office and research and development
personnel. Cabletron also occupies facilities in Ann Arbor, Michigan,
Piscataway, New Jersey and Salt Lake City, Utah. Cabletron also leases sales and
technical support offices that range from 1,000 to 25,000 square feet at various
locations throughout the world.

Pursuant to the March 1999 restructuring initiative, the Company expects to
consolidate some facilities and staff as a result of the restructuring plan. The
outsourcing agreement, entered into subsequent to the end of fiscal 1999, will
potentially enable the Company to sub-lease certain manufacturing facilities in
New Hampshire and close its manufacturing facility in Ironton, Ohio. Management
expects to decrease the total number of facilities that it occupies throughout
the next 12 - 18 months.

Financial information regarding leases and lease commitments are contained in
Note 10 of "Notes to the Consolidated Financial Statements" included at page 43
of this document.

ITEM 3. Legal Proceedings

As previously disclosed in Cabletron's annual report on Form 10-K for fiscal
1998, a consolidated class action lawsuit purporting to state claims against
Cabletron and certain officers and directors of Cabletron was filed and
currently is pending in the United States District Court for the District of New
Hampshire. The complaint alleges 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 complaint also alleges that certain of the Company's alleged accounting
practices resulted in the disclosure of materially misleading financial results
during the same period. More specifically, the complaint challenged the
Company's revenue recognition policies, accounting for product returns, and the
validity of certain sales. The complaint does not specify the amount of damages
sought on behalf of the class. Cabletron and other defendants moved to dismiss
the complaint and, by Order dated December 23, 1998, the District Court
expressed its intention to grant Cabletron's motion to dismiss unless the
plaintiffs amended their complaint within 30 days (or January 22, 1999).
Plaintiffs timely served a Second Consolidation Class Action Complaint, and the
Company has filed a motion to dismiss this second complaint. A ruling on that
motion is not expected earlier than July, 1999. 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, the Company could be required to pay substantial
damages. This litigation may be protracted and may result in a diversion of
management and other resources of the Company. The payment of substantial legal
costs or damages, or the diversion of management and other resources, could have
a material adverse effect on the Company'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.

Executive Officers of the Registrant

The executive officers of the Company are as follows:

Name Age Position
- ---- --- --------

Craig R. Benson 44 Chairman, President, Chief Executive Officer, Treasurer and Director

Carl E. Boisvert 41 Executive Vice President, Sales

John d'Auguste 48 President of Operations

Enrique P. Fiallo 46 Senior Vice President and Chief Information Officer

Allen L. Finch 38 Senior Vice President, Worldwide Marketing, Corporate Strategy & Communications

Earle S. Humphreys 52 Executive Vice President, Global Services

Eric Jaeger 36 Senior Vice President and General Counsel

David J. Kirkpatrick 47 Corporate Executive Vice President of Finance and Chief Financial Officer

Piyush Patel 43 Senior Vice President, Worldwide Engineering

Linda F. Pepin 46 Senior Vice President, Human Resources

Michael A. Skubisz 32 Chief Technology Officer

Craig R. Benson served as 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.

Carl E. Boisvert has served as Executive Vice President, Sales since October
1998. Prior to joining Cabletron, he held a variety of senior management roles,
including Vice President/General Manager for North America, at Amdahl
Corporation during an 8-year tenure. Prior to joining Amdahl, he served as a
Vice President with State Street Bank and a Regional Sales Manager with IBM.

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 served Gateway 2000 as the Vice
President of Direct Sales. He previously held the position of Vice President of
Operations. Prior to joining Gateway 2000, he served as the Vice President of
Product Business Unit for General Railway Signal.

Enrique P. (Henry) Fiallo has served as Senior Vice President and Chief
Information Officer since November 1998. Prior to joining Cabletron, he served
as Senior Vice President and Chief Information Officer at Entergy Services,
Inc.. Prior to joining Entergy, he was Vice President of Logistics Information
Systems at Ryder Systems, Inc., in Miami, Florida, where he held a variety of
senior management roles in IT, MIS and telecommunications during a 10-year
tenure.

Allen L. Finch has served as Senior Vice President of Worldwide Marketing,
Corporate Strategy & Communications since March 1998. From October 1997 to March
1998, he served as Senior Vice President of Corporate Strategy and Business
Development. From 1991 to 1997, he was a strategic and communications consultant
in Washington, D.C.

Earle S. Humphreys has served as Executive Vice President of Global Services
since July 1998. Prior to joining Cabletron, he served as Senior Director of
Services Solution Marketing at Compaq Computer Corp. Prior to joining Compaq, he
held a variety of senior management roles, including Vice President of
Consulting Services, at Tandem Computers during a 10-year tenure.

Eric Jaeger has served as General Counsel and Senior Vice President since
October 1998. Prior to joining Cabletron, he was a corporate attorney with the
law firm of Ropes & Gray.

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

Piyush Patel has served as Senior Vice President of Worldwide Engineering since
October 1998. From September 1996 to October 1998, he served as CEO at Yago
Systems, Inc. and from 1980 to 1996, he held a variety of senior management
positions at Intel, Sun Microsystems, MIPS computers and QED.

Linda F. Pepin has served as Senior Vice President of Human Resources since
September 1997. From 1989 to 1997, she was Director of Human Resources. Prior to
joining Cabletron, she held various positions in human resource management.

Michael A. Skubisz has served as Chief Technology Officer since September 1998.
From 1993 to 1998, he served as Vice President of Product Marketing and Product
Management. He has held various positions at Cabletron, including Regional
Manager of Field Engineering in the New York City office where he began his
career with Cabletron in 1988.

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, and on July 29, 1998 Mr. Reed resigned as a director of Cabletron. 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 these individuals could
adversely affect the Company'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 May 17, 1999, the Company had approximately 3,540
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 1999 High Low
- ----------- ------ ------

First quarter $15.56 $12.50
Second quarter 14.31 6.63
Third quarter 15.31 6.63
Fourth quarter $14.38 $7.69

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

ITEM 6. SELECTED FINANCIAL DATA

CABLETRON SYSTEMS, INC.

Statement of Operations Data:

(in thousands, except per share data)

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

February 28, February 28, February 28, February 29, February 28,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Restated) (Restated)

Net sales $1,411,279 $1,377,330 $1,406,552 $1,100,349 $833,218
Cost of sales 811,350 676,291 595,407 448,699 340,424
---------- ---------- ---------- ---------- --------
Research and development 210,393 181,777 161,674 127,289 89,129
Selling, general and administrative 446,232 373,789 301,469 223,083 166,649
Fixed asset loss 17,570 --- --- --- ---
Special charges 217,350 234,285 21,724 94,343 ---
---------- ---------- ---------- ---------- --------
Income (loss) from operations (291,616) (88,812) 326,278 206,935 237,016
Interest income 15,089 18,578 19,422 17,891 5,572
---------- ---------- ---------- ---------- --------
Income (loss) before taxes (276,527) (70,234) 345,700 224,826 242,588
Income tax expense (benefit) (31,136) (35,273) 119,621 80,341 86,014
---------- ---------- ---------- ---------- --------
Net income (loss) ($ 245,391) ($ 34,961) $ 226,079 $ 144,485 $156,574
========== ========== ========== ========== ========

Net income (loss) per share - basic ($1.47) ($0.22) $1.46 $0.95 $1.08
========== ========== ========== ========== ========
Net income (loss) per share - diluted ($1.47) ($0.22) $1.42 $0.93 $1.07
========== ========== ========== ========== ========

Weighted average number of shares
outstanding - basic 167,432 157,686 155,207 151,525 145,125
========== ========== ========== ========== ========
Weighted average number of shares
outstanding - diluted 167,432 157,686 158,933 155,171 147,017
========== ========== ========== ========== ========

Note: Included in fiscal 1999 results are special charges ($207.2 million, net
of tax) related to the in-process research and development expenses for the
acquisitions of Yago Systems, Inc., the DSLAM division of Ariel Corporation,
FlowPoint, Inc. and NetVantage, Inc.. Included in fiscal 1998 results are
special charges related to the in-process research and development expenses for
the acquisition of Digital's Network Products Group and the implementation of a
strategic realignment plan consisting of $121.8 million and $21.5 million,
respectively (net of tax). Included in fiscal 1997 and fiscal 1996 results are
$13.5 million and $60.8 million (net of tax) of special charge items related to
all acquisitions for each fiscal year, respectively. Excluding these one-time
charges, pro forma net income (loss) and diluted net income (loss) per share are
as follows:

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

February 28, February 28, February 28, February 29,
1999 1998 1997 1996
------------ ------------ ------------ ------------
(in thousands, except per share data) (Restated) (Restated)

Pro forma net income (loss) ($38,191) $108,339 $239,579 $205,285
Pro forma diluted net income per share (loss) ($0.23) $0.68 $1.51 $1.32

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

Balance Sheet Data: February 28, February 28, February 28, February 29, February 28,
(in thousands) 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Restated) (Restated)

Working capital $370,945 $593,046 $679,056 $485,152 $381,758
Total assets 1,566,500 1,682,048 1,310,809 996,908 702,200
Stockholders' equity 1,089,833 1,085,075 1,085,452 809,886 593,942

As previously reported, in its second quarter Form 10-Q for the year ended
February 28, 1999, the Company received comments from the staff of the
Securities & Exchange Commission ("SEC") on the Company's financial statements,
particuraly with respect to the accounting for recent acquisitions. Based upon
these comments, the Company has agreed to make certain revisions to the
consolidated financial statements contained in this Annual Report on Form 10-K,
in certain prior Quarterly Reports on Form 10-Q and in the Company's Annual
Report of Form 10-K for the Company's year ended February 28, 1998. The SEC has
indicated that, based upon the revisions the Company has agreed to make, it has
no further comments on the affected consolidated financial statements. The
revisions relate primarily to special charges associated with the acquisition of
the Network Products Group of Digital Equipment Corporation ("DNPG"), during the
fourth quarter of the year ended February 28, 1998 and special charges
associated with the acquisition of ZeitNet, Inc. ("ZeitNet"), during the second
quarter of the year ended February 28, 1997. The Company has also reclassified
certain other expenses related to the DNPG acquisition and to three acquisitions
consummated during the year ended February 28, 1997 (ZeitNet, Network Express,
Inc. and Netlink, Inc.) from special charges to cost of sales and selling,
general and administrative expenses. The reclassifications had no effect on net
income (loss).

See Notes 2 (b) and 17 of the Consolidated Financial Statements for additional
information.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 the Company'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, 1999, 1998 and 1997:

1999 1998 1997
----- ----- -----

Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 57.5 49.1 42.3
----- ----- -----
Gross profit 42.5 50.9 57.7
Research and development 14.9 13.2 11.5
Selling, general and administrative 31.6 27.1 21.5
Fixed asset loss 1.2 --- ---
Special charges 15.4 17.0 1.5
----- ----- -----
Income (loss) from operations (20.6) (6.4) 23.2
Interest income 1.1 1.3 1.4
----- ----- -----
Income (loss) before income taxes (19.5) (5.1) 24.6
----- ----- -----
Income tax expense (benefit) (2.2) (2.6) 8.5
----- ----- -----
Net income (loss) (17.4) % (2.5) % 16.1 %
===== ====== ======

Net Sales

Net sales for the year ended February 28, 1999 increased by 2.5% to $1,411.3
million from $1,377.3 million in the year ended February 28, 1998 and compared
to $1,406.6 million in the year ended February 28, 1997. Net sales within the
United States ("domestic"), in the year ended February 28, 1999, were $829.4
million or 58.8% of net sales, compared to $923.3 million or 67.0% of net sales
in the year ended February 28, 1998 and $998.4 million or 71.0% of net sales in
the year ended February 28, 1997. Domestic net sales declined due to continued
price competitiveness resulting in lower prices and the decline in sales of
shared technology products not fully offset by the increase in sales of switched
media products. Net sales outside the United States in the year ended February
28, 1999 were $581.9 million, or 41.2% of net sales, compared to $454.0 million
or 33.0% of net sales in the year ended February 28, 1998 and $408.2 million or
29.0% of net sales in the year ended February 28, 1997. In addition to the
Company's direct international sales force, the Company sells its products
through several reseller channels and international distributors. The increase
in international net sales in fiscal 1999 compared to the year ended February
28, 1998 reflects a full year of DNPG/Compaq activity and the Company's emphasis
on managing global operations. The increase reflects growth rates of 47.1% and
32.9% in the Pac Rim region and Europe, respectively, offset by a 29.0%
reduction in other international sales, primarily Latin America. The increase in
international net sales in the year ended February 28, 1998 compared to the year
ended February 28, 1997 reflected growth in all major international regions. The
Company's international net sales are 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. The Company expects
that international sales will continue to account for a significant portion of
the Company's net sales in future periods.

The overall increase in the year ended February 28, 1999 net sales compared to
the year ended February 28, 1998 net sales was due to increases in the sales of
switched products, software and professional services. The current year also
included a full year of DNPG/Compaq sales, largely contributing to the increase
in sales of switched products. Sales of shared media and other products,
including similiar DNPG/Compaq products, decreased throughout the year and
relative to the prior year. Sales of switched products increased 14.2% to $776.9
million in the year ended February 28, 1999 compared to sales of $680.6 million
in the year ended February 28, 1998. The increase in sales of switched products
was a result of increasing unit sales (primarily related to the SmartSwitch 6000
products). Prices per product decreased slightly for some of the older switched
products during the year ended February 28, 1999, but shipments of new products
offset this slight price decline. Sales of the Company's shared media products
decreased 46.5% to $170.0 million in the year ended February 28, 1999 compared
to sales of $317.6 million in the year ended February 28, 1998. Sales of shared
media products steadily decreased throughout the year ended February 28, 1999.
Sales of shared media products, during the second half of the year ended
February 28, 1999, were approximately $59.6 million (as 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 2000 as
customers continue the migration from shared media products to switched
products. The pricing environment has been very competitive and has caused
significant price erosion in the Company's older products.

Sales of software, professional services and other were $464.4 million or 32.9%
of total net sales in the year ended February 28, 1999, compared to $379.1
million or 27.5% of total sales in the year ended February 28, 1998 and $389.5
million or 27.7% of net sales in the year ended February 28, 1997. The Company
is focused on supplying customers with advanced software packages that include
the applicable software programs, installation, training and maintenance
services as one product. This bundled product will become an integral part of
Cabletron's customer development and support activities. During the year ended
February 28, 2000, management intends to offer customers more advanced software
packages and to attempt to increase service revenue by continuing to emphasize
this portion of the business. As part of the Company's acquisition of DNPG, the
Company agreed to appoint Digital as the service provider for the Company's
products in certain smaller countries, where the Company did not already have a
significant investment in services. This appointment has not had a significant
effect on the growth of the Company's own service and support organization.

