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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

For the quarter ended December 29, 2002 OR

For the transition period from                          to                         

Commission file number 000-25711

EXTREME NETWORKS, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (408) 579-2800

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.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at

February 3, 2003 was 115,967,177.

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EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31, 2002

INDEX

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Part I.    Financial Information

Item 1.    Financial Statements

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to the unaudited condensed consolidated financial statements.

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EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

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EXTREME NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    DESCRIPTION OF BUSINESS

Extreme Networks, Inc. (“Extreme Networks” or the “Company”) is a leading provider of network infrastructure equipment and markets its products primarily to business, governmental and educational customers with a focus on large corporate enterprises and metropolitan service providers. Extreme Networks was incorporated in California in 1996 and reincorporated in Delaware in 1999.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

Extreme Networks’ fiscal year is a 52/53-week fiscal accounting year that closes on the Sunday closest to June 30^th every year. Fiscal 2003 is a 52-week fiscal year. The December 31, 2002 quarter closed on December 29, 2002 and comprised 13 weeks of revenue and expense activity. All references herein to “fiscal 2003” or “2003” represent the year ending June 29, 2003.

Basis of Presentation

The unaudited condensed consolidated financial statements of Extreme Networks have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet at June 30, 2002 was derived from audited financial statements as of that date but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These interim financial statements and notes should be read in conjunction with Extreme Networks’ audited consolidated financial statements and notes thereto included in Extreme Networks’ Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

The unaudited financial statements reflect all adjustments that are, in the opinion of management, consisting only of normal recurring adjustments necessary to a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition of Extreme Networks at December 31, 2002. The results of operations for the six months ended December 31, 2002 are not necessarily indicative of the results that may be expected for the remaining quarters or fiscal 2003.

Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2003 presentation. Such reclassifications have not impacted previously reported revenues, operating income (loss) or net income (loss).

Principles of Consolidation

The consolidated financial statements include the accounts of Extreme Networks and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Investments in which management intends to maintain more than a temporary 20% to 50% interest, or otherwise has the ability to exercise significant influence, are accounted for under the equity method. Investments in which Extreme Networks owns less than a 20% interest and does not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value.

Assets and liabilities of foreign operations are translated to United States dollars at current rates of exchange, and revenues and expenses are translated using weighted-average rates. Foreign currency transaction gains and losses during the interim periods reported have not been significant. Gains and losses from foreign currency translation are included as a separate component of other comprehensive income (loss).

Cash Equivalents, Short-Term Investments and Marketable Securities

Highly liquid investment securities with insignificant interest rate risk and with original maturities of three months or less at date of purchase are classified as cash equivalents. Investment securities with original maturities greater than three months and remaining maturities of less than one year are classified as short-term investments. Investment securities with remaining

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maturities greater than one year are classified as marketable securities. Extreme Networks’ investments are comprised solely of U.S., state and municipal government obligations and corporate securities.

To date, all marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses, when material, reported net-of-tax as a separate component of stockholders’ equity. Realized gains and losses on available-for-sale securities are included in other income, net. The cost of securities sold is based on specific identification. Premiums and discounts are amortized over the period from acquisition to maturity and are included in investment income, along with interest and dividends.

Extreme Networks has certain other minority investments in privately held companies. These investments are included in other assets on the balance sheet and are carried at cost. Extreme Networks monitors these investments for other than temporary impairment and makes appropriate reductions in carrying values when necessary. Extreme Networks did not record any write-downs of its privately held investments for the three or six months ended December 31, 2002. Extreme Networks recorded write-downs of $6.0 million related to impairments of its privately held investments for the six months ended December 31, 2001. Investments in privately held companies with a carrying value of $0.2 million remained as of December 31, 2002.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost or market (on a first-in, first-out basis). Inventories consist of (in thousands):

Fair Value of Financial Instruments

The carrying amounts of certain of Extreme Networks financial instruments, including cash and cash equivalents, approximate fair value because of their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments. The fair value of the convertible subordinated notes due 2006 is estimated using quoted market prices.

