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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

OR

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.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at May 2, 2003 was 116,386,108.

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EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 30, 2003

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

Our fiscal year is a 52/53-week fiscal accounting year that closes on the Sunday closest to June 30^th every year. Fiscal 2003 and 2002 are 52-week fiscal years. The third quarter of fiscal 2003 closed on March 30, 2003 and comprised 13 weeks of revenue and expense activity.

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 our audited consolidated financial statements and notes thereto included in our 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 March 30, 2003. The results of operations for the nine months ended March 30, 2003 are not necessarily indicative of the results that may be expected for fiscal 2003 or any future periods.

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 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 we own less than a 20% interest and do 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 maturities greater than one year are classified as marketable securities. Our investments are comprised solely of U.S., state and municipal government obligations and corporate securities.

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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.

We have certain other minority investments in privately held companies. These investments are included in other assets on the balance sheet and are carried at cost. We monitor these investments for other than temporary impairment and make appropriate reductions in carrying values when necessary. We did not record any write-downs of our privately held investments for the three or nine months ended March 30, 2003. We recorded write-downs of $9.7 million related to impairments of our privately held investments for the nine months ended March 31, 2002. Investments in privately held companies with a carrying value of $0.2 million remained as of March 30, 2003.

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 our 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

We may be subject to concentration of credit risk as a result of certain financial instruments consisting principally of marketable investments and accounts receivable. We have placed our investments with high-credit quality issuers. We will not invest an amount exceeding 10% of our 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. We perform ongoing credit evaluations of our customers and do not require collateral in exchange for credit. We endeavor to keep pace with the networking industry by adopting credit policies and standards in view of assessable risks.

In regard to customer concentration, two distributors of Extreme Networks’ products accounted for 13% and 11% of our net revenue and one reseller of our products accounted for 10% of our net revenue for the three months ended March 30, 2003. One distributor of Extreme Networks’ products and one end-user customer accounted for 13% and 14% of our net revenue for the three months ended March 31, 2002, respectively. One distributor of Extreme Networks’ products accounted for 12% and 15% of Extreme Networks’ net revenue for the nine months ended March 30, 2003 and March 31, 2002, respectively.

Revenue Recognition

We derive the majority of our revenue from sales of our stackable and chassis-based networking equipment, with the remaining revenue generated from service fees relating to the maintenance and installation of, and training on, our products. Our revenue recognition policy follows SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. We generally recognize 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 is deferred and recognized on a straight-line basis over the contractual period, which typically ranges from one to five years. When we provide a combination of products and services to customers, revenue is allocated based on the relative fair values.

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We make 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, we grant these distributors the right to return a portion of unsold inventory to us for the purpose of stock rotation. Therefore, we defer 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 us. 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

Our 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 our customers, including both end users and channel partners, we estimate expenses for the cost to repair or replace products that may be returned under warranty and accrue a liability for this amount.

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. We estimate and adjust these accruals at each balance sheet date in accordance with changes in these factors. Changes in our accrued warranty liability account for the three and nine months ended March 30, 2003 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.

We operate in one segment, the development and marketing of network infrastructure equipment. We conduct business globally and are managed geographically. Revenue is attributed to a geographical area based on the location of the customers.

As of March 30, 2003, substantially all of our assets were attributable to our operations conducted in the United States.

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. We adopted this statement July 1, 2002. In accordance with SFAS 142, we 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 nine months ended March 31, 2002 (in thousands, except per-share amounts):

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We are 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 March 30, 2003. 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 nine months ended March 30, 2003 and March 31, 2002 because we 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):

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):

Stock Based Compensation

Extreme Networks has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Extreme Networks’ employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in Extreme Networks’ financial statements.

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Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS 123. This information is required to be determined as if Extreme Networks had accounted for its employee stock options and shares issued under the 1999 Purchase Plan under the fair value method of that statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The following pro forma information sets forth our net loss and net loss per share assuming that we had used the SFAS 123 fair value method in accounting for employee stock options and purchases (in thousands, except per share amounts):

Derivatives

We use derivative financial instruments to manage exposures to foreign currency. Our objective for holding derivatives is to use the most effective methods to minimize the impact of these exposures. We do 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 income, net 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 sales, marketing and service expense upon occurrence of the forecasted transaction. The ineffective portion of the gain or loss is reported in other income, net immediately.

Foreign Currency Hedging

Our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts between the parent company in the United States and our 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. We are 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.

We have 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 us 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 our 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. Typically, changes in the fair value of foreign exchange forward contracts are offset largely by changes upon remeasurement of the underlying assets and liabilities.

We enter 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 No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, (“SFAS 133”). At March 30, 2003, these exposures amounted to $4.3 million and were partially offset by foreign currency forward contracts with a notional principal amount of $4.3 million (fair value of approximately $178,000). These contracts were traded in the last month of the quarter and have a final maturity of less than 45 days.