The slight decrease in net sales in the year ended February 28, 1998 compared to
the year ended February 28, 1997 was largely a result of a decrease in sales of
the Company's shared media products. Sales of the Company's shared media
products decreased 56.6% to $317.6 million in the year ended February 28, 1998
compared to sales of $717.8 million in the year ended February 28, 1997. The
decline in revenue of shared media products was a result of both declining unit
shipments and lower prices per product. 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 the year ended
February 28, 1998 compared to sales of $299.3 million in fiscal 1997. The
increase in sales of switched products was a result of increasing unit sales.
Prices per product decreased slightly for switched products during the year
ended February 28, 1998, but the increase in unit shipments offset this slight
price decline.

Gross Profit, Expenses and Interest Income

Gross profit was $599.9 million or 42.5% in the year ended February 28, 1999
compared to $701.0 million or 50.9% of net sales in the year ended February 28,
1998 and compared to $811.1 million or 57.7% of net sales in the year ended
February 28, 1997. The decrease in gross profit in the year ended February 28,
1999, as compared to the year ended February 28, 1998, as a percentage of net
sales reflects the impact on pricing from increased sales to channel resellers
and independent distributors (rather than selling directly to the end-user) and
a more competitive pricing environment; additionally, the shift from shared
media to switch products resulted in higher inventory obsolesence. The Company's
decrease in gross profit in the year ended February 28, 1998 as compared to the
year ended February 28, 1997 was due to pricing pressures, especially in the
Company's foreign markets which traditionally carried a higher margin, and also
to increased inventory write-offs. The Company was able to maintain a consistent
gross margin in the year ended February 28, 1997, as compared to prior years, by
introducing and selling products with improved functionality, further developing
its service maintenance program and improving purchasing and manufacturing
efficiencies. In the future, the Company's gross profit may be affected by the
same factors as the year ended February 28, 1999, including the price per
product sold, inventory obsolescence, the distribution channels used, price
competition, the mix of products sold, the acquisition of newer products at
different margins and the result of the anticipated savings recognized through
its outsourcing of the manufacturing process.

Research and development ("R&D") expenses in the year ended February 28, 1999
increased to $210.4 million or 14.9% of net sales, compared to $181.8 million or
13.2% of net sales in the year ended February 28, 1998 and $161.7 million or
11.5% of net sales in the year ended February 28, 1997. The increased R&D, in
the year ended February 28, 1999, reflected higher spending due to the addition
of software and hardware engineering personnel, directly hired and as a result
of the Company's acquisitions, and the associated costs related to development
of new products and the next generation of existing products. The increased R&D
spending in fiscal 1998, as compared to the year ended February 28, 1997,
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 the year ended February
28, 1998 compared to the year ended February 28, 1997 primarily because net
sales were lower than the Company expected in the year ended February 28, 1998.
The Company plans to continue emphasizing research and development as a critical
strategy for the Company. In the future, the Company will attempt to reduce R&D
spending as a percentage of net sales similar to the percentage levels prior to
the year ended February 28, 1998. The Company plans to continue to develop new
products through a combination of internal development efforts, minority
investments in independent companies and acquisitions. There can be no assurance
that research and development efforts or acquisitions of technology will result
in commercially successful new technology and products in the future, or that
such technology and products will be introduced in time to meet market
requirements. The Company's research and development efforts may be adversely
affected by other factors discussed more fully below in "Business Environment
and Risk Factors."

Selling, general and administrative ("SG&A") expenses were $446.2 million or
31.6% of net sales in the year ended February 28, 1999, compared to $373.8
million or 27.1% of net sales in the year ended February 28, 1998 and $301.5
million or 21.5% of net sales in the year ended February 28, 1997. These
increases were a result of an increase in amortization expense of intangible
assets recorded from the acquisitions, an increase in sales and technical
personnel, incentive payments to employees added through the acquisitions and
increased marketing programs. SG&A expenses increased as a percentage of net
sales in fiscal 1999 primarily as a result of lower than expected sales. The
Company expects to focus more of the future SG&A expenditures on core spending,
advertising and marketing to potential customers, for revenue generation; and
the Company expects that SG&A expenses will include more amortization expense in
the year ended February 28, 2000, due to a full year of amortization expense for
acquisitions completed during the year ended February 28, 1999, as compared to
fiscal 1999; while other components of SG&A will remain approximately constant,
in absolute dollars, in the upcoming year.

In the fourth quarter of the year ended February 28, 1999, the Company performed
a physical inventory of manufacturing equipment and fixtures in preparation for
the planned outsourcing of its manufacturing operations. As a result of this
inventory, the Company wrote off approximately $17.6 million of assets. The
writeoff consisted of equipment and fixtures that could not be located ($14.2
million) and equipment recently idled with no future value.

In the year ended February 28, 1999, special charges were taken for in-process
research and development related to the acquisition of Yago Systems, Inc.
($150.0 million), the DSLAM division of Ariel Corporation ($26.0 million),
FlowPoint Corp. ($12.0 million) and NetVantage, Inc. ($29.4 million). In the
year ended February 28, 1998, special charges were taken for in-process research
and development related to the acquisition of the DNPG ($199.3 million) and the
implementation of a realignment plan ($35.0 million), totaling $234.3 million.
In the year ended February 28, 1997, a $21.7 million special charge was taken
for the acquisitions of ZeitNet, Network Express, Netlink and The OASys Group.

Net interest income in the year ended February 28, 1999 was $15.1 million
compared to $18.6 million in the year ended February 28, 1998 and compared to
$19.4 million in the year ended February 28, 1997. The decrease of net interest
income in the year ended February 28, 1999 as compared to fiscal 1998 is a
result of lower cash available for short-term investments caused by Compaq's
utilization of product credits in place of cash to settle accounts receivable
and cash used to fund acquisitions. The slight decrease in interest income in
the year ended February 28, 1998 is primarily the result of lower interest rates
than in the year ended February 28, 1997.

Income (Loss) Before Taxes

Loss before taxes was $276.5 million in the year ended February 28, 1999,
compared to $70.2 million in the year ended February 28, 1998 and income before
taxes of $345.7 million in the year ended February 28, 1997. In the year ended
February 28, 1999, the Company recorded a fixed asset loss of $17.6 million; and
recorded special charges of $217.4 million for in-process research &
development, consisting of (i) NetVantage, Inc. for $29.4 million, (ii)
FlowPoint Corp. for $12.0 million, (iii) the DSLAM division of Ariel Corporation
for $26.0 million and (iv) Yago Systems, Inc. for $150.0 million. In fiscal
1998, the Company recorded special charges of $234.3 million, consisting of (i)
in process research and development of $199.3 million in connection with the
acquisition of the DNPG, and (ii) charges relating to the Company's realignment
of $35.0 million. In the year ended February 28, 1997, the Company's recorded
special charges related to acquisitions of $21.7 million. The increase in loss
before taxes in the year ended February 28, 1999 was due to lower gross profit
margins as the Company continued its migration from shared media products to
switched products and higher personnel costs in R&D departments more than
offsetting the decrease in special charges. The decrease in income before taxes
in the year ended February 28, 1998 was due primarily to the increase of $212.6
million in special charges. Excluding special charges, loss before taxes was
$59.2 million in the year ended February 28, 1999, compared to income before
taxes of $164.1 million in the year ended February 28, 1998, and $367.4 million
in the year ended February 28, 1997. The decrease in income before taxes in the
year ended February 28, 1998 as compared to the year ended February 28, 1997 was
also due to lower revenues and higher cost of sales. The factors affecting net
sales and cost of sales are discussed above.

Income Tax Expense (Benefit)

Excluding the effects of special charges, the Company's effective tax rate was
34.0% for the year ended February 28, 1999, 34.1% for the year ended February
28, 1998 and 34.6% for the year ended February 28, 1999. The income tax benefit
was $31.1 million in fiscal 1999 compared to a benefit of $35.3 million in the
year ended February 28, 1998 and $119.6 million of income tax expense in the
year ended February 28, 1997. The tax benefit decreased in the year ended
February 28, 1999 as compared to the year ended February 28, 1998 due to fewer
tax deductible charges related to acquisitions and other corporate charges. The
year ended February 28, 1999 income tax benefit included a $10.2 million tax
benefit related to the acquisition of Ariel and a $6.8 million tax benefit
related to the fixed asset loss. The year ended February 28, 1998 income tax
benefit included $77.5 million related to the acquisition of DNPG and $13.5
million related to the Company's realignment. The year ended February 28, 1997
income tax expense was incurred due to net income after special charges. Net
loss was $245.4 million in the year ended February 28, 1999, compared to net
loss of $35.0 million in the year ended February 28, 1998 and net income of
$226.1 million in the year ended February 28, 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
elimination of duplicate facilities, consolidation of related operations,
reallocation of resources, including the elimination of certain existing
projects, and personnel reduction. During fiscal 1999, the Company completed the
reductions required to better align its global initiative.

Business Combinations

1999 Acquisitions

Yago Systems, Inc.

In connection with the acquisition of YAGO, the Company allocated $150.0 million
of the purchase price to in-process research and development projects. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the incomplete products. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the research
and development ("R&D") in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.

The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of YAGO's
next-generation switching router family of products and technologies.

At the time of its acquisition, YAGO was a development stage company that had
spent approximately $5.6 million on research and development focused on the
development of advanced gigabit switching technology. In fact, all of Yago's
efforts since the company's inception had been directed towards the introduction
of an advanced gigabit layer-2, layer-3, and layer-4 switching and router
product family. YAGO had no developed products or technology and had not
generated any revenues as of its acquisition date. At the time, YAGO was testing
the technology related to the MSR8000, its first product to be released, and was
developing its MSR16000/8600 family of products. These two primary development
efforts were made up of six significant research and development components,
which were ongoing at the acquisition date. These component efforts included
continued MSR8000 development and testing, research and development of the
MSR2000 (a desktop version of the MSR8000), development of the MSR8600,
development of Wide Area Network interfaces for its switching products, routing
software research and development, and device management software research and
development.

At the time of YAGO's acquisition, the Company believed that the MSR product
family of switching routers would set a new standard for performance and
functionality by delivering wire-speed layer-2, layer-3 and layer-4
functionality. Designed for the enterprise and ISP backbone markets, upon
completion of their development, the MSR products were intended to offer large
table capacity, a multi-gigabit non-blocking backplane, low latency and seamless
calling. YAGO also intended to develop its MSR products to be interoperable with
other standard-based routers and switches. As of the acquisition date,
management expected the development of the MSR product family would be the only
mechanism to fuel YAGO's revenue growth and profitability in the future. Despite
the incomplete state of YAGO's technology, the Company felt that the projected
size and growth of the market for the MSR product, YAGO's demonstrated promise
in the development of the MSR product family and the consideration paid by
Cabletron's competitors to acquire companies comparable to YAGO all warranted
the consideration paid by Cabletron for YAGO.

The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, high-volume verification, and testing
activities that were necessary to establish that the proposed technologies met
their design specifications including functional, technical, and economic
performance requirements. Anticipated completion dates for the projects in
progress were expected to occur over the next two years, the Company expected to
begin generating the economic benefits from the technologies in the second half
of 1998. Funding for such projects was expected to be obtained from internally
generated sources. Expenditures to complete the MSR technology were expected to
total approximately $10.0 million over the next two years. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.

The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors.

In the model used to value in-process research and development in the YAGO
acquisition, as of March 17, 1998, total revenues attributable to YAGO were
projected to exceed $900 million in 2002, assuming the successful completion and
market acceptance of the major R&D efforts. As of the valuation date, YAGO had
no existing products and accordingly all revenue growth in the first several
years were related to the in-process technologies. The estimated revenues for
the in-process were projected to peak in 2003 and then decline as other new
products and technologies were projected to enter the market.

Cost of sales was estimated based on YAGO's internally generated projections and
discussions with management regarding anticipated gross margin improvements. Due
to the market opportunities in the Gigabit Ethernet arena and YAGO's unique
product architecture substantial gross margins are expected through 2000.
Thereafter, gross margins are expected to gradually decline as competition
increases. Cost of sales was projected to average approximately 47.5 percent
through 2003. SG&A expenses (including depreciation), was projected to remain
constant as a percentage of sales at approximately 23 percent. R&D expenditures
were projected to decrease as a percentage of sales as the in-process projects
were completed. R&D expenditures were expected to peak in 1998 at 7.1 percent of
sales, decline, and then level out at 5.0 percent of sales in 2000 and
thereafter.

The rates utilized to discount the net cash flows to their present value were
based on venture capital rates of return. Due to the nature of the forecast and
the risks associated with the projected growth, profitability and developmental
projects, discount rates of 45.0 to 50.0 percent were used for the business
enterprise and for the in-process R&D. The Company believes these rates were
appropriate because they were commensurate with YAGO's stage of development; the
uncertainties in the economic estimates described above; the inherent
uncertainty surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and, the uncertainty of technological advances that are unknown at
this time.

The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. No assurance can be given that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary from the projected results.

Management expects to continue their support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there is risk associated with the completion of the projects and there
is no assurance that any will meet with either technological or commercial
success. The Company believes as it did at the time of the YAGO acquisition,
that if YAGO does not successfully complete its outstanding in-process research
and development efforts, Cabletron's future operating results would be
materially adversely impacted and the value of the in-process research and
development might never be realized.

DSLAM division of Ariel Corporation

On September 1, 1998, Cabletron acquired the assets and liabilities of the DSLAM
division of Ariel Corporation ("Ariel"). Cabletron recorded the cost of the
acquisition at approximately $45.1 million, including fees, expenses and other
costs related to the acquisition. Cabletron's consolidated results of operations
include the operating results of the DSLAM division of Ariel Corporation from
the acquisition date.