Concentration of Credit Risk and Significant Customers

Extreme Networks may be subject to concentration of credit risk as a result of certain financial instruments consisting principally of marketable investments and accounts receivable. Extreme Networks has placed its investments with high-credit quality issuers. Extreme Networks will not invest an amount exceeding 10% of the corporation’s combined cash, cash equivalents, short-term investments and marketable securities in the securities of any one obligor or maker, except for obligations of the United States government, obligations of United States government agencies and money market accounts. Extreme Networks performs ongoing credit evaluations of its customers and does not require collateral in exchange for credit. Extreme Networks endeavors to keep pace with the networking industry by adopting credit policies and standards in view of assessable risks.

In regard to customer concentration, one distributor of Extreme Networks’ products accounted for 10% and 15% of Extreme Networks’ net revenue for the three months ended December 31, 2002 and 2001, respectively. One distributor of Extreme Networks’ products accounted for 13% of Extreme Networks’ net revenue for the six months ended December 31, 2002. One distributor of Extreme Networks’ products and one end-user customer accounted for 16% and 10% of Extreme Networks’ net revenue, respectively, for the six months ended December 31, 2001.

Revenue Recognition

Extreme Networks derives the majority of its revenue from sales of its stackable and chassis-based networking equipment, with the remaining revenue generated from service fees relating to the maintenance and installation of, and training on, its products. Extreme Networks’ revenue recognition policy follows SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Extreme Networks generally recognizes product revenue from end-user and reseller customers at the time of shipment, provided that persuasive evidence of an arrangement exists, the price of the product is fixed or determinable and collection of the sales proceeds is reasonably assured. When significant obligations or contingencies remain after products are delivered, such as installation or customer acceptance, revenue and related costs are deferred until such obligations or contingencies are satisfied. Revenue from service obligations under maintenance contracts

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is deferred and recognized on a straight-line basis over the contractual period, which typically range from one to three years. When Extreme Networks provides a combination of products and services to customers, revenue is allocated based on the relative fair values.

Extreme Networks makes certain sales to partners in two-tier distribution channels. The first tier consists of a limited number of independent distributors that sell primarily to resellers and, on occasion, to end-user customers. Under specified conditions, Extreme Networks grants these distributors the right to return a portion of unsold inventory to it for the purpose of stock rotation. Therefore, Extreme Networks defers the recognition of revenue on sales to distributors until the distributors sell the product, as evidenced by a monthly sales-out report that the distributors provide to Extreme Networks. The second tier of the distribution channel consists of a large number of third-party resellers that sell directly to end users and are not granted return privileges, except for defective products.

Warranty Reserves

Extreme Networks’ hardware warranty period is typically 12 months from the date of shipment to end users and 14 months from the date of shipment to channel partners, which include resellers and distributors. Upon shipment of products to its customers, including both end users and channel partners, Extreme Networks estimates expenses for the cost to repair or replace products that may be returned under warranty and accrues the amount, as revenue is recognized. In addition, the Company estimates expenses for the cost to repair or replace products that may be returned under service agreements after the expiration of the warranty period as well as products returned or replaced at the discretion of the Company outside the warranty period and not covered by a separate service agreement. As a result, the charges to cost of revenue and expenses incurred include not only expenses associated with repairs or replacements during the warranty period but also amounts related to obligations under service contracts and amounts associated with discretionary repair or replacement programs. In future periods, these amounts will be more readily segregated as part of the implementation of our new enterprise resource planning (“ERP”) system.

The determination of warranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costs and any product warranty problems that are identified after shipment. Extreme Networks adjusts these accruals at each balance sheet date in accordance with changes in these factors. Changes in Extreme Networks’ accrued warranty account for the three and six months ended December 31, 2002 and 2001 are as follows (in millions):

Disclosure about Segments of an Enterprise and Geographic Areas

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers with respect to the allocation of resources and performance.

Extreme Networks operates in one segment, the development and marketing of network infrastructure equipment. Extreme Networks conducts business globally and is managed geographically. Revenue is attributed to a geographical area based on the location of the customers. Extreme Networks does not allocate cost of revenue, research and development, sales, marketing and service, or general and administrative expenses to its geographic areas or measure the performance of geographic areas based on allocation of these costs and expenses. Management does not believe that allocating these expenses is significant in evaluating Extreme Networks’ performance on a geographic basis.

