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                      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 March 3, 2001

                                      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 0-32269

                           RIVERSTONE NETWORKS, INC.
            (Exact name of registrant as specified in its charter)

              Delaware                                 95-4596178
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                  identification no.)

           5200 Great America Parkway, Santa Clara, California 95054
             (Address of principal executive offices and zip code)

      Registrant's telephone number, including area code: (408) 878-6500

                               ----------------

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

                                     None

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

                         Common Stock, $0.01 par value

  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. [X]

  As of May 29, 2001, 107,490,205 shares of the Registrant's common stock,
$.01 par value per share, were outstanding.

                      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 2001 Annual Meeting of
  Stockholders is incorporated by reference into Part III of this Form 10-K.

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           No.
                                                                           ----
 <C>         <S>                                                           <C>
 PART I
    Item 1.  Business...................................................     3
    Item 2.  Properties.................................................    11
    Item 3.  Legal Proceedings..........................................    12
    Item 4.  Submission of Matters to a Vote of Security Holders........    12
    Item 4A. Executive Officers of the Registrant.......................    13

 PART II
                       Market for Registrant's Common Equity and Related
    Item 5.  Stockholder Matters........................................    14
    Item 6.  Selected Consolidated Financial Data.......................    15
    Item 7.  Management's Discussion and Analysis of Financial Condition
             and Results of Operation...................................    17
                   Quantitative and Qualitative Disclosures about Market
    Item 7A. Risk.......................................................    36
    Item 8.  Consolidated Financial Statements and Supplementary Data...    38
    Item 9.  Change in and Disagreements with Accountants and Accounting
             and Financial Disclosure...................................    72

 PART III
    Item 10. Directors and Executive Officers of the Registrant.........    72
    Item 11. Executive Compensation.....................................    72
    Item 12. Security Ownership of Beneficial Owners and Management.....    72
    Item 13. Certain Relationships and Related Transactions.............    72

 PART IV
             Exhibits, Financial Statement Schedules and Reports on Form
    Item 14. 8-K........................................................    72
             Signatures.................................................    75
</TABLE>

                                       2
<PAGE>

                                    PART I

  In addition to historical information, this Annual Report on From 10-K
contains forward-looking statements. These forward-looking statements involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including but not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Risk Factors That May Affect Future Results and Market Price of
Stock." Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's opinions only as of the date
hereof. Riverstone Networks, Inc. (the "Company" , "Riverstone", "us" or "we")
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the risk factors described in this document as well as in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on From 10-Q to be filed by the Company in
fiscal year 2002.

ITEM 1. Business

Overview

 Separation from Cabletron

  We are a majority-owned subsidiary of Cabletron Systems, Inc. ("Cabletron"),
which as of March 3, 2001 owned approximately 86% of the outstanding shares of
our common stock. This means that Cabletron is able to control many aspects of
our business. Effective as of June 3, 2000, Cabletron transferred a
substantial portion of Cabletron's operating assets and related liabilities to
its subsidiaries: Riverstone, Aprisma Management Technologies, Inc.
("Aprisma"), Enterasys Networks, Inc. ("Enterasys") and GlobalNetwork
Technology Services, Inc ("GNTS"). We have entered into agreements related to
the separation of our business operations from Cabletron. These agreements
generally provide for:

  .  the transfer from Cabletron to us of assets and the assumption by us of
     liabilities relating to our business; and

  .  arrangements governing tax sharing and commercial arrangements among
     Cabletron, Aprisma, Enterasys, GNTS and us and services that Cabletron
     will provide us.

  The terms of these agreements with Cabletron and its affiliates were
established in the context of a parent-subsidiary relationship and may be more
or less favorable to us than if they had been negotiated with unaffiliated
third parties. More information about the separation of our business
operations from Cabletron and the related agreements is provided in Items 7
and 8 of this Report on Form 10-K.