In connection with the acquisition of Ariel, the Company allocated $26.0 million
($15.8 million, net of tax) of the purchase price to in-process research and
development projects. The valuation of the in-process research and development
("IPR&D") incorporated the guidance on IPR&D valuation methodologies recently
promulgated by the Securities and Exchange Commission ("SEC"). These
methodologies incorporate the notion that cash flows attributable to development
efforts, including the effort to be completed on the development effort
underway, and development of future versions of the product that have not yet
been undertaken, should be excluded in the valuation of IPR&D. This allocation
represents risk-adjusted cash flows related to the incomplete products. At the
date of acquisition, the development of these projects had not yet reached
technological feasibility and the research and development ("R&D") in progress
had no alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.

The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets was determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Ariel's
next-generation DSLAM technology.

The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, high-volume verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements.

The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors.

For purposes of the IPR&D valuation, the total revenues attributable to Ariel
were projected to exceed $195 million within 5 years, assuming the successful
completion and market acceptance of the major R&D efforts. As of the valuation
date, Ariel had no existing products and accordingly all revenue growth in the
first several years are related to the in-process technologies. For purposes of
the IPR&D valuation, it was estimated that revenues for the in-process projects
would peak in 2004 and then decline as other new products and technologies were
expected to enter the market.

Cost of sales was estimated based on Ariel's internally generated projections
and discussions with management regarding anticipated gross margin improvements.
Due to the market opportunities in the network equipment arena and Ariel's
unique technology architecture, substantial gross margins were estimated through
the forecast period. Cost of sales as a percentage of sales was forecasted to
decline until 2001 and then remain constant at 55%. SG&A expenses (including
depreciation) as a percentage of sales were projected to decline slightly until
2003 and then remain constant at 26%. R&D expenditures as a percentage of sales
were projected to remain constant at 8% over the projection period.

The rates utilized to discount the net cash flows to their present value were
based on venture capital rates of return. Due to the nature of the forecast and
the risks associated with the projected growth, profitability and developmental
projects, a discount rate of 27.5 percent was determined to be appropriate for
the in-process R&D. These discount rates were commensurate with Ariel's stage of
development; the uncertainties in the economic estimates described above; the
inherent uncertainty surrounding the successful development of the purchased
in-process technology; the useful life of such technology; the profitability
levels of such technology; and, the uncertainty of technological advances that
were unknown at the time of acquisition.

The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and unanticipated events and circumstances are likely
to occur. For these reasons, actual results may vary from the projected results.

The Company believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected project sales,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary from the
projected results.

Ariel's in-process research and development value is comprised of several
significant individual on-going projects. Remaining development efforts for
these projects include various phases of design, development and testing.
Anticipated completion dates for the projects in progress are estimated to occur
over the next year. The Company projected to begin generating the economic
benefits from the technologies in the second half of fiscal year 2000. Funding
for such projects was estimated to be obtained from internally generated
sources. Expenditures to complete these projects were estimated to total
approximately $0.5 million over the next year. These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. However, there is
risk associated with the completion of the projects and there is no assurance
that any will meet with either technological or commercial success.

FlowPoint Corp.

On September 9, 1998, Cabletron acquired FlowPoint, Corp., a privately held
manufacturer of digital subscriber line router networking products. Prior to the
Agreement, Cabletron owned 42.8% of the outstanding shares of FlowPoint stock.
Pursuant to the terms of the Agreement, $20.6 million is to be paid in four
installments, within 9 months after the merger date. Each installment may be
paid in either cash or Cabletron common stock, as determined by Cabletron
management at the time of distribution. In addition, Cabletron assumed 494,000
options, valued at approximately $2.7 million.

Cabletron recorded the cost of the acquisition at approximately $25.0 million,
including direct costs of the acquisition. Cabletron's consolidated results of
operations include the operating results of FlowPoint, Corp. from the
acquisition date.

In connection with the acquisition of FlowPoint, the Company recorded special
charges of $12.0 million for in-process research and development projects. The
valuation of the IPR&D incorporated the guidance on IPR&D valuation
methodologies recently promulgated by the SEC. These methodologies incorporate
the notion that cash flows attributable to development efforts, including the
effort to be completed on the development effort underway, and development of
future versions of the product that have not yet been undertaken, should be
excluded in the valuation of IPR&D. This allocation represents risk-adjusted
cash flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.

The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of
FlowPoint's next-generation Router technologies.

The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, high-volume verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements.

The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors.

For purposes of the in-process R&D valuation, the total revenues attributable to
FlowPoint were projected to exceed $150 million within 5 years, assuming the
successful completion and market acceptance of the major R&D efforts. As of the
valuation date, FlowPoint had a few existing products, which lacked the
technological breadth and depth necessary in the evolving networking equipment
market. Accordingly, for purposes of the in-process R&D valuation, it was
estimated that significant revenue growth in the first several years would be
primarily related to the in-process technologies. The estimated revenues for the
in-process projects were projected to peak in 2007 and then decline as other new
products and technologies were expected to enter the market.

Cost of sales was estimated based on FlowPoint's internally generated
projections and discussions with management regarding anticipated gross margin
improvements. Due to the market opportunities in the Network Equipment arena and
FlowPoint's unique technology architecture, substantial gross margins were
projected through the forecast period. Cost of sales as a percentage of sales
was forecasted to decline until 2003 and then remain constant at 55%. SG&A
expenses (including depreciation) as a percentage of sales were projected to
remain constant at 23%. R&D expenditures as a percentage of sales were projected
to decline significantly from 30% in 1999 to 10% in 2001 and remain constant at
10% thereafter.

The rates utilized to discount the net cash flows to their present value were
based on venture capital rates of return. Due to the nature of the forecast and
the risks associated with the projected growth, profitability and developmental
projects, a discount rate of 27.5 percent was determined to be appropriate for
the in-process R&D. These discount rates were commensurate with FlowPoint's
stage of development; the uncertainties in the economic estimates described
above; the inherent uncertainty surrounding the successful development of the
purchased in-process technology; the useful life of such technology; the
profitability levels of such technology; and, the uncertainty of technological
advances that were unknown at the time of the acquisition.

The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and unanticipated events and circumstances are likely
to occur. For these reasons, actual results may vary from the projected results.

The Company believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected project sales,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary from the
projected results.

FlowPoint's in-process research and development value is comprised of several
significant individual on-going projects. Remaining development efforts for
these projects include various phases of design, development and testing.
Anticipated completion dates for the projects in progress are estimated to occur
over the first nine months following the acquisition. The Company estimated it
will begin generating the economic benefits from the technologies in the second
half of fiscal year 2000. Funding for such projects was estimated to be obtained
from internally generated sources. Expenditures to complete these projects were
estimated to total approximately $1.0 million over the next six months. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.

Management expects to continue their support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there is risk associated with the completion of the projects and there
is no assurance that any will meet with either technological or commercial
success.

NetVantage, Inc.

On September 25, 1998, Cabletron acquired NetVantage, Inc., a publicly held
manufacturer of ethernet workgroup switches. Under the terms of the Merger
Agreement, Cabletron issued 6.4 million shares of Cabletron common stock to the
shareholders of NetVantage in exchange for all of the outstanding shares of
stock of NetVantage.

Cabletron recorded the cost of the acquisition at approximately $77.8 million,
including direct costs of the acquisition. The cost represents 6.4 million
shares at $9.9375 per share, in addition to direct acquisition costs.
Cabletron's consolidated results of operations include the operating results of
NetVantage, Inc. from the acquisition date.

In connection with the acquisition of NetVantage, the Company recorded special
charges of $29.4 million for in-process research and development projects. The
valuation of the IPR&D incorporated the guidance on IPR&D valuation
methodologies recently promulgated by the SEC. These methodologies incorporate
the notion that cash flows attributable to development efforts, including the
effort to be completed on the development effort underway, and development of
future versions of the product that have not yet been undertaken, should be
excluded in the valuation of IPR&D. This allocation represents risk-adjusted
cash flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.

The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of
NetVantage's next-generation Ethernet technologies.

The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, high-volume verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements.

The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors.

For purposes of the IPR&D valuation, the total revenues attributable to
NetVantage were projected to exceed $250 million within 5 years, assuming the
successful completion and market acceptance of the major R&D efforts. As of the
valuation date, NetVantage had a few existing products, which lacked the
technological breadth and depth necessary in the evolving networking equipment
market. Accordingly, it was estimated that the significant revenue growth in the
first several years would be primarily related to the in-process technologies.
The estimated revenues for the in-process projects were expected to peak in 2004
and then decline as other new products and technologies were expected to enter
the market.

Cost of sales was estimated based on NetVantage's internally generated
projections and discussions with management regarding anticipated gross margin
improvements. Due to the market opportunities in the Network Equipment arena and
NetVantage's unique technology architecture, substantial gross margins were
projected through the forecast period. Cost of sales as a percentage of sales
was forecasted to remain constant at 57.5%. SG&A expenses (including
depreciation) as a percentage of sales was projected to decline slightly in 2001
and then remain constant at 23%. R&D expenditures as a percentage of sales were
projected to decline slightly in 2000 and remain constant at 10% over the
projection period.

The rates utilized to discount the net cash flows to their present value were
based on venture capital rates of return. Due to the nature of the forecast and
the risks associated with the projected growth, profitability and developmental
projects, a discount rate of 25.0 percent was determined to be appropriate for
the in-process R&D. These discount rates are commensurate with NetVantage's
stage of development; the uncertainties in the economic estimates described
above; the inherent uncertainty surrounding the successful development of the
purchased in-process technology; the useful life of such technology; the
profitability levels of such technology; and, the uncertainty of technological
advances that were unknown at the time of the acquisition.

The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and unanticipated events and circumstances are likely
to occur. For these reasons, actual results may vary from the projected results.

The Company believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected project sales,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary from the
projected results.

NetVantage's in-process research and development value is comprised of several
significant individual on-going projects. Remaining development efforts for
these projects include various phases of design, development and testing.
Anticipated completion dates for the projects in progress are estimated to occur
over the next year. The Company began recognizing the economic benefits from the
technologies in the fourth quarter of fiscal year 1999. Funding for such
projects was estimated to be obtained from internally generated sources.
Expenditures to complete these projects were estimated to total approximately
$2.0 million over the next year. These estimates are subject to change, given
the uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur.

Management expects to continue their support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there is risk associated with the completion of the projects and there
is no assurance that any will meet with either technological or commercial
success.

1998 Acquisitions

In connection with the acquisition of NPG, the Company allocated $199.3 million
of the purchase price to in-process research and development projects. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the incomplete products. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the research
and development ("R&D") in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.

The Company used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of NPG's
next-generation switch, hub, adapter, and internetworking technologies.

The incomplete projects related to switch technology included, among other
efforts, the introduction of Fast Ethernet and OC-12 technology into
GIGAswitch/ATM and GIGAswitch/ FDDI technologies, development of Gigabit and
Fast Ethernet modules for the VNswitch 900 chassis, and the introduction of a
new GIGAswitch/Ethernet platform to provide Gigabit Ethernet technology. In the
internetworking area, the Company had several significant efforts on-going
related to network management software products, new wireless/remote access
offerings, and web gateway technology. The primary developmental efforts related
to the adapter family of products involved the introduction of new ATM and
Gigabit network interface cards. Finally, in the hub family, specific R&D
efforts included the introduction of ATM and Fast Ethernet modules for the
DEChub 900 and the development of advanced layer 3 switching support for the
100Mbps Hub Multiswitch.

The nature of the efforts to fully develop the acquired in-process technology
into commercially viable products, technologies, and services principally
related to the completion of all planning, designing, prototyping, high-volume
verification, and testing activities that were necessary to establish that the
proposed technologies met their design specifications including functional,
technical, and economic performance requirements. Anticipated completion dates
for the projects in progress were expected to occur over the next one and
one-half years, at which time the Company expected to begin generating economic
benefits from the technologies. Funding for such projects was expected to be
obtained from internally generated sources. As of February 7, 1998, expenditures
to complete these projects were expected to total approximately $61 million for
the remainder of calendar year 1998 and $10 million in calendar year 1999. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.

The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors. In the model used to value NPG's in-process
research and development, as of February 7, 1998, NPG' total revenues were
projected to exceed $1.1 billion in 2002, assuming the successful completion and
market acceptance of the major R&D programs. Estimated revenue from NPG's
existing technologies was expected to be $350 million in 1998, with a rapid
decline as existing processes and know-how approached obsolescence. The
estimated revenues for the in-process projects were estimated to peak in 2002
and then decline as other new products and technologies were expected to enter
the market.

In the model used to value NPG's in-process research and development, cost of
sales was estimated based on NPG's historical results and discussions with
management regarding anticipated gross margin improvements. A substantial gross
margin improvement was expected in 1999 due to a restructuring of NPG's cost
structure. Thereafter, gradual improvements were expected due to purchasing
power increases and general economies of scale. Cost of sales averaged
approximately 49.0 percent through 2003. Combined SG&A and R&D expenses were
expected to peak in 1998 at 44.6 percent of sales, decline, and level out at
approximately 35.8 percent of sales in 2001 and remain constant thereafter.

The rates utilized to discount the net cash flows to their present value were
based on cost of capital calculations. Due to the nature of the forecast and the
risks associated with the projected growth, profitability and developmental
projects, a discount rate of 15.0 percent was appropriate for the business
enterprise, 14.0 percent for the existing products and technology, and 30.0
percent for the in-process R&D. These discount rates were selected to reflect
NPG's corporate maturity; the uncertainties in the economic estimates described
above; the inherent uncertainty surrounding the successful development of the
purchased in-process technology; the useful life of such technology; the
profitability levels of such technology; and, the uncertainty of technological
advances that are unknown at this time.

The forecasts used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. No assurance can be given that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur.
For these reasons, actual results may vary from the projected results.

Management expects to continue their support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there has been and will continue to be risk associated with the
completion of the projects and there is no assurance that any will meet with
either technological or commercial success. The Company believes, as it did at
the time of the NPG acquisition, that if NPG did not successfully complete its
outstanding in-process research and development efforts, Cabletron's future
operating results could be materially impacted and the value of the in-process
research and development might never be realized.

1997 Acquisitions

During the year ended February 28, 1997, the Company augmented its product line
and expanded its markets 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.