Information regarding geographic areas is as follows (in thousands):

As of December 31, 2002, substantially all of Extreme Networks’ assets were attributable to its operations conducted in the United States.

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Goodwill and Purchased Intangible Assets

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Extreme Networks adopted this statement beginning July 1, 2002. In accordance with SFAS 142, Extreme Networks ceased amortizing goodwill as of July 1, 2002. Goodwill at July 1, 2002 was $1.0 million.

The following table presents the impact of SFAS 142 on net loss and net loss per share had the standard been in effect for the three and six months ended December 31, 2001 (in thousands, except per-share amounts):

Extreme Networks is required to perform a goodwill impairment test on an annual basis and between annual tests in certain circumstances. No impairment of goodwill was recognized as of December 31, 2002. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Income Taxes

Income tax expense (benefit) is based on pre-tax financial accounting income (loss). Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.

Computation of Net Income (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of options, warrants, convertible subordinated notes and convertible securities. Dilutive earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares used in the basic earnings (loss) per share calculation plus the dilutive effect of options, warrants, convertible subordinated notes and convertible securities. Diluted net loss per share was the same as basic net loss per share for the three and six months ended December 31, 2002 and 2001 because Extreme Networks had net losses for those periods. The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

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The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above because to do so would be antidilutive for the periods (in thousands):

Derivatives

Extreme Networks uses derivative financial instruments to manage exposures to foreign currency. Extreme Networks’ objective for holding derivatives is to use the most effective methods to minimize the impact of these exposures. Extreme Networks does not enter into foreign exchange forward contracts for speculative or trading purposes. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative designated as a fair value hedge, the gain or loss is recognized in other expense in the period of change together with the offsetting gain or loss on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income and is subsequently reclassified into other expense upon occurrence of the forecasted transaction. The ineffective portion of the gain or loss is reported in other expense immediately.

Foreign Currency Hedging

Extreme Networks’ exposure to foreign exchange rate fluctuations arises in part from intercompany accounts between the parent company in the United States and its foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. Extreme Networks is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into United States dollars for consolidation purposes. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact overall financial results.

Extreme Networks has a program to reduce the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of foreign exchange forward contracts in Japanese Yen, the Euro, the Swedish Krona and the British Pound. A foreign exchange forward contract obligates Extreme Networks to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent United States dollar payment equal to the value of such exchange. Under this program, increases or decreases in Extreme Networks’ foreign currency transactions are substantially offset by gains and losses on the forward contracts, so as to mitigate the possibility of significant foreign currency transaction gains and losses.

Extreme Networks enters into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the remeasurement of certain assets and liabilities denominated in Japanese Yen, the Euro, the Swedish Krona and the British Pound. These derivatives are not designated as hedges under SFAS 133. At December 31, 2002, these exposures amounted to $2.0 million and were partially offset by foreign currency forward contracts with a notional principal amount of $2.0 million (fair value of approximately $108,000). These contracts were traded in the last month of the quarter and have a final maturity of less than 45 days.

Extreme Networks also uses foreign exchange forward contracts to hedge foreign currency forecasted transactions related to certain operating expenses, denominated in Japanese Yen, the Euro, the Swedish Krona and the British Pound. These derivatives are designated as cash flow hedges under SFAS 133. At December 31, 2002, these exposures amounted to $6.7 million and were partially offset by forward foreign currency contracts with a notional principal amount of $6.7 million (fair value of approximately $85,000). These contracts were traded in the last week of the quarter and have a final maturity of less than 60 days.

Typically, changes in the fair value of foreign exchange forward contracts are offset largely by changes upon remeasurement of the underlying assets and liabilities. These contracts have original maturities ranging from one to three months.

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Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but are not limited to, accounting for the allowance for doubtful accounts, inventory valuation, depreciation and amortization, impairment of purchased intangible assets and minority investments, sales returns, warranty accruals and income taxes. Actual results could differ materially from these estimates.