We also use 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

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are designated as cash flow hedges under SFAS 133. At March 30, 2003, these exposures amounted to $6.6 million and were partially offset by forward foreign currency contracts with a notional principal amount of $6.6 million (fair value of approximately $43,000). These contracts were traded in the last week of the quarter and have a final maturity of less than 60 days.

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

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. 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. The adoption of SFAS 146 did not have a material impact on Extreme Networks’ operating results or financial position.

Guarantor’s Accounting and Disclosure Requirements for 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 disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. We have determined that the requirements of FIN 45 apply to our standard product warranty, to a guarantee of a lease obligation of one of our contract manufacturers, to letters of credit issued under our line of credit and to indemnification obligations contained in commercial agreements, including customary intellectual property indemnification for our products contained in agreements with our resellers and end-users.

Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure an Amendment of FASB Statement No. 123 (“SFAS 148”). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative methods of transition of SFAS 148 are effective for fiscal years ending after December 15, 2002. The disclosure provision of SFAS 148 is effective for interim periods beginning after December 15, 2002. Extreme Networks follows APB 25 in accounting for its employee stock options.

Revenue Arrangements with Multiple Deliverables

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Extreme Networks is currently evaluating the effect that the adoption of EITF 00-21 will have on its results of operations and financial condition.

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3. CHANGES IN ACCOUNTING POLICY

Effective July 1, 2002, we changed our capitalization policy for property and equipment from $1,000 to $3,000. Since the original policy was put into place, we have increased our 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 any periods presented.

We purchase assets manufactured by our competitors in order to evaluate their products. Our policy in the past has been to depreciate these assets over three years. We have changed our 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 has been applied prospectively to any competitive equipment purchased on or after September 30, 2002. The impact of the change on results of operations was not material for any periods presented.

4. BUSINESS COMBINATIONS AND INVESTMENTS

During fiscal 2001, we acquired two privately held companies in which we 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 ours was a significant investor in Optranet at the time of our initial investment and the subsequent acquisition. In addition, a related party of ours was a significant investor in Webstacks at the time of our initial investment and the subsequent acquisition. In connection with these acquisitions, we 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.

We 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 $1.4 million and $2.2 million for the three months ended March 30, 2003 and March 31, 2002, respectively, and was $4.8 million and $7.2 million for the nine months ended March 30, 2003 and March 31, 2002, respectively. The amortization of stock-based compensation associated with the acquisition of Webstacks was $0.2 million and $0.2 million for the three months ended March 30, 2003 and March 31, 2002, respectively, and was $0.6 million and $0.8 million for the nine months ended March 30, 2003 and March 31, 2002, 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 substantially all of the goodwill and purchased intangible assets related to these acquisitions. See Note 11.

5. COMMITMENTS AND CONTINGENCIES

Line of Credit

We have 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 March 30, 2003, 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 March 30, 2003, we had letters of credit totaling $2.1 million. These letters of credit were primarily issued to satisfy requirements of certain of our customers for performance bonds. The line of credit requires us to maintain specified financial covenants related to tangible net worth and liquidity with which we were in compliance as of March 30, 2003. The line of credit expires on November 30, 2003.

Leases

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

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At the time of exercise of the option to purchase the Property, the appraised value of the land and buildings was $38.0 million. We 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 in our consolidated balance sheet as of March 30, 2003 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 with which we were in compliance as of March 30, 2003. The liability related to this lease is included in lease commitments on the balance sheet.

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 our common stock from April 8, 1999 through December 6, 2000. It names as defendants Extreme Networks; six of our present and former officers; and several investment banking firms that served as underwriters of our 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 our officers and us are made as to the secondary offering only. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.

We are 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, we (and the other issuer defendants) filed a motion to dismiss. On February 19, 2003, the Court ruled on the motions to dismiss. The Court denied the motions to dismiss claims under the Securities Act of 1933. The Court denied the motion to dismiss the claim under Section 10(a) of the Securities Exchange Act of 1934 against Extreme Networks and 184 other issuer defendants, on the basis that the complaints alleged that the respective issuers had acquired companies or conducted follow-on offerings after their initial public offerings. The Court denied the motion to dismiss the claims under Section 10(a) and 20(a) of the Securities Exchange Act of 1934 against the remaining Extreme Networks individual defendants and 59 other individual defendants, on the basis that the respective amended complaints alleged that the individuals sold stock. We cannot assure you that we will prevail in the lawsuit. Failure to prevail could have a material adverse effect on our 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 us for infringement of the six patents, which allegations we vigorously opposed. Following limited pre-trial discovery and negotiation, Nortel and we 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.

We are 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 our consolidated financial position, results of operations or cash flows.