Liquidity and Capital Resources

Cash, cash equivalents, short and long-term investments increased to $454.5
million at February 28, 1999 from $435.1 million at February 28, 1998. Net cash
provided by operating activities was $83.9 million in the year ended February
28, 1999 compared to $49.5 million in the year ended February 28, 1998, and
compared to $188.8 million in the year ended February 28, 1997. The increase in
net cash provided by operating activities during the year ended February 28,
1999 was a result of improved inventory controls that resulted in a reduction in
inventory, improved collections from customers being partially offset by Compaq
utilizing product credits received in its acquisition of DNPG. Compaq can use
the product credits through February 7, 2000 to purchase certain Cabletron
products that are ordered under the Reseller Agreement. See Note 9 (Notes to the
Consolidated Financial Statements) included at page 43 of this document for
additional details regarding the product credits. The decrease in net cash
provided by operating activities between the year ended February 28, 1998 and
the year ended February 28, 1997 was primarily a result of higher inventories,
higher purchased research and development through acquisitions and increased
deferred taxes. Net cash used in investing activities increased to $139.9
million in the year ended February 28, 1999 compared to $90.2 million in the
year ended February 28, 1998. The increased use of cash in investing activities
is primarily due to increased purchases of securities. This increase was
partially offset by less cash paid (net) for acquisitions during fiscal 1999,
$32.2 million as compared to $129.1 million in the year ended February 28, 1998,
less capital expenditures and the proceeds from the sale of a duplicate facility
which the Company acquired from DNPG for cash totaling $24.5 million. Capital
expenditures have decreased steadily during the three year period ended February
28, 1999 due to the decreased need for additional facilities and manufacturing
equipment, as sales have remained relatively flat.

Accounts receivable, net of allowance for doubtful accounts, were $216.8 million
at February 28, 1999 or 57 days sales outstanding, compared to $241.2 million or
78 days of sales outstanding at February 28, 1998. This decrease in receivables
reflects Compaq's use of product credits, which reduces days sales outstanding
because the Company deems purchases paid in product credits to be collected
immediately and, secondarily, to the increased collection efforts of the
Company. These trends are expected to continue as Compaq has product credits
available until February 7, 2000 and the Company has focused their sales efforts
through resellers and distributors. During fiscal 1999, the Company sold
slightly more than half of its products to resellers and distributors. The
Company has been able to monitor these relationships and improved the efficiency
of collections as there are fewer resellers and distributors than the number of
end-users the Company shipped to during fiscal 1998.

Worldwide inventories were $229.5 million at February 28, 1999 or 107 days of
inventory, compared to $309.7 million or 157 days of inventory at the end of the
preceding fiscal year. The decrease of days in inventory was due to improved
inventory control performance and increased reserves for inventory in connection
with the transition from shared media products to switched products. The
Company's use of distributors and resellers has allowed the Company to maintain
lower inventory levels, while the distributors and resellers will be able to
service the end-user customers, in a timely manner. The Company expects
inventory levels to decrease as it outsources its manufacturing process.

During the year ended February 28, 1999, capital expenditures were $44.8
million, which were principally related to upgrades of computers, computer
related and manufacturing equipment. During the year ended February 28, 1998,
capital expenditures were $74.2 million, which were primarily related to
software and hardware products and upgrades of computers. Capital expenditures
for the year ended February 28, 1997 were $94.4 million, which were primarily
related to engineering computer hardware and software.

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. As of February 28, 1999, 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 provide adequate
funds to support the Company's working capital and capital expenditure
requirements for the next twelve months.

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., FORE
Systems, Inc., Lucent Technologies, Inc., Northern Telecom Ltd. and 3Com
Corporation. Several large telecommunications equipment companies, including
Nokia Corp., Alcatel, Ericsson and Siemens 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 may 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. See "Acquisition Strategy."

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 distributor and reseller sales channels, increased
component costs and increased expenses, which may be necessary in future periods
to meet the demands of greater competition and if the expected cost savings from
outsourcing the manufacturing process is not achieved. For example, as a result
of various acquisitions completed during fiscal 1999, the Company acquired
products that contribute a lower gross margin than the Company's core products
have historically contributed. Additionally, as a result of the DNPG acquisition
and other business strategy initiatives, Cabletron achieved a higher percentage
of its sales 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, 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. If
growth in Cabletron's revenues in any quarter fails to match Cabletron's
expectations, its earnings and margins would be materially adversely affected.
During the year ended February 28, 1999, the Company incurred higher inventory
obsolescence and a more competitive pricing environment which resulted in lower
gross margins; additionally sales to channel resellers and distributors have
also contributed to the lower gross margin. There can be no assurance that net
sales will not decrease in future periods. 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. In addition, because of the global
nature of Cabletron's business, a variety of uncontrollable and changing factors
including foreign exchange rates, political and economic factors, foreign
regulators and natural disasters could have a material adverse effect on future
results. See "Quantitative and Qualitative Disclosures About Market Risks."

Management Structure. The Company 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 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 NetVantage, FlowPoint, Ariel, Yago and
DNPG, 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
NetVantage, FlowPoint, Ariel and 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 NetVantage, FlowPoint,
Ariel, Yago and DNPG, 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.

Near the end of the year ended February 28, 1998, the Company acquired several
product lines previously marketed by Digital's NPG pursuant to Cabletron's
acquisition of the NPG. Cabletron's sales of the NPG products are subject to
numerous risks. Substantially all of NPG's revenues have historically been
derived from sales by Digital's worldwide sales force and certain major third
party resellers. Under Digital, the NPG had no direct sales force to end users
(Digital's direct sales force resides in an independent business unit), and
Cabletron did not acquire 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 DNPG products, and has contractually committed to purchase certain minimum
volumes of Cabletron products for resale and internal use. In April 1998,
Digital was acquired by Compaq Computer Corporation ("Compaq") and Compaq has
assumed all of Digital's obligations to Cabletron. Compaq/Digital accounted for
approximately 11% of Cabletron's revenues in the year ended February 28, 1999.
Any failure by Compaq 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 NPG'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 Compaq's resellers will
continue to purchase the DNPG 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 Compaq's sales force and third party resellers, including
the DNPG products and certain Cabletron products, may be sold under the Compaq
brand name and, in many cases, will be specifically adapted for use in existing
Compaq/Digital hardware platforms. The Company 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 third party resellers, could have a material adverse effect
on the Company'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 the Company'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 the
Company or its competitors, expenses or other difficulties associated with
assimilating the businesses of NetVantage, FlowPoint, Ariel, Yago and DNPG 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 the Company expects that such decline will continue. 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. Nearly all of
the Company's products, and the products of its subsidiaries, will be
manufactured by third-party contract manufacturers, beginning in fiscal 2000.
The failure of a third-party manufacturer to manufacture the products or to
deliver the 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

As widely reported, many computer systems were not designed to handle any dates
beyond the year 1999 and, therefore, computer hardware and software will need to
be modified prior to the year 2000 in order to remain functional. The Year 2000
issue is the result of computer programs being written using two digits rather
than four, to define a specific year. Absent corrective measures, a computer
program that has date-sensitive software may recognize a date using "00" as 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions to various activities and operations. As is
true for most companies, the Year 2000 computer issue creates a risk for the
Company. If the Company's products, internal systems or the systems of its
suppliers do not correctly recognize date information when the year changes to
2000, there could be an adverse impact on the Company's operations. To address
this issue, the Company initiated a project to assess and address Year 2000
compliance issues for its internal information systems, equipment and
facilities, key suppliers and products.

With respect to the Company's infrastructure and internal systems (consisting of
facilities, telecommunications, and the corporate network), enterprise,
manufacturing and engineering systems, as well as those of third party
suppliers, the phases of the project include: (1) inventorying Year 2000 items;
(2) assigning priorities to identified items and assessing the Year 2000
compliance of items determined to be critical to the Company; (3) remediation of
critical items that are determined not to be Year 2000 ready; (4) testing
critical items; and (5) designing and implementing contingency plans.

Internal Information Systems

Cabletron has largely completed the inventory and assessment phases of its main
engineering, financial, manufacturing and order processing systems. The Company
is in the process of remediating and testing these systems and expects to
complete these phases by the end of October 1999, and does not currently expect
any significant issues to be identified during the completion of these phases.
However, the failure of any internal system to achieve Year 2000 readiness could
disrupt the Company's ability to conduct its business or record transactions,
which could adversely affect results of operations or financial condition.

Equipment and Facilities

The Company is in the final stages of contacting the suppliers of its critical
equipment to ascertain the equipment's Year 2000 readiness. Cabletron expects to
achieve Year 2000 readiness of its critical equipment by the end of September
1999. If identification of non-compliant equipment and any upgrade or
replacement is delayed, the Company's design, production and shipping
capabilities could be disrupted, which could adversely affect the Company's
results of operations and financial condition. The Company is also assessing the
Year 2000 readiness of its owned facilities and critical leased facilities that
house large numbers of Cabletron employees. The Company expects to complete
remediation and testing efforts by September 1999. These facilities are critical
to operations and any delays in achieving Year 2000 readiness with respect to
these facilities could adversely affect the Company's results of operations or
financial condition.

Key Suppliers

The Company has completed the inventory and assessment phases of its review of
Cabletron's critical supplier base and, as part of the remediation phase, is in
the process of reviewing the state of readiness of its critical suppliers. This
process includes compliance inquiries and reviews that will continue throughout
1999. Where issues are identified with a particular supplier, contingency plans
will be developed. Even where assurances are received from third parties there
remains a risk that failure of systems and products of other companies on which
Cabletron relies could have a material adverse effect on the Company. Further,
if these suppliers fail to adequately address the Year 2000 issue for the
products they provide to Cabletron, critical materials, products and services
may not be delivered in a timely manner, which could adversely affect the
Company's results of operations or financial condition.

Cabletron Products

The Company has conducted extensive work regarding the status of its current,
developing and installed base of products. The Company has published a list of
its major products indicating their status of Year 2000 compliance. This list is
available on the Company's World Wide Web page
(http://www.cabletron.com/year-2000) and is updated periodically. The Company
believes that substantially all of its current hardware products are Year 2000
compliant. The Company believes that its older hardware products that are not
Year 2000 compliant will continue to perform all essential and material
functions after the year 2000 but may, in limited circumstances, incorrectly
report the date of events (i.e., events on the network that are reported to a
network management software package) after the year 2000. The Company believes
that its current version of Spectrum (Version 5.1), its network management
platform, is Year 2000 compliant. Older versions of Spectrum are not Year 2000
compliant. The Company is offering upgrades for some, but not all, of the
non-compliant products (both hardware and software) previously sold by the
Company. For those non-compliant products with no upgrade available, the Company
is offering customers the opportunity to purchase equipment offering equivalent
functionality. Given that most non-compliant products previously sold will
continue to perform their standard functions, the Company expects that many
customers will decide not to replace those products. Despite the Company's
efforts to date to identify the Year 2000 compliance of its current and
installed base of products and the effects of any non-compliance, the Company
cannot be sure that it has identified all areas of non-compliance or that any
solutions it implements to address the non-compliance will prove satisfactory.
Further, since all customer situations cannot be anticipated, particularly those
involving third party products, the Company may experience an increase in
warranty and other claims as a result of the Year 2000 transition. For these
reasons, the impact of customer claims could have a material adverse impact on
the Company's results of operations or financial condition.

As used in this section, "Year 2000 compliant" means, with respect to
information technology, that the information technology, where applicable,
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it.

Costs

Based on the work performed to date, the Company has not incurred material
costs. The Company presently estimates it will incur between $15 and $18 million
of costs, of which approximately 85% will be for capital expenditures, in
connection with its Year 2000 efforts. This estimate is based on information
gathered to date, and may be materially revised as assessment continues. If
implementation of replacement systems is delayed, or if significant new
non-compliance issues are identified, the Company's results of operations or
financial condition could be materially adversely affected. Expectations about
future Year 2000-related costs are subject to various uncertainties that could
cause the actual results to differ materially from the Company's expectations,
including the success of the company in identifying systems and programs that
are not Year 2000 ready, the nature and amount of programming required to
upgrade or replace each of the affected programs, the availability, rate and
magnitude of related labor and consulting costs and the success of the Company's
business partners, vendors and clients in addressing the Year 2000 issue.

Contingency Plans

Contingency plans are being developed in critical areas, to ensure that any
potential material business interruptions caused by the Year 2000 issue are
mitigated. Preliminary contingency plans will be updated as the Company
continues to refine and assess risk.

The foregoing statements are based upon management's best estimates at the
present time which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. The Company has taken and will continue to
take corrective action to mitigate any significant Year 2000 problems. There can
be no guarantee that the Company will not experience significant business
disruptions or loss of business due to the Year 2000 issue. Specific factors may
later become known which could result in a material adverse impact on the
Company's results of operations or financial condition.

New Accounting Pronouncements

In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-9, "Modification of Software Revenue Recognition"
which requires recognition of revenue using specific methods and amends SOP 98-4
(Deferral of the Effective Date of a Provision of SOP 97-2) and amends certain
paragraphs of SOP 97-2. The Company will adopt SOP 98-9 for its fiscal year
2000, beginning on March 1, 1999. Management believes that this Statement will
not have a significant impact on the Company.

In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which requires
companies to record derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's first quarter of fiscal year ending February 28,
2002. Management is currently evaluating the potential effects of this
pronouncement on its consolidated financial statements. However, management does
not expect the impact to be significant.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, as a result of its global operating and financial activities, is
exposed to changes in interest rates and foreign currency exchange rates which
may adversely affect its results of operations and financial position. The
Company's overall objective in managing its credit risk is to minimize the
adverse impact of any single event or set of events. In seeking to minimize the
risks and/or costs associated with such activities, the Company uses foreign
currency forward and option contracts to hedge the currency risk inherent in
global operations. The Company does not use utilize financial instruments for
trading or other speculative purposes, nor does it utilize leveraged financial
instruments.

Market Risk Disclosures. The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. The
Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The hedging activity of the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities and the Company does not use derivative financial
instruments for trading or speculative purposes.

Interest Rate Sensitivity. The Company maintains an investment portfolio
consisting mainly of debt securities of various issuers, types and maturities.
The securities that the Company classifies as held-to-maturity are recorded on
the balance sheet at amortized cost, which approximates market value. Unrealized
gains or losses associated with these securities are not material. The
securities that the Company classifies as available-for-sale are recorded on the
balance sheet at fair market value with unrealized gains or losses reported as
part of accumulated other comprehensive income as a component of stockholders'
equity. A hypothetical 50 or 100 basis point increase in interest rates would
result in an approximate $1.0 million or $2.5 million decrease, respectively
(approximately 0.3 percent or 0.7 percent, respectively) in the fair market
value of the securities. The Company has the ability to hold its fixed income
investments until maturity, and therefore the Company would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on its securities portfolio.