Recently Issued Accounting Standards

Impairment of Long-Lived Assets

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (“SFAS 121”). Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The statement also supersedes certain provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations —Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period or periods in which the losses are incurred rather than as of the measurement date, as previously required. Extreme Networks adopted SFAS 144 on July 1, 2002. The adoption of SFAS 144 did not have a material impact on Extreme Networks’ consolidated financial position, results of operations or cash flows for the six months ended December 31, 2002.

SFAS 144 requires that long-lived assets be tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Factors that could trigger an impairment review include significant under-performance relative to the expected historical or projected future operating results, significant changes in the manner of use of the assets, significant negative industry or economic trends and significant changes in Extreme Networks’ market capitalization relative to net book value. In the event of one or more of the above indicators of impairment, Extreme Networks will test such assets for a potential impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cash flows are less than the asset’s carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to dispose of the affected assets.

Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS addresses costs associated with restructuring activities that are currently accounted for under Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also covers termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement, costs related to terminating a contract that is not a capital lease and costs to consolidate facilities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Extreme Networks does not expect the adoption of SFAS 146 to have a material impact on its operating results or financial position.

Consideration Granted by Vendors

In November 2001, the EITF reached a consensus on EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products (“EITF 01-09”), which addresses the accounting for consideration given by a vendor to a customer. Extreme Networks adopted EITF 01-09 during fiscal 2002 and its adoption did not have a material impact on its financial position or results of operations.

Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15,

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2002. Extreme Networks has determined that the requirements of FIN 45 apply to its accrued warranty, to a guarantee of a lease obligation of one of its contract manufacturers and to letters of credit issued under its line of credit. Extreme Networks has complied with the disclosure provisions of FIN 45 as of December 31, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. Extreme Networks has not yet determined the impact of the adoption of the recognition requirements criteria of FIN 45 on its results of operations or financial position.

3.     CHANGES IN ACCOUNTING POLICY

Effective July 1, 2002, Extreme Networks changed its capitalization policy for property and equipment from $1,000 to $3,000. Since the original policy was put into place, Extreme Networks has increased its scale of operations. As a result, tracking assets less than $3,000 became impracticable. The impact of the change on the accompanying financial statements was not material for all periods presented.

Extreme Networks purchases assets manufactured by its competitors in order to evaluate their products. Extreme Networks’ policy in the past has been to depreciate these assets over three years. Extreme Networks has changed its estimate of the useful life of these assets to one year to match with the currently anticipated use of this equipment. The new one-year life will be applied prospectively to any competitive equipment purchased on or after October 1, 2002. The impact of the change on results of operations was not material for all periods presented.

4.    BUSINESS COMBINATIONS AND INVESTMENTS

During fiscal 2001, Extreme Networks acquired two privately held companies in which it previously held minority interests: Optranet, Inc. (“Optranet”), a developer of broadband access equipment, and Webstacks, Inc. (“Webstacks”), a developer of content switching equipment. A related party of Extreme Networks was a significant investor in Optranet at the time of Extreme Networks’ initial investment and the subsequent acquisition. In addition, a related party of Extreme Networks was a significant investor in Webstacks at the time of Extreme Networks’ initial investment and the subsequent acquisition. In connection with these acquisitions, Extreme Networks acquired all of the outstanding stock and assumed all of the outstanding stock options of the respective acquirees. Both acquisitions were accounted for as purchase business combinations.

Extreme Networks recognized deferred stock-based compensation associated with unvested stock options issued to employees that were assumed in conjunction with the acquisition of Optranet and Webstacks. This amount is included as a component of stockholders’ equity and is being amortized ratably by charges to operations over the vesting period of the options. The amortization of stock-based compensation associated with the acquisition of Optranet was $1.6 million and $2.4 million for the three months ended December 31, 2002 and 2001, respectively, and was $3.4 million and $5.0 million for the six months ended December 31, 2002 and 2001, respectively. The amortization of stock-based compensation associated with the acquisition of Webstacks was $0.2 million and $0.3 million for the three months ended December 31, 2002 and 2001, respectively, and was $0.4 million and $0.5 million for the six months ended December 31, 2002 and 2001, respectively. The amortization of stock-based compensation relates to options awarded to employees in research and development.