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6. EMPLOYEE STOCK PLANS

1999 Employee Stock Purchase Plan

In January 1999, the board of directors approved the adoption of Extreme Networks’ 1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”). A total of 4,000,000 shares of common stock have been reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase Plan permits eligible employees to acquire shares of Extreme Networks’ common stock through periodic payroll deductions of up to 15% of total compensation. No more than 1,250 shares may be purchased on any purchase date per employee. Each offering period will have a maximum duration of 12 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Extreme Networks’ common stock on the first day of the applicable offering period or on the last day of the respective purchase period. Through March 30, 2003, 2,426,730 shares had been purchased under the 1999 Purchase Plan.

Amended 1996 Stock Option Plan

The Amended 1996 Stock Option Plan (the “1996 Plan”) was originally adopted in September 1996 and amended in January 1999. Under the Plan, options may be granted for common stock, pursuant to actions by the board of directors, to eligible participants. A total of 50,586,572 shares have been reserved under the 1996 Plan. Options granted are exercisable as determined by the board of directors. Options vest over a period of time as determined by the board of directors, generally four years. The term of the 1996 Plan is ten years. Options to purchase approximately 0 and 12,201 shares of common stock had been exercised as of March 30, 2003 and June 30, 2002, respectively, but are subject to repurchase until vested. As of March 30, 2003, 11,964,129 shares were available for future grant under the 1996 Plan.

2000 Stock Option Plan

In March 2000, the board of directors adopted the 2000 Nonstatutory Stock Option Plan (the “2000 Plan”). Options may be granted for common stock, pursuant to actions by the board of directors, to eligible participants. Generally, only non-officer employees are eligible to participate in this stock plan, except that options may be granted to officers under this plan in connection with written offers of employment. A total of 4,000,000 shares have been reserved under the 2000 Plan. Options vest over a period of time as determined by the board of directors, generally four years. The term of the 2000 Plan is ten years. As of March 30, 2003, 2,246,595 shares were available for future grant under the 2000 Plan. In February 2003, the board of directors approved an amendment to the 2000 Plan to allow for the issuance of stock appreciation right awards, restricted stock and restricted stock units.

2001 Stock Option Plan

In May 2001, the board of directors adopted the 2001 Nonstatutory Stock Option Plan (the “2001 Plan”). Options may be granted for common stock, pursuant to actions by the board of directors, to eligible participants. Generally, only non-officer employees are eligible to participate in this stock plan, except that options may be granted to officers under this plan in connection with written offers of employment. A total of 4,000,000 shares have been reserved under the 2001 Plan. Options vest over a period of time as determined by the board of directors, generally four years. The term of the 2001 Plan is ten years. As of March 30, 2003, 238,720 shares were available for future grant under the 2001 Plan. In February 2003, the board of directors approved an amendment to the 2001 Plan to allow for the issuance of stock appreciation right awards, restricted stock and restricted stock units.

The following table summarizes stock option activity under all plans:

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In connection with the acquisitions of Optranet and Webstacks, Extreme Networks assumed the stock option plans of each company. During fiscal 2001, approximately 608,401 and 115,676 shares of Extreme Networks’ common stock were reserved for issuance under the assumed plans of Optranet and Webstacks, respectively. Options to purchase approximately 98,378 and 198,925 shares of common stock have been exercised under the Optranet plan as of March 30, 2003 and June 30, 2002, respectively, but are subject to repurchase until vested. Options to purchase approximately 203,309 and 564,130 shares of common stock have been exercised under the Webstacks plan as of March 30, 2003 and June 30, 2002, respectively, but are subject to repurchase until vested.

The following table summarizes significant ranges of outstanding and exercisable options at March 30, 2003:

Options to purchase 11,523,895 shares were exercisable at June 30, 2002 with a weighted-average exercise price of $17.56.

7. INCOME TAXES

We have recorded tax benefits of $4.1 million and $19.3 million for the three and nine months ended March 30, 2003, respectively. The benefits for the three and nine months ended March 30, 2003 reflect effective tax rates of 35.0% and 37.5%, respectively, which differ from the statutory rate primarily due to the impact of research and experimentation credits and the tax impact of foreign operations.

8. 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):

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9. RESTRUCTURING CHARGE AND PROPERTY AND EQUIPMENT WRITE-OFF

Restructuring

During the three months ended December 29, 2002, we 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 takes 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 ended December 29, 2002 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, we implemented a restructuring plan to lower our overall cost structure. Restructuring charges of $73.6 million included a $39.0 million charge related to the exit of two facility leases we 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 we are 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 our 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. We anticipate that we will continue to make cash outlays to meet lease obligations for these facilities in accordance with their terms, unless estimates and assumptions change or we are able to negotiate acceptable lease terminations prior to the anticipated termination dates for the applicable leases.

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):