Foreign Currency Exchange Risk. The Company enters into foreign exchange
contracts to hedge certain balance sheet exposures and intercompany balances
against future movements in foreign exchange rates. Gains and losses on the
contracts are largely offset by gains and losses on the underlying exposure. At
February 28, 1999, the Company had purchased forwards with a notional value of
approximately $8.0 million and options with a notional value of approximately
$39.0 million. A hypothetical 10 percent appreciation or depreciation of the
U.S. Dollar from February 28, 1999 market rates would not result in a material
decrease in fair market value, earnings or cash flows. Also, any gains or losses
on the contracts are largely offset by the gains or losses on the underlying
transactions and consequently a sudden or significant change in foreign exchange
rates would not have a material impact on future net income or cash flows.

Euro Conversion

Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies (the "legacy currencies") and one common currency (the
"Euro"). The participating countries adopted the Euro as their common legal
currency on that date (the "Euro Conversion"). Since that date, the Euro began
trading on currency exchanges and has been used in business transactions. On
January 1, 2002, participating countries will issue new Euro-denominated bills
and coins. The legacy currencies will be withdrawn from circulation as legal
tender effective January 1, 2002. During the period from January 1, 1999 and
June 30, 2002, parties may use either the Euro or a participating country's
legacy currency as legal tender.

Earlier in the year ended February 28, 1999, the Company formed a Euro
Committee. The Euro Committee has analyzed the impact of the Euro conversion on
the Company in a number of areas, including the Company's information systems,
product pricing, finance and banking resources, foreign exchange management,
contracts, accounting and tax policies. While the Company has made certain
adjustments to its business and operations to accommodate the Euro conversion, a
failure to fully implement the Euro conversion on the part of the European
Union, would not have a material adverse impact on the Company's financial
position and results of operations.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CABLETRON SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
February 28, 1999 and 1998
(in thousands, except per share amounts)

Assets 1999 1998
----------- -----------

(Restated)
Current assets:
Cash and cash equivalents $ 159,422 $ 207,078
Short-term investments (note 4) 113,932 116,979

Accounts receivable, net of allowance for
doubtful accounts ($23,260 and $21,043 in 1999
and 1998, respectively) 216,793 241,181
Inventories (note 5) 229,512 309,667
Deferred income taxes (note 11) 60,252 81,161
Prepaid expenses and other assets 60,510 89,396
---------- ----------
Total current assets 840,421 1,045,462
---------- ----------
Long-term investments (note 4) 202,984 123,272
Long-term deferred income taxes (note 11) 135,197 107,094
Property, plant and equipment, net (note 6) 188,479 244,730
Intangible assets, net (note 7) 199,419 161,490
---------- ----------
Total assets $1,566,500 $1,682,048
========== ==========

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable $ 121,580 $ 79,969
Current portion of long-term obligation (note 9) 129,747 157,719
Accrued expenses (note 8) 218,149 214,728
---------- ----------
Total current liabilities 469,476 452,416
Long-term obligation (note 9) --- 132,500
Long-term deferred income taxes (note 11) 7,191 12,057
---------- ----------
Total liabilities 476,667 596,973
---------- ----------

Commitments and contingencies (notes 10 and 12)

Stockholders' equity (note 15):

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 172,184
and 158,267 shares in 1999 and 1998, respectively 1,722 1,583
Additional paid-in capital 551,232 300,834
Retained earnings 536,487 781,878
---------- ----------
1,089,441 1,084,295
Accumulated other comprehensive income 392 780
---------- ----------
Total stockholders' equity 1,089,833 1,085,075
---------- ----------
Total liabilities and stockholders' equity $1,566,500 $1,682,048
========== ==========

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 28, 1999, 1998 and 1997
(in thousands, except per share amounts)

1999 1998 1997
---------- ---------- ----------
(Restated) (Restated)

Net sales $1,411,279 $1,377,330 $1,406,552
Cost of sales 811,350 676,291 595,407
---------- ---------- ----------
Gross profit 599,929 701,039 811,145
Operating expenses:
Research and development 210,393 181,777 161,674
Selling, general and administrative 446,232 373,789 301,469
Fixed asset loss (note 6) 17,570 --- ---
Special charges (notes 2 and 3) 217,350 234,285 21,724
---------- ---------- ----------
Income (loss) from operations (291,616) (88,812) 326,278
Interest income 15,089 18,578 19,422
---------- ---------- ----------
Income (loss) before income taxes (276,527) (70,234) 345,700
Income tax expense (benefit) (note 11) (31,136) (35,273) 119,621
---------- ---------- ----------
Net income (loss)(note 2) ($ 245,391) ($ 34,961) $ 226,079
========== ========== ==========
Net income (loss) per share - basic ($1.47) ($0.22) $1.46
========== ========== ==========
Net income (loss) per share - diluted ($1.47) ($0.22) $1.42
========== ========== ==========
Weighted average number of shares outstanding:
Basic 167,432 157,686 155,207
========== ========== ==========
Diluted 167,432 157,686 158,933
========== ========== ==========

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended February 28, 1999,
1998 and 1997 (in thousands, except number of shares)

- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER NOTES TOTAL
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE RECEIVABLE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS INCOME STOCKHOLDERS EQUITY
- -------------------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996 72,234,000 $776 $218,792 $591,518 ($1,049) ($151) $809,886
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income (Restated) --- --- --- 226,079 --- --- 226,079
Other comprehensive income:
Effect of foreign currency
translation --- --- --- --- 1,270 --- 1,270
Total comprehensive income 226,079 1,270 --- 227,349
Effect of stock split 72,730,577 758 --- (758) --- --- ---
Exercise of options for shares
of common stock 909,882 10 18,012 --- --- --- 18,022
Repayment of notes receivable --- --- --- --- --- 151 151
Issuance of common stock for
pooled acquisitions 10,054,897 15 8,562 --- --- --- 8,577
Issuance of common stock for
purchased acquisitions 225,582 2 6,955 --- --- --- 6,957
Tax benefit for options
exercised --- --- 8,302 --- --- --- 8,302
Issuance of shares under employee
stock purchase plan 150,374 2 6,206 --- --- --- 6,208
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997* 156,305,312 1,563 266,829 816,839 221 --- 1,085,452
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net loss (Restated) --- --- --- (34,961) --- --- (34,961)
Other comprehensive income:
Effect of foreign currency
translation --- --- --- --- 559 --- 559
Total comprehensive income (loss) --- --- --- (34,961) 559 --- (34,402)
Retirement of treasury stock (32,209) --- --- --- --- --- ---
Exercise of options for shares
of common stock 1,762,565 18 17,291 --- --- --- 17,309
Tax benefit for options
exercised --- --- 10,469 --- --- --- 10,469
Issuance of shares under employee
stock purchase plan 231,326 2 6,245 --- --- --- 6,247
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998* 158,266,994 1,583 300,834 781,878 780 --- 1,085,075
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net loss --- --- --- (245,391) --- --- (245,391)
Other comprehensive income:
Unrealized gain/(loss) on
available-for-sale
securities --- --- --- --- 1,186 --- 1,186
Effect of foreign currency
translation --- --- --- --- (1,574) --- (1,574)
Total comprehensive income (loss) --- --- --- (245,391) (388) --- (246,965)
Exercise of options for shares
of common stock 497,696 5 2,761 --- --- --- 2,766
Issuance of common stock for
purchased acquisitions 12,757,395 127 239,621 --- --- --- 239,748
Issuance of common stock for
minority interests 89,921 1 1,117 --- --- --- 1,118
Tax benefit for options
exercised --- --- 935 --- --- --- 935
Issuance of shares under employee
stock purchase plan 572,087 6 5,378 --- --- --- 5,384
Other --- --- 586 --- --- --- 586
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1999 172,184,093 $1,722 $551,232 $536,487 $392 --- $1,089,833
- -------------------------------------------------------------------------------------------------------------------
* Restated

See accompanying notes to consolidated financial statements.

CABLETRON SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28, 1999, 1998 and 1997
(in thousands)

1999 1998 1997
-------- -------- --------
(Restated) (Restated)

Cash flows from operating activities:
Net income (loss) ($245,391) ($34,961) $226,079
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 114,679 66,358 49,704
Provision for losses on accounts receivable 2,240 5,668 9,140
Loss (gain) on disposal of property, plant and equipment 781 (285) 87
Fixed asset loss 17,570 --- ---
Purchased research and development from acquisitions 217,350 199,300 ---
Deferred income taxes (6,475) (111,425) (22,933)
Changes in assets and liabilities:
Accounts receivable (9,059) (31,847) (74,925)
Inventories 88,682 (91,412) (41,623)
Prepaid expenses and other assets (7,527) 1,213 (1,709)
Accounts payable and accrued expenses (102,608) 83,471 52,661
Income taxes payable 13,616 (36,591) (7,653)
-------- -------- --------
Net cash provided by operating activities 83,858 49,489 188,828
-------- -------- --------

Cash flows from investing activities:
Capital expenditures (44,773) (74,264) (94,368)
Cash paid for business acquisitions, net (32,193) (129,107) ---
Proceeds from sale of fixed assets 24,531 --- ---
Purchase of available-for-sale securities (101,331) (118,919) (203,667)
Purchase of held-to-maturity securities (121,740) (37,228) (247,855)
Sales/maturities of marketable securities 135,648 269,344 424,308
-------- -------- --------
Net cash used in investing activities (139,858) (90,174) (121,582)
-------- -------- --------

Cash flows from financing activities:
Repayment of notes receivable from stockholders --- --- 151
Other 586 --- ---
Tax benefit of options exercised 924 10,469 8,302
Proceeds from sale of common stock --- --- 8,577
Common stock issued to employee stock purchase plan 5,384 6,247 6,208
Proceeds from exercise of stock options 2,766 17,309 18,022
-------- -------- --------
Net cash provided by financing activities 9,660 34,025 41,260
-------- -------- --------

Effect of exchange rate changes on cash (1,316) (1,090) 220
-------- -------- --------

Net (decrease) increase in cash and cash equivalents (47,656) (7,750) 108,726
Cash and cash equivalents, beginning of year 207,078 214,828 106,102
-------- -------- --------
Cash and cash equivalents, end of year $159,422 $207,078 $214,828
======== ======== ========

Cash paid (received) during the year for:
Income taxes ($28,706) $57,941 $132,291
======== ======== ========

See accompanying notes to consolidated financial statements.

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) Restatements and Reclassifications

The accompanying consolidated financial statements have been restated to reflect
the impact of adjustments made by the Company to reduce its previously reported
special charges associated with the acquisition of the Network Products Group of
Digital Equipment Corporation ("DNPG"), during the fourth quarter of the year
ended February 28, 1998 and to its previously reported special charges
associated with the acquisition of ZeitNet, Inc. ("ZeitNet"), during the second
quarter of the year ended February 28, 1997. The Company has also reclassified
certain other expenses related to the DNPG acquisition and to three acquisitions
consummated during the year ended February 28, 1997 (ZeitNet, Network Express,
Inc. and Netlink, Inc.) from special charges to cost of sales and selling,
general and administrative expenses. The reclassifications had no effect on net
income (loss).

These restatements and reclassifications were made to address comments made by
the Securities and Exchange Commission ("SEC") in letters to the Company on
accounting issues related to the amount of the DNPG purchase price allocated by
the Company to in-process research and development and to the timing of the
recognition and the classification of certain expenses included in special
charges.

As a result, the Company reduced the amount of its charge for in-process
research and development in connection with the acquisition of DNPG from $325.0
million to $199.3 million and, correspondingly, increased the amounts allocated
to intangible assets by $125.7 million. The $125.7 million increase to
intangible assets was allocated as follows ($97.0 million for customer
relations, $14.1 million for goodwill and $14.6 million for developed
technology) and is being amortized by a non-cash charge to income over a period
of 5 - 10 years.

As previously disclosed in its second quarter Form 10-Q, the Company has also
reduced the amount of its special charges recorded in the fourth quarter of the
year ended February 28, 1998 in connection with the acquisition of DNPG by $33.2
million. The reduction of special charges related to expenses recorded for
contract employee benefits and contract compensation write-offs of $12.5
million, software licenses and software tools costs of $7.0 million,
professional fees and some facility costs reclassified to purchase price of $3.2
million, customer warranty and stock rotation costs of $3.0 million and other
integration costs reductions in estimates and classifications of $7.5 million.
To the extent that a portion of these integration costs were incurred in the
year ended February 28, 1998, the amounts are included in the restated results
for that year.

The Company has also reduced the amount of its write down of inventory recorded
in the year ended February 28, 1997 relating to the ZeitNet acquisition by $6.0
million and has recorded the write down in the year ended February 28, 1998,
upon disposal of the inventory.

The Company has reclassified certain expenses relating to its business
combinations from special charges to cost of sales and selling, general and
administrative expense. For the year ended February 28, 1998, $24.5 million
relating to the write down of Company inventory made redundant and discontinued
as a result of the acquisition of DNPG has been reclassified from special
charges to cost of sales. For the year ended February 28, 1997 the amounts
reclassified to cost of sales represented the write down of $20.3 million of
inventory that was duplicative and/or rendered obsolete as a result of the
acquisitions of ZeitNet, Network Express and Netlink. The amounts reclassified
to selling, general and administrative expenses represented $3.4 million for
customer warranty costs, $2.8 million for contract termination, $1.5 million for
stay bonuses and $7.3 million for other costs that were attributable to the
businesses acquired during the year ended February 28, 1997.