During the third quarter of fiscal 2002, Extreme Networks determined that there was other than temporary impairment of some of the goodwill and purchased intangible assets related to these acquisitions. See Note 10.

5.     COMMITMENTS AND CONTINGENCIES

Line of Credit

Extreme Networks has entered into a revolving line of credit for $10.0 million with a major lending institution. Borrowings under this line of credit bear interest at the bank’s prime rate. As of December 31, 2002, there were no outstanding borrowings under this line of credit. The line of credit contains a provision for the issuance of letters of credit not to exceed the unused balance of the line. As of December 31, 2002, Extreme Networks had letters of credit totaling $1.7 million. The line of credit requires Extreme Networks to maintain specified financial covenants related to tangible net worth and liquidity with which Extreme Networks was in compliance as of December 31, 2002. The line of credit expires on November 30, 2003.

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Leases

In June 2000, Extreme Networks entered into two operating lease agreements for approximately 16 acres of land and the accompanying 275,000 square feet of buildings to house its primary facility in Santa Clara, California (the “Property”). The two lease agreements provided Extreme Networks with the option to purchase the Property at any time during the lease term and required the purchase at the end of the lease term. In April 2002, Extreme Networks exercised the option to purchase the Property and title to the Property was transferred to it in May 2002. Extreme Networks was obligated to pay a total of $80.0 million for the Property. As part of the original lease transactions, $80.0 million of Extreme Networks’ investment securities served as collateral for specified obligations under the lease agreements. Extreme Networks transferred the $80.0 million of investment securities held as security for the lease obligations to the lessor as payment for the Property.

At the time of exercise of the option to purchase the Property, the appraised value of the land and buildings was $38.0 million. Extreme Networks recognized a charge, net of a $3.0 million improvement allowance, of $39.0 million in the third quarter of fiscal 2002. The land and buildings are included on Extreme Networks’ consolidated balance sheet as of December 31, 2002 and June 30, 2002.

As part of our business relationship with MCMS, Inc., the predecessor-in-interest to Plexus Corp., we entered into a $9.0 million operating equipment lease for manufacturing equipment in September 2000 with a third-party financing company; we, in turn, subleased the equipment to MCMS. The equipment lease with the third-party financing company requires us to make monthly payments through June 2010 and to maintain specified financial covenants related to profitability and our cash to debt ratio. The liability related to this lease is included in accrued commitments on the balance sheet. As of December 31, 2002, we were not in compliance with the profitability covenant and obtained the necessary waiver and expect to be in compliance in future quarters.

Legal Proceedings

Beginning on July 6, 2001, multiple purported securities fraud class action complaints were filed in the United States District Court for the Southern District of New York. The cases were consolidated and the litigation is now captioned as In re Extreme Networks, Inc. Initial Public Offering Securities Litigation, Civ. No. 01-6143 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.).

On or about April 19, 2002, plaintiffs electronically served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased Extreme Networks’ common stock from April 8, 1999 through December 6, 2000. It names as defendants Extreme Networks; six of the its present and former officers; and several investment banking firms that served as underwriters of Extreme Networks’ initial public offering and October 1999 secondary offering. Subsequently, plaintiffs and one of the individual defendants stipulated to a dismissal of that defendant without prejudice. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The Securities Act of 1933 allegations against Extreme Networks and its officers are made as to the secondary offering only. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.

Extreme Networks is aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. On July 15, 2002, Extreme Networks (and the other issuer defendants) filed a motion to dismiss. That motion was heard on November 1, 2002. Extreme Networks cannot assure you that it will prevail in the lawsuit. Failure to prevail could have a material adverse effect on its consolidated financial position, results of operations and cash flows in the future.

On March 14, 2001, Nortel Networks, Inc. and Nortel Networks Limited (collectively, “Nortel”) filed suit against Extreme Networks in the United States District Court for the District of Massachusetts, Civil Action No. 01-10443EFH (the “Case”). The complaint alleged willful infringement of U.S. Patent Nos. 5,790,554; 5,490,252; 5,408,469; 5,398,245; 5,159,595 and 4,736,363, and sought, among other findings, a judgment against Extreme Networks for infringement of the six patents, which allegations Extreme Networks vigorously opposed. Following limited pre-trial discovery and negotiation, Extreme Networks and Nortel agreed on September 17, 2002 to a settlement of all claims. As part of the settlement, the parties agreed to a prospective five-year cross-license with respect to the patents covering technologies that were at issue in the Case. The Case was dismissed with prejudice on September 20, 2002.