The following is a summary of the effects of the restatements and
reclassifications on special charges and net income (loss):

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

Special charges, as originally reported $417,685 $63,024

Reduction of in-process research and
development charge (125,700) ---
Reduction of special charges (33,200) (6,000)
Reclassification to cost of sales (24,500) (20,300)
Reclassification to selling, general and
adminstrative expenses --- (15,000)
-------- -------
Special charges, as restated $234,285 $21,724
======== =======

Net income (loss), as originally reported ($127,062) $222,125
Reduction of in-process research and
development charge, net of tax
benefit of $49.9 million 75,838 ---
Reduction of special charges, net of
tax benefit of $11.3 million and $2.0
million, respectively 21,899 3,954
Recognition of integration costs as
incurred, net of tax of $0.5 million (1,023) ---
Recognition of ZeitNet inventory writedown,
net of tax of $2.0 million (3,954) ---
Increase in amortization charges of
intangible assets, net of tax benefit
of $0.4 million (659) ---
-------- --------
Net income (loss), as restated ($34,961) $226,079
======== ========

1998 1997
---- ----

Net income (loss) per share - basic, ($0.81) $1.43
as originally reported ======= =====

Net income (loss) per share - diluted, ($0.81) $1.40
as originally reported ======= =====

Net income (loss) per share - basic, ($0.22) $1.46
as restated ======= =====

Net income (loss) per share - diluted, ($0.22) $1.42
as restated ======= =====

The effect of the restatement on the consolidated balance sheet as of February
28, 1998 is as follows:

As Originally As
(in thousands) Reported Restated
------------- -----------
Prepaid expenses and other assets $ 78,084 $ 89,396
Total current assets 1,034,150 1,045,462
Long-term deferred income taxes 167,308 107,094
Intangible assets 36,867 161,490
Total assets 1,606,327 1,682,048
Accrued expenses 235,062 214,728
Total current liabilities 472,750 452,416
Total liabilities 617,307 596,973
Retained earnings 685,823 781,878
Total stockholders' equity 989,020 1,085,075
Total liabilities and stockholders' equity $1,606,327 $1,682,048

(c) 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 and accretion 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. Available-for-sale securities are recorded at fair value. Unrealized
gains and losses net of the related tax effect on available-for-sale securities
are reported in accumulated other comprehensive income, a component of
stockholders' equity, until realized. The estimated market values of investments
are based on quoted market prices as of the end of the reporting period.

(d) 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.

(e) Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided on a
straight-line method 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.

(f) Intangible Assets

Intangible assets consist of goodwill and other intangible assets acquired in
business combinations at cost less accumulated amortization. Amortization of
these intangible assets is provided on a straight-line basis over the respective
useful lives which range from three to ten years. Purchased in-process research
and development without alternative future use is expensed when acquired. The
carrying amount of intangible assets is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The measurement of possible impairment is based primarily on
an evaluation of undiscounted projected cash flows through the remaining
amortization period.

(g) 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 of a change in tax rates on
deferred tax assets and liabilities 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, 1999 and February 28, 1998
amounted to approximately $175.1 million and $152.2 million, respectively.
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 of
unrecognized deferred US taxes on these undistributed earnings.

(h) Net Income (Loss) Per Share

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

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

1999 1998 1997
---- ---- ----
Weighted average number of
shares outstanding - basic 167,432 157,686 155,207

Incremental shares upon exercise of
common stock options --- --- 3,726
------- ------- -------
Weighted average number of
shares outstanding - diluted 167,432 157,686 158,933
======= ======= =======

Net income (loss) ($245,391) ($34,961) $226,079
======== ======= ========

Basic income (loss) per share amount ($1.47) ($0.22) $1.46
======== ======= ========

Diluted income (loss) per share amount ($1.47) ($0.22) $1.42
======== ======= ========

For 1999 and 1998, stock options to purchase shares of common stock totaling 4.5
million and 4.1 million, respectively, were outstanding but were not included in
the calculation of diluted earnings per share since the effect was
anti-dilutive. In addition, the effect of the 5.5 million shares that may be
issued related to the acquisition of Yago, as of the end of the years ended
February 28, 1999 and 1998, was not included since the effect was anti-dilutive.

(i) 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 as other comprehensive income and are reflected in the
stockholders' equity section, as part of accumulated other comprehensive income.
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.

(j) 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.

(k) Revenue Recognition

The Company generally recognizes revenue upon shipment of products and software.
In the case of design, consulting, installation and support services, revenues
are recognized upon completion and acceptance of such products and services. The
Company recognizes software revenue after the delivered software no longer
requires significant production, modification, or further customization and
collection of the related receivable is deemed probable. Revenues from service
contracts are deferred and recognized ratably over the period the services are
performed. Estimated warranty costs and sales returns and allowances are accrued
at the time of shipment based on contractual rights and historical experience.
The Company extends limited product return and price protection rights to
certain distributors and resellers. Such rights are generally limited to a
certain percentage of sales over primarily a three month period.

(l) Reclassifications

Certain prior year balances have been reclassified to conform to the current
year presentation.

(m) Derivatives

The Company utilizes derivative financial instruments to reduce financial market
risks. The Company enters into foreign exchange forward and option contracts to
minimize the impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward and option contracts are designated as a
hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on the contracts are
reflected in operating results and offset foreign exchange gains or losses from
the revaluation of inter-company balances or other current assets and
liabilities denominated in currencies other than the functional currency of the
reporting entity. Gains and losses on the contracts are calculated using
published foreign exchange rates to determine fair value. The gain or loss that
results from the early termination of a contract is reflected in operating
results.

(n) 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.

(o) New Accounting Pronouncements

In the year ended February 28, 1999, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" (SFAS 130)
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. For the Company,
comprehensive income includes net income (loss), unrealized gains and losses
from foreign currency translation and unrealized gains and losses on available
for sale securities. The adoption of SFAS 130 did not have a material impact on
the Company's results of operations for the year ended February 28, 1999.

In the year ended February 28, 1999, the Company adopted Financial Accounting
Standards Board Statement No.131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131) 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. The adoption of
SFAS 131 did not have any impact on the Company's results of operations for the
year ended February 28, 1999.

In October 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition" which provides
guidance on applying generally accepted accounting principles in recognizing
revenue for licensing, selling, leasing or otherwise marketing computer software
and supersedes SOP 91-1. The adoption of SOP 97-2 did not have a material impact
on the Company's results of operations for the year ended February 28, 1999.

In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2" which amends certain paragraphs of SOP 97-2. The adoption of SOP
98-4 did not have a material impact on the Company's results of operations for
the year ended February 28, 1999.

In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-9, "Modification of Software Revenue Recognition"
which requires revenue recognition of revenue using specific methods and amends
SOP 98-4 (Deferral of the Effective Date of a Provision of SOP 97-2) and amends
certain paragraphs of SOP 97-2. The Company will adopt SOP 98-9 for its year
ended February 28, 2000, beginning on March 1, 1999. Management believes that
this Statement will not have a significant impact on the Company.

In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which requires
companies to record derivative instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's first quarter of fiscal year ending February 28,
2002. Management is currently evaluating the potential effects of this
pronouncement on its consolidated financial statements. However, management does
not expect the impact to be significant.

Note (3) Business Combinations

For acquisitions accounted for under the pooling-of-interests method, all
financial data of the Company has been restated to include the historical
financial data of these acquired companies. For acquisitions accounted for as
purchases, the Company'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 September 25, 1998, Cabletron acquired NetVantage, Inc., ("NetVantage") a
publicly held manufacturer of ethernet workgroup switches. Under the terms of
the Merger Agreement, Cabletron issued 6.4 million shares of Cabletron common
stock to the shareholders of NetVantage in exchange for all of the outstanding
shares of stock of NetVantage. In addition, Cabletron assumed 1,309,000 options,
valued at approximately $4.8 million.

Cabletron recorded the cost of the acquisition at approximately $77.8 million,
including direct costs of $4.2 million. This acquisition has been accounted for
under the purchase method of accounting. The cost represents 6.4 million shares
at $9.9375 per share, in addition to assumed options and direct acquisition
costs. Based on an independent appraisal, approximately $29.4 million of the
purchase price was allocated to in-process research and development.
Accordingly, Cabletron recorded special charges of $29.4 million for this
in-process research and development, at the date of acquisition. The excess of
cost over the estimated fair value of net assets acquired of $35.6 million was
allocated to goodwill and other intangible assets and is being amortized on a
straight-line basis over a period of 5 - 10 years. Cabletron's consolidated
results of operations include the operating results of NetVantage, Inc. from the
acquisition date.

On September 9, 1998, Cabletron acquired all of the outstanding stock of
FlowPoint Corp., ("FlowPoint") a privately held manufacturer of digital
subscriber line router networking products. Prior to the agreement, Cabletron
owned 42.8% of the outstanding shares of stock. Pursuant to the terms of the
agreement, $20.6 million is to be paid in 4 installments, within nine months
after the merger date. Each installment may be paid in either cash or Cabletron
common stock, as determined by Cabletron management at the time of distribution.
In addition, Cabletron assumed 494,000 options, valued at approximately $2.7
million.

Cabletron recorded the cost of the acquisition at approximately $25.0 million,
including direct costs of $0.4 million. This acquisition has been accounted for
under the purchase method of accounting. Based on an independent appraisal,
approximately $12.0 million of the purchase price was allocated to in-process
research and development. Accordingly, Cabletron recorded special charges of
$12.0 million for this in-process research and development, at the date of
acquisition. The excess of cost over the estimated fair value of net assets
acquired of $11.9 million was allocated to goodwill and other intangible assets,
and is being amortized on a straight-line basis over a period of 5 - 10 years.
Cabletron's consolidated results of operations include the operating results of
FlowPoint Corp. from the acquisition date.

On September 1, 1998, Cabletron acquired the assets and assumed certain
liabilities of the DSLAM division of Ariel Corporation ("Ariel"), a privately
held designer and manufacturer of digital subscriber line network access
products. Under the terms of the agreement, Cabletron paid $33.5 million and
assumed certain liabilities.

Cabletron recorded the cost of the acquisition at approximately $45.1 million,
including direct costs of $1.1 million related to the acquisition, which
consisted of cash payments of $33.5 million and other assumed liabilities. This
acquisition has been accounted for under the purchase method of accounting.
Based on an independent appraisal, approximately $26.0 million of the purchase
price was allocated to in-process research and development. Accordingly,
Cabletron recorded special charges of approximately $26.0 million ($15.8
million, net of tax) for this in-process research and development, at the date
of acquisition. The excess of cost over the estimated fair value of net assets
acquired of $18.2 million was allocated to goodwill, and is being amortized on a
straight-line basis over a period of 10 years. Cabletron's consolidated results
of operations include the operating results of the DSLAM division of Ariel
Corporation from the acquisition date.

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 6.0 million
shares of Cabletron common stock to the shareholders of Yago in exchange for all
of the outstanding shares of Yago, not then owned by Cabletron. 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.

Cabletron recorded the cost of the acquisition at approximately $165.7 million,
including direct costs of $2.6 million. This acquisition has been accounted for
under the purchase method of accounting. The cost represents 11.5 million shares
at $14.1875 per share, in addition to direct acquisition costs. Based on an
independent appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. Accordingly, Cabletron
recorded special charges of $150.0 million for this in-process research and
development, at the date of acquisition. The excess of cost over the estimated
fair value of net assets acquired of $16.3 million was allocated to goodwill and
other intangible assets and is being amortized on a straight-line basis over a
period of 5 - 10 years. Cabletron's consolidated results of operations include
the operating results of Yago from the acquisition date.

On February 7, 1998, the Company acquired certain assets of the Network Products
Group of Digital Equipment Corporation ("DNPG"). 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. Based on
an independent appraisal, approximately $199.3 million of the purchase price was
allocated to in-process research and development. Accordingly, Cabletron
recorded special charges of $199.3 million for this in-process research and
development at the date of acquisition. The excess of cost over the estimated
fair value of $161.8 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a period of 5 to 10
years. The Company's consolidated results of operations include the operating
results of the acquired business from the acquisition date. During the third
quarter of fiscal 1999, the Company sold buildings that it had purchased in the
acquisition for $24.5 million. See "Note 6" of the consolidated financial
statements. The gain from the sale of the buildings resulted in an adjustment to
goodwill.

On February 7, 1997, the Company acquired The OASys Group, Inc. ("OASys"), 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 December 11, 1996, the Company acquired Netlink Inc. ("Netlink"), 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 $1.8 million for
professional fees and $0.2 million for employee severance.

On August 1, 1996, the Company acquired Network Express, Inc., ("Network
Express") 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 $5.5 million for in-process research and
development, $3.1 million for professional fees and $1.7 million for employee
severance.

On July 26, 1996, the Company acquired ZeitNet Inc., ("ZeitNet") 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 $1.8 million for
professional fees and $0.6 million for employee severance.

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.

The following unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had the
transactions taken place at the beginning of each fiscal year or of the future
results of the combined companies. The special charges, related to these
acquisitions, were not included in the results as these charges are unusual and
not indicative of results of normal operating results. Net sales and operating
income (loss) of Cabletron, DNPG, Yago Systems, Inc., the DSLAM division of
Ariel, FlowPoint Corp. and NetVantage, Inc for the periods preceding the
acquisitions are presented in the following table:

(in thousands) (unaudited)

Fiscal 1999 Fiscal 1998
------------- -------------
Twelve months Twelve months
ended 2/28/99 ended 2/28/98
------------- -------------

Net sales $1,426,322 $1,878,476
Operating income (loss) (107,651) 136,937

Note: the information related to the years ended February 28, 1999 and February
28, 1998 is presented for the interim periods nearest the dates that the
combinations were consummated.

Net sales, operating income (loss) and net income (loss) of Cabletron, Zeitnet,
Network Express and Netlink for the periods preceding the acquisitions are
presented in the following table:

(in thousands) (unaudited)

Fiscal 1997
-------------------------------
Nine months Six months
ended 11/30/96 ended 8/31/96
-------------------------------
Net sales:
Cabletron $1,025,997 $664,439
Zeitnet --- 2,140
Network Express --- 3,177
Netlink 7,935 ---
---------- --------
Pro forma total net sales $1,033,932 $669,756
========== ========

Operating income (loss):
Cabletron $234,842 $135,813
Zeitnet --- (2,965)
Network Express --- (2,293)
Netlink (2,856) ---
-------- --------
Pro forma total operating income $231,986 $130,555
======== ========

Net income (loss):
Cabletron $161,789 $94,047
Zeitnet --- (2,972)
Network Express --- (2,154)
Netlink (2,887) ---
-------- -------
Pro forma total net income $158,902 $88,921
======== =======

Note: the fiscal 1997 interim information is presented for the interim periods
nearest the dates that the combinations were consummated.

The purchase price for each acquisition, completed during the years ended
February 28, 1999 and 1998, was allocated to assets acquired and liabilities
assumed based on fair market value at the date of each acquisition. The total
cost, of acquisitions completed during the years ended February 28, 1999 and
1998, is summarized as follows:

(in thousands) 1999 1998
---- ----

Cash paid for acquisitions $ 38,656 $129,107
Less cash acquired 6,463 ---
-------- --------
Net cash paid for acquisitions 32,193 129,107
Product credits granted --- 302,500
Discount on product credits --- (11,691)
Common stock issued 239,748 ---
Assumed liabilities 41,630 19,581
-------- --------
Purchase price $313,571 $439,497
======== ========

The following are supplemental disclosures of noncash transactions in connection
with the NetVantage, FlowPoint, Ariel, Yago and DNPG acquisitions.

(in thousands) 1999 1998
---- ----

Fair value of assets acquired $80,982 $251,888
In-process research and development 217,350 199,300
Assumed liabilities (26,391) (19,581)
Common stock issued (239,748) ---
Product credits --- (302,500)
------- --------
Cash portion of acquisition $32,193 $129,107
======= ========

Note (4) Investments

Investments are summarized as follows at February 28, 1999 and 1998:

(in thousands)

Gross Gross
Amortized Unrealized Unrealized
February 28, 1999 Cost Gains Losses Fair Value

--------- ---------- ---------- ----------
State, municipal and county government
notes and bonds $282,386 $2,001 ($43) $284,344
Foreign Deposits 12,647 --- --- 12,647
-------- ------ --- --------
Total $295,033 $2,001 ($43) $296,991
======== ====== === ========

Gross Gross
Amortized Unrealized Unrealized
February 28, 1998 Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
State, municipal and county government
notes and bonds $227,296 $1,448 ($6) $228,738
Foreign Deposits 724 --- --- 724
-------- ------ --- --------
Total $228,020 $1,448 ($6) $229,462
======== ======= === ========

Amortized
Cost Fair Value
--------- ----------

Less than one year $113,732 $114,245
Due in 1 - 2 years 135,130 136,177
Due in 2 - 3 years 46,171 46,569
-------- --------
Total $295,033 $296,991
======== ========

February 28, 1999 Short-term Long-term Total

---------- --------- --------
Held-to-Maturity $ 61,255 $ 87,376 $148,631
Available-for-Sale 52,677 93,725 146,402
-------- -------- --------
$113,932 $181,101 $295,033
======== ======== ========

February 28, 1998 Short-term Long-term Total
---------- --------- --------
Held-to-Maturity $ 57,506 $ 2,665 $ 60,171
Available-for-Sale 59,473 108,376 167,849
-------- -------- --------
$116,979 $111,041 $228,020
======== ======== ========

Net unrealized gains on available-for-sale investments are reported as a
separate component of stockholders' equity until realized and amounted to $1.2
million at February 28, 1999. The amount was not material at February 28, 1998
and 1997.

The Company also has investments in certain companies accounted for using the
cost or equity method of accounting. The carrying amount of these investments
was $21.9 million and $12.3 million at February 28, 1999 and 1998, respectively.
These investments are reflected in long-term investments in the accompanying
consolidated balance sheets.

Note (5) Inventories

Inventories consist of the following at February 28, 1999 and 1998:

(in thousands) 1999 1998
---- ----

Raw materials $ 64,603 $105,099
Work-in-process 16,033 34,247
Finished goods 148,876 170,321
-------- --------
Total $229,512 $309,667
======== ========

Note (6) Property, Plant and Equipment

Property, plant and equipment consist of the following at February 28, 1999 and
1998:

(in thousands)

1999 1998 Estimated useful lives
---- ---- ----------------------

Land and land improvements $ 1,855 $ 3,093 15 years
Buildings and building improvements 40,177 61,699 30-40 years
Construction in progress 841 236 ---
Equipment 394,600 361,967 3-5 years
Furniture and fixtures 13,333 18,261 5-7 years
Leasehold improvements 17,751 15,030 3-5 years
-------- --------
468,557 460,286
Less accumulated depreciation and
amortization 280,078 215,556
-------- --------
$188,479 $244,730
======== ========

For the years ended February 28, 1999, 1998 and 1997, depreciation expense was
$87.5 million, $64.8 million and $49.5 million, respectively.

In the fourth quarter of the year ended February 28, 1999, the Company performed
a physical inventory of manufacturing equipment and fixtures in preparation for
the planned outsourcing of its manufacturing operations. As a result of this
inventory, the Company wrote off approximately $17.6 million of assets. The
writeoff consisted of equipment and fixtures ($14.2 million) that could not be
located and equipment that was recently idled and of no future use.

Note (7) Intangible Assets

Intangible assets consist of the following at February 28, 1999 and 1998:

(in thousands)

1999 1998 Estimated useful lives
---- ---- ---------------------

Goodwill $ 82,358 $ 20,160 7 - 10 years
Customer relations 97,000 97,000 8 years
Assembled work force 7,380 6,500 3 - 10 years
Patents and technologies acquired in
business acquisitions 41,652 39,600 3 - 5 years
-------- -------
228,390 163,260
Less accumulated amortization (28,971) (1,770)
-------- --------
$199,419 $161,490
======== ========

Note (8) Accrued expenses consist of the following at February 28, 1999 and
1998:

(in thousands) 1999 1998
-------- --------

Salaries & benefits $ 27,777 $ 25,152
Deferred revenue 94,023 74,414
Warranty 13,602 18,669
Other 82,747 96,493
------- -------
Total $218,149 $214,728
======== ========

Note (9) Long-Term Obligations

Long-term obligations consist of the following at February 28, 1999 and 1998:

(in thousands) 1999 1998
--------- ---------
Unused product credits $129,747 $290,219
less current portion (129,747) (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, which was
subsequently adjusted to $288.4 million with the final valuation of the assets
acquired. In April 1998, Compaq Corporation ("Compaq") acquired Digital and
Compaq has assumed these product credits. The product credits may be used by
Compaq to purchase products that are ordered under the Reseller Agreement.
Adjusted first year product credits were fully utilized during the period
beginning on the closing date (February 7, 1998) and ending on the first
anniversary of the closing date (February 7, 1999). The remaining product
credits of $129.7 million, may be used prior to 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.

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 $18.1 million,
$14.6 million and $12.2 million for the years ended February 28, 1999, 1998 and
1997, respectively.

Total future minimum lease payments under all noncancelable operating leases as
of February 28, 1999, are as follows:

(in thousands) Year
----

2000 $15,953
2001 14,014
2002 10,041
2003 8,393
2004 6,847
Thereafter 24,333
-------
$79,581
=======

Note (11) Income Taxes

(in thousands)

1999 1998 1997
---- ---- ----

Total US domestic income (loss) ($315,428) ($36,343) $319,017
Total foreign subsidiaries income (loss) 38,901 (33,891) 26,683
-------- -------- --------
Total income (loss) before income taxes ($276,527) ($70,234) $345,700
======== ======== ========

Tax expense (benefit) is summarized as follows:

Currently payable:
Federal ($29,939) $55,782 $117,546
State --- 10,689 21,962
Foreign 13,254 956 1,000
Deferred tax benefit (14,451) (102,700) (20,887)
------- -------- --------
Tax expense (benefit) ($31,136) ($35,273) $119,621
======= ======= ========

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

1999 1998 1997
---- ---- ----

Statutory federal income tax (benefit) rate (35.0) % (35.0) % 35.0 %
State income tax, net of federal tax benefit (1.9) (3.3) 3.6
Exempt income of foreign sales corporation,
net of tax (1.7) (10.9) (0.7)
Research and experimentation credit (0.7) (5.9) (0.7)
Municipal income (1.6) (8.9) (2.0)
Rate differential on foreign operations (1.2) 14.0 (2.5)
Nondeductible goodwill & intangibles 27.5 1.7 ---
Other 3.3 (1.9) 1.9
---- ---- ----
(11.3) % (50.2) % 34.6 %
==== ==== ====

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at February 28, 1999 and
1998 are presented below:

(in thousands) 1999 1998
---- ----

Deferred tax assets:
Accounts receivable $ 7,450 $6,166
Inventories 44,125 37,415
Property, plant and equipment 1,150 200
Other reserves and accruals 9,540 34,382
Acquired research and development 113,367 105,078
Domestic net operating loss carryforwards 31,675 27,213
Foreign net operating loss carryforwards 22,786 23,715
-------- --------
Total gross deferred tax assets 230,093 234,169
Less valuation allowance (34,644) (45,914)
-------- --------
Net deferred tax assets 195,449 188,255
-------- --------
Deferred tax liabilities:
Property, plant and equipment (5,971) (12,057)
Other reserves and accruals (1,220) ---
-------- --------
Total gross deferred liabilities (7,191) (12,057)
-------- --------
Net deferred tax assets $188,258 $176,198
======== ========

At February 28, 1999, the Company had domestic net operating loss (NOL)
carryforwards for tax purposes of $83,822,000 and tax credit carryforwards of
$1,912,000 expiring in fiscal 2000 through fiscal 2018. Approximately
$27,974,000 of the above stated NOL amount is subject to Section 382 limitations
due to ownership changes.

The net change in the total valuation allowance for the year ended February 28,
1999 was a decrease of $11,270,000. The net change in total valuation allowance
for the year ended February 28, 1998 was an increase of $7,533,000. 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, 1999.

Note (12) Financial Instruments and Concentration of Credit Risk

The Company utilizes derivative financial instruments, principally forward
exchange contracts and options, to reduce financial currency exposures arising
from its international operations. All foreign exchange forward and option
contracts are designated as a hedge and are highly inversely correlated to the
hedged item as required by generally accepted accounting principles. These
contracts primarily require the Company to purchase or sell certain foreign
currencies either with or for US dollars at contractual rates. Gains and losses
on the contracts are reflected in operating results and offset foreign exchange
gains or losses from the revaluation of inter-company balances or other current
assets and liabilities denominated in currencies other than the functional
currency of the reporting entity. Gains and losses on the contracts are
calculated using published foreign exchange rates to determine fair value. The
gain or loss that results from the early termination of a contract is reflected
in operating results.

At February 28, 1999 and 1998, the Company had forward exchange contracts and
purchased option contracts, all having maturities less than two years, in the
contractual amount of $47 million (forward contracts were $8 million and option
contracts were $39 million) and $43 million (forward contracts were $14 million
and option contracts were $29 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, 1999 and 1998.

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 accounted for under the cost or equity method.

For the year ended February 28, 1999, one customer, Compaq, accounted for
approximately 11% of net sales and sales to the United States federal government
accounted for approximately 15% of net sales. For the years ended February 28,
1998 and 1997 no single customer represented more than 4% of net sales in either
year; however, sales to the United States federal government in the year ended
February 28, 1998 and the year ended February 28, 1997 accounted for
approximately 13% and 12% of net sales, respectively.

Note (13) Segment and Geographical Information

The Company provides a broad product line and service for the computer
networking industry. Substantially all revenues result from the sales of
hardware and software products and professional services (training,
installation, maintenance, etc.). During the year ended February 28, 1999, sales
of switched products were $776.9 million, sales of shared media products were
$170.0 million and sales of software, professional services and other were
$464.4 million compared to sales of switched products of $680.6 million, sales
of shared media products of $317.6 million and sales of software, professional
services and other of $379.1 million during the year ended February 28, 1998.
During the year ended February 28, 1997, sales of switched products were $299.3
million, sales of shared media products were $717.8 million and sales of
software, professional services and other were $389.5 million. The United States
federal government accounted for approximately 15% of net sales in fiscal 1999
and Compaq accounted for approximately 11% of net sales in the year ended
February 28, 1999. The Company's reportable segments are based on geographic
area. All intercompany revenues and expenses are eliminated in computing
revenues and operating income. Operating income excludes interest income,
interest expense, taxes and special charges. Long-lived assets consist primarily
of the net book value of property, plant and equipment and long-term investments
and the long-term investments were attributable to the United States. The Other
segment includes Canada and Latin America.

All revenue amounts are based on product shipment destination and asset balances
are based on location. The United States operating income amount for the year
ended February 28, 1999 excludes the $17.6 million charge related to fixed asset
loss and the $217.4 million of special charges related to acquisitions completed
during that fiscal year. The United States operating income in the year ended
February 28, 1998 excludes the $199.3 million of special charges related to
acquisitions completed during that fiscal year and the $35.0 of special charges
related to the realignment. The United States operating income amount for the
year ended February 28, 1997 excludes the $21.7 million of special charges
related to acquisitions completed during that fiscal year.

(in thousands)

1999 1998 1997
---- ---- ----

Sales to unaffiliated customers (trade):
United States $ 829,380.6 $ 923,285.3 $ 998,405.6
Europe 430,283.1 323,680.7 307,221.8
Pac Rim 114,173.6 77,594.1 64,166.6
Other 37,441.9 52,769.7 36,758.2
------------ ------------ ------------
Total trade sales $1,411,279.2 $1,377,329.8 $1,406,552.2
------------ ------------ ------------

Operating income (loss):
United States $ (68,026.6) $ 140,645.5 $ 321,150.6
Europe 32,828.9 19,907.1 29,877.2
Pac Rim (7,422.1) (16,540.7) (2,375.5)
Other (14,076.4) 1,460.9 (650.8)
------------ ------------ ------------
Total operating income (loss) $ (56,696.2) $ 145,472.8 $ 348,001.5
------------ ------------ ------------

Assets:
United States $1,002,119.0 $1,073,890.5
Europe 483,847.7 510,514.9
Pac Rim 52,101.6 47,248.0
Other 28,431.7 50,394.6
------------ ------------
Total assets $1,566,500.0 $1,682,048.0
------------ ------------

Long-lived assets:
United States $ 363,679.3 $ 335,396.4
Europe 19,453.1 21,315.4
Pac Rim 5,828.0 8,279.9
Other 2,502.6 3,010.3
------------ ------------
Total long-lived assets $ 391,463.0 $ 368,002.0
------------ ------------

Note (14) Legal Proceedings

As previously disclosed in Cabletron's annual report on Form 10-K for fiscal
1998, a consolidated class action lawsuit purporting to state claims against
Cabletron and certain officers and directors of Cabletron was filed and
currently is pending in the United States District Court for the District of New
Hampshire. The complaint alleges 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 complaint also alleges that certain of the Company's alleged accounting
practices resulted in the disclosure of materially misleading financial results
during the same period. More specifically, the complaint challenged the
Company's revenue recognition policies, accounting for product returns, and the
validity of certain sales. The complaint does not specify the amount of damages
sought on behalf of the class. Cabletron and other defendants moved to dismiss
unless the plaintiffs amended their complaint within 30 days (or January 22,
1999). Plaintiffs timely served a Second Consolidation Class Action Complaint,
and the Company has filed a motion to dismiss the second complaint. A ruling on
that motion is not expected earlier than July, 1999. 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, the Company could be required to pay substantial
damages. This litigation may be protracted and may result in a diversion of
management and other resources of the Company. 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.