Extreme Networks is subject to other legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters, including the specific matters discussed above, is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on Extreme Networks’ consolidated financial position, results of operations or cash flows.

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6.    INCOME TAXES

Extreme Networks has recorded tax benefits of $13.2 million and $15.2 million for the three and six months ended December 31, 2002, respectively. The benefits for the three and six months ended December 31, 2002 reflect effective tax rates of 40.0% and 38.3%, respectively, which differs from the statutory rate primarily due to the impact of research and experimentation credits and the tax impact of foreign operations.

7.     COMPREHENSIVE INCOME (LOSS)

The following are the components of accumulated other comprehensive income, net of tax (in thousands):

The components of comprehensive loss, net of tax, are as follows (in thousands):

8.    RESTRUCTURING CHARGE AND PROPERTY AND EQUIPMENT WRITE-OFF

Restructuring

During the three months ended December 31, 2002, Extreme Networks recorded a restructuring charge of $14.2 million. The restructuring charge included excess facilities charges of $9.6 million, severance charges of $2.7 million and asset impairments of $1.9 million. The excess facilities charge represents an increase to the charge recognized during fiscal 2002 for the domestic and international facilities discussed below. The commercial real estate market has continued to deteriorate since the initial charge was recorded in the third quarter of fiscal 2002 necessitating an increase in reserves that take into consideration the unfavorable difference between lease obligation payments and projected sublease receipts. The severance charges related to a reduction in total staff during the quarter of approximately 100 people, or 10% of the total workforce, across all departments. The asset impairment charge relates to the write-off of leasehold improvements and office furniture related to excess facilities.

During the third quarter of fiscal 2002, Extreme Networks implemented a restructuring plan to lower its overall cost structure. Restructuring charges of $73.6 million included a $39.0 million charge related to the exit of two facility leases Extreme Networks entered into in June 2000, as described in Note 5 under the subheading “Leases.” The actual cost could differ from this estimate, and additional facilities charges could be incurred if Extreme Networks is unsuccessful in negotiating reasonable termination fees on certain facilities, if facility operating lease rental rates continue to decrease in these markets, if it takes longer than expected to find a suitable tenant to sublease these facilities, or if other estimates and assumptions change.

Excess facilities charges during the third quarter of fiscal 2002 were $25.4 million. These costs are the result of Extreme Networks’ decision to permanently reduce occupancy or vacate certain domestic and international facilities. The estimated facilities costs were based on current comparable rates for leases in the respective markets or estimated termination fees. Extreme Networks anticipates that it will continue to make cash outlays to meet lease obligations for these facilities in accordance with their terms, unless estimates and assumptions change or Extreme Networks is able to negotiate acceptable lease terminations prior to the anticipated termination dates for the applicable leases.

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Asset impairments were $9.1 million for fiscal 2002. This charge represented the unamortized amount of the assets at the date a decision was made to discontinue use. These assets were not utilized subsequently or held for sale. They were either scrapped or abandoned.

Restructuring liabilities consist of (in thousands):

Property and equipment write-off

During the second quarter of fiscal 2003, Extreme Networks completed a property and equipment physical inventory in conjunction with the implementation of its new enterprise resource planning (“ERP”) system. The property and equipment physical inventory resulted in the identification of $12.7 million of property and equipment that was either no longer in service or not identifiable and therefore was written off during the second quarter of fiscal 2003.

9.    PROVISION FOR INVENTORY

As a result of the rapid change in the market for networking products, Extreme Networks recorded $7.6 million and $39.2 million in charges for excess and obsolete inventory and non-cancelable purchase commitments in fiscal 2002 and 2001, respectively. The following is a summary of these charges and their disposition from the third quarter of fiscal 2001 to December 31, 2002 (in thousands):