In addition, the Company is involved in various other legal proceedings and
claims arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a materially adverse effect on the
financial condition or results of operations of the Company.

Note (15) 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, 1999, the Company had issued
20,108,401 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.

Prior to February 28, 1999, the Company maintained a Directors Option Plan which
provided for 1,250,000 shares of common stock for purchase by nonemployee
directors of the Company. The Directors Option Plan provided 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
435,000 stock options are outstanding under the Directors Option Plan at
February 28, 1999. As of March 1, 1999, the nonemployee directors of the Company
will be granted options to purchase shares of common stock in accordance with
the Company's 1998 Equity Incentive Plan.

A summary of option transactions under the two plans follows:

Number of Weighted-Average
Options Exercise Price
---------- ----------------

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
----------
Options exercisable at February 28, 1997 3,356,372 14.88
----------
Granted and assumed 5,015,000 23.11
Exercised (1,762,565) 10.40
Cancelled (1,968,762) 29.45
----------
Options outstanding at February 28, 1998 14,879,091 25.45
----------
Options exercisable at February 28, 1998 4,134,623 22.99
----------
Granted and assumed 20,023,369 7.69 *
Exercised (497,696) 5.58
Cancelled (15,421,085) 16.43 *
----------
Options outstanding at February 28, 1999 18,983,679 $9.67
==========
Options exercisable at February 28, 1999 4,518,681 $13.32
==========

* - At September 1998, employees holding outstanding stock options with a
value exceeding $7.25 per option were given the right to have their options
canceled and repriced to $7.25 per option. The repriced options will vest
over a period of four to six years from September 1, 1998. 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.

The following table summarizes information concerning currently outstanding and
exercisable options as of February 28, 1999:

Weighted-
average Weighted- Weighted-
remaining average average
Range of Options contractual exercise Options exercise
exercise prices Outstanding life (years) price exercisable price
--------------- ----------- ------------ --------- ----------- ---------

$0.00 - 6.30 626,133 7.2 $ 0.83 309,673 $ 1.25
6.31 - 7.85 13,255,139 7.7 7.25 1,569,775 7.25
7.86 - 9.01 682,705 7.1 8.49 152,445 7.99
9.01 - 11.25 1,261,897 4.8 10.04 748,214 9.95
11.26 - 19.33 1,452,732 6.6 13.61 575,711 13.76
19.34 - 26.99 801,542 2.2 25.58 778,656 25.57
27.00 - 33.52 808,086 5.8 30.09 333,077 29.44
33.53 - 48.67 95,445 6.2 41.07 51,130 41.46
---------- --- ------ --------- ------
18,983,679 7.1 $ 9.67 4,518,681 $13.32
========== === ====== ========= ======

The weighted average estimated fair values of stock options granted and assumed
during the years ended February 28, 1999, 1998 and 1997 were $7.69, $9.19 and
$12.01 per share, respectively.

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) 1999 1998 1997
---- ---- ----

Net income (loss) As reported ($245,391) ($ 34,961) $226,079
Pro forma ($299,654) ($ 60,583) $211,063
Pro forma diluted earnings per share ($ 1.79) ($ 0.38) $ 1.33

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 the years ended February 28, 1999, 1998 and 1997:

1999 1998 1997
---- ---- ----

Risk-free interest rates 5.1.% 6.13% 6.18%
Expected option lives 3.7 years 3.8 years 3.7 years
Expected volatility 76.32% 60.37% 63.97%
Expected dividend yields 0.0% 0.0% 0.0%

(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 $12,500 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 the year ended February 28, 1999, 572,087
shares were purchased at a weighted average price of $9.41 (231,326 at $27.00
and 197,262 at $31.47, for the years ended February 28, 1998 and 1997,
respectively). The remaining balance of both ESPPs for purchase by employees at
February 28, 1999 was 2,711,524 shares.

Note (16) 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 was 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 the year ended February 28, 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 pre-existing projects, and personnel reduction.
The Company has completed the reductions.

Note (17) Quarterly Financial Data (unaudited)

(in thousands, except per share amounts)

Income (Loss) Net
Net Gross from Net Income (Loss)
Sales Profit Operations Income (Loss) Per Share(a)
---------- --------- ------------- ------------- -------------

1999 (Restated)
---- --------------------------------------------------------------------

First Quarter $ 365,747 $149,635 ($161,360)(b) ($154,569)(b) ($0.95)
Second Quarter 370,591 171,791 5,030 6,393 0.04
Third Quarter 329,868 126,627 (113,027)(c) (84,477)(c) (0.50)
Fourth Quarter 345,073 151,876 (22,259)(d) (12,738)(d) (0.06)
---------- -------- -------- -------- -----
Total Year $1,411,279 $599,929 ($291,616) ($245,391) ($1.47)
========== ======== ======== ======== =====

1998
----
First Quarter (Restated) $ 362,688 $203,127 $ 78,596 $54,870 $0.34
Second Quarter 371,293 212,261 82,434 57,587 0.36
Third Quarter 331,827 167,573 25,500 19,898 0.12
Fourth Quarter (Restated) 311,522 118,078 (275,342)(e) (167,316)(e) (1.06)
---------- -------- -------- -------- -----
Total Year $1,377,330 $701,039 ($88,812) ($34,961) ($0.22)
========== ======== ======== ======== =====

(a) Due to rounding some totals may not add.
(b) Includes $150.0 million of in-process research and
development charges related to the acquisition of Yago.
(c) Includes $67.4 million of in-process research and
charges related to the acquistions of Ariel, FlowPoint,
and NetVantage.
(d) Includes $17.6 million related to fixed asset loss for
idle, obsolete and discarded equipment.
(e) Includes $234.3 million of in-process research and
development charges related to the acquisition of DNPG
and the strategic alignment plan, $199.3 million and
$35.0 million, respectively.

The first and fourth quarters of the year ended February 28, 1998 have been
restated, see Note 2. First quarter gross profit and income from operations have
been reduced by $6.0 million and net income has been reduced by $3.9 million
($.03 per share) from amounts previously reported. This restatement relates to
the ZeitNet inventory write-off. Fourth quarter gross profit has been reduced by
$24.5 million as a result of a reclassification of an inventory write-off from
special charges to cost of sales. This reclassification had no effect on net
income. Fourth quarter loss from operations has been reduced by $156.3 million
and net loss has been reduced by $96.1 million ($.60 per share) from amounts
previously reported. This restatement relates to the in-process research and
development and special charges relating to the DNPG acquisition.

The first, second and third quarters of the year ended February 28, 1999 have
been restated. First quarter gross profit has been reduced by $6.5 million, loss
from operations and net loss have been increased by $3.0 million and $2.3
million ($.02 per share), respectively. Second quarter gross profit has been
reduced by $3.8 million and income from operations and net income have been
reduced by $8.1 million and $5.0 million ($.03 per share), respectively. Third
quarter gross profit has been reduced by $6.2 million, loss from operations has
been increased by $2.8 million and net loss has been reduced by $0.5 million
($.00 per share).

The restated information reflects adjustments needed to record the amortization
on the increase in the DNPG intangible assets and to expense as incurred the
reversal of DNPG special charges that had been previously recorded in the fourth
quarter of the year ended February 28, 1998.

To address further comments made by the SEC in letters to the Company, the
Company has reduced the amount of the inventory writeoff recorded in the first
quarter of the year ended February 28, 1999 for the phase out of superceded
product lines related to the Yago acquisition and recorded the writeoff upon
disposal of the inventory, during the first, second and third quarters.

The Company has also reduced the amount of its charges for in-process research
and development in connection with the acquisitions of Ariel, FlowPoint and
NetVantage from $74.7 million to $67.4 million and, correspondingly, increased
the amounts allocated to intangible assets by $7.3 million.

Note (18) Subsequent Event

On March 22, 1999, the Company announced that it signed a letter of intent with
Celestica, Inc. to outsource primarily all of its worldwide manufacturing
operations. As part of this transaction, Cabletron and Celestica entered into a
strategic long-term supply agreement, under which Celestica will acquire
approximately $35 - 40 million of Cabletron inventory and manufacturing assets.
As a result of this agreement, Cabletron's Ohio-based operations will be closed.
The Ohio-based employees will be provided with severance packages, as well as
career outplacement and training services by Cabletron.

On March 22, 1999, the Company also announced an initiative ("Project Ignition")
to re-energize the corporate focus. This initiative is intended to reduce the
expense structure of the Company; lower cost of goods sold; increase cash
reserves; provide higher return on assets and revenue per employee; enable
aggressive asset reduction and consolidation initiatives and increase net
income. The Company expects to incur a pre-tax restructuring and strategic
business realignment charge of approximately $20 - 30 million, during the first
quarter of fiscal 2000. The Project Ignition charge will include the costs to
consolidate facilities, elimination of manufacturing facilities and personnel
reductions, including the impact from the manufacturing outsourcing.

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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended February 28, 1999, in conformity with generally accepted accounting
principles.

The consolidated balance sheet as of February 28, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the the years ended in the two year period then ended have been restated
as discussed in Note 2 (b).

Boston, Massachusetts

March 22, 1999, except for Notes 2 (b) and 17, as to which the date is
May 25, 1999

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 1999 Annual Meeting of Stockholders ("Proxy Statement"), which is
incorporated herein by reference. Information relating to the executive officers
of the Company is included in the section titled "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 1999 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 1999
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 1999 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 50

Consolidated Balance Sheets at February 28, 1999 and February 28, 1998 30

Consolidated Statements of Operations for fiscal years 1999, 1998 and 1997 31

Consolidated Statements of Stockholders' Equity for fiscal years 1999, 1998 and 1997 32

Consolidated Statements of Cash Flows for fiscal years 1999, 1998 and 1997 33

Notes to Consolidated Financial Statements 34 - 49

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 50

Schedule II - Valuation and Qualifying Accounts 55

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.

22.1 Subsidiaries of Cabletron Systems, Inc.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule

(b) The Registrant did not file any information on Form 8-K during the last
quarter of the fiscal year ended February 28, 1999.

INDEPENDENT AUDITORS' REPORT

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

Under date of March 22, 1999, we reported on the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1999 and 1998, 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, 1999. 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.

The consolidated balance sheet as of February 28, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the the years ended in the two year period then ended have been restated
as discussed in Note 2 (b).

KPMG LLP

Boston, Massachusetts

March 22, 1999, except for Notes 2 (b) and 17, as to which the date is
May 25, 1999

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: June 2, 1999 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 June 2, 1999
- ---------------------------- Chairman, President, ------------
Craig R. Benson Chief Executive Officer and Director

/s/ David J. Kirkpatrick June 2, 1999
- --------------------------- Corporate Executive Vice President of Finance ------------
David J. Kirkpatrick and Chief Financial Officer

/s/ Michael D. Myerow Secretary and Director June 2, 1999
- -------------------------- ------------
Michael D. Myerow

/s/ Paul R. Duncan Director June 2, 1999
- ----------------------------- ------------
Paul R. Duncan

/s/ Donald F. McGuinness Director June 2, 1999
- ------------------------ ------------
Donald F. McGuinness

EXHIBIT INDEX

Exhibit
No. Exhibit Page No.
- ------- ------- --------

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 Form 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.

10.10Lease 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.

10.11Lease 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).

10.12Credit 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).

10.13Asset 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).

10.14Reseller 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).

10.15Employment 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).

10.16First 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).

10.17Amendment 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).

10.18Letter agreement between the Registrant and Donald B. Reed dated as of
March 30, 1998.

22.1 Subsidiaries of Cabletron Systems, Inc. 58

23.1 Consent of Independent Auditors 59

27 Financial Data Schedule

EXHIBIT 22.1

SUBSIDIARIES OF CABLETRON SYSTEMS, INC.

SCHEDULE II

CABLETRON SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

For Years Ended February 28, 1999, 1998 and 1997

(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, 1999 $21,043 $10,784 $0 ($8,567) $23,260

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

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

Cabletron Systems de Argentina S.A. (Argentina) The OASys Group, Inc. (California)
Cabletron Systems Pty. Limited (Australia) Yago Systems, Inc. (California)
Cabletron Systems do Brasil Representacoes Ltda. (Brazil) ZeitNet Inc. (California)
Cabletron Systems of Canada Limited (Canada) ) ZeitNet India Private Limited (India)
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)
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 (Singapore)
Fivemere Developments Limited (UK)
FlowPoint Corp.(California)
NetVantage, Inc. (Delaware)
Network Express, Inc. (Michigan)
Network Express GmbH (Germany)
Network Express K.K. (Japan)
Network Express Europe Limited (UK)

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 22, 1999, relating to the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of February 28, 1999 and 1998, 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, 1999, which reports are included in the February 28, 1999
Annual Report to Stockholders on Form 10-K of Cabletron Systems, Inc.

The consolidated balance sheet as of February 28, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the the years ended in the two year period then ended have been restated
as discussed in Note 2 (b).

Boston, Massachusetts
June 2, 1999

DIRECTORS AND OFFICERS

Board of Directors

Craig R. Benson
Chairman of the Board, President,
Chief Executive Officer and Treasurer

Paul R. Duncan
Executive Vice President (Retired)
Reebok International, Ltd.

Donald F. McGuinness
Chairman of the Board,
Electronic Designs, Inc.

Michael D. Myerow
Partner in law firm of Myerow & Poirier

Officers

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

Carl E. Boisvert
Executive Vice President, Sales

John d'Auguste
President of Operations

Enrique P. Fiallo
Senior Vice President and Chief Information Officer

Allen L. Finch
Senior Vice President, Worldwide Marketing,
Corporate Strategy & Communications

Earle S. Humphreys
Executive Vice President, Global Services

Eric Jaeger
Senior Vice President and General Counsel

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

Piyush Patel
Senior Vice President, Worldwide Engineering

Linda F. Pepin
Senior Vice President, Human Resources

Michael A. Skubisz
Chief Technology Officer

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 Tuesday, the Transfer Agent and Registrar of the
July 13, 1999 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 information Boston EquiServe
of Cabletron Systems, Inc. should be P.O. Box 8040
addressed to: Boston, MA 02266-8040
Cabletron Systems, Inc.
Investor Relations Independent Auditors
PO Box 5005 KPMG 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.