  On March 28, 2001, Cabletron announced that it has received a private letter
ruling from the Internal Revenue Service that the distribution of Cabletron's
shares of our common stock to Cabletron's stockholders will be tax-free to
Cabletron and its stockholders. The private letter ruling is subject to
potential amendments and to compliance with representations made by Cabletron
to the Internal Revenue Service. Cabletron will not be able to rely on the
ruling if any of the representations or assumptions on which the ruling is
based are, or become, incorrect or untrue in any material respect. On March
28, 2001 Cabletron also announced that it anticipated that, subject to
prevailing market conditions and other factors, the distribution will be
completed within four to seven months from the date of the announcement.
Cabletron is not obligated to complete the distribution, and there can be no
assurance that the distribution will occur. Cabletron will, in its sole
discretion, determine the timing, structure and all terms of its distribution
of our common stock that it owns.

Business

  We are a leading provider of Internet infrastructure equipment to service
providers in the metropolitan area network. The metropolitan area network, or
MAN, encompasses service providers, the Internet infrastructure

                                       3
<PAGE>

connecting these service providers with their customers and the Internet
backbone. Historically, end-users only required basic bandwidth and
connectivity to the Internet. Today, the Internet is an integral part of
communication and commerce, creating end-user demand for sophisticated
business applications and services. Service providers are seeking to build
networks with advanced capabilities to offer these services. Our routers and
web switches contain bandwidth management and provisioning, accounting and
billing, quality of service and content delivery capabilities that enable
service providers to deliver advanced applications and differentiated services
to their customers.

  Our customers include carriers, Internet service providers, content hosting
providers, and metropolitan service providers. Our top customers by revenue
for the period March 1, 2000 to March 3, 2001 were British Telecom, CAIS
Internet, IntelliSpace, Interlan Communications, MCI Worldcom, Itochu Techno
Science, Metricom, NetRail, Network Value Components, New Technologies &
Telecommunications Investment, Saritel, Soliton Systems, Telecom Italia,
Telia, Tellabs, Telseon, Terabeam, Terayon, Verizon and Vitts Networks. We
sell and market our products primarily through our direct sales organization
and value-added resellers. We have also entered into a non-exclusive strategic
distribution agreement with Tellabs.

Our Solution

  We design and manufacture routers and switches that enable service providers
to convert optical and electrical bandwidth into differentiated services for
their customers. Our products deliver advanced service creation features such
as bandwidth provisioning, traffic accounting, data classification and quality
of service. Our products benefit customers in several ways:

 Network Availability, Reliability and Security

  Our products provide high levels of network availability and reliability,
even under heavy network traffic conditions. We achieve this by combining our
custom application specific integrated circuits, or ASICs, with our RapidOS
software in a scalable, modular architecture. Our routers and switches are
interoperable with a variety of products from other vendors. In collaboration
with our customers, we have developed a testing environment that includes real
world configurations, allowing us to deliver reliable products. Our products
meet numerous regulatory requirements and our most advanced products are
designed to be NEBS compliant. Our products also incorporate numerous security
protocols for supporting virtual private networks and secure network access.

 Service Creation

  We have designed our products as platforms on which service providers can
deliver sophisticated and differentiated services. The key service enablers
that are embedded in our products are:

  Bandwidth Management. Our products offer advanced capabilities to manage
bandwidth in real-time, without sacrificing network performance. Our products
allow our customers to remotely set bandwidth limits from one kilobit to one
gigabit and easily integrate with leading bandwidth management software.

  Provisioning. As customer and application bandwidth needs change, commands
sent remotely to our products can instantly and inexpensively set-up, modify
or terminate connections.

  Accounting and Billing. Our products support hardware-based accounting,
allowing service providers to collect real-time customer billing information
without affecting network performance. This allows service providers to create
and offer advanced pricing structures tailored to their customers' needs by
usage, by time-of-day and by location.

  Quality of Service. Our products separate traffic into multiple service
classes based on end-user identity, application type, time-of-day and other
attributes. Our quality of service features allow service providers to improve
service quality by assigning priority to delay-sensitive or high-priority
traffic such as voice or video.

                                       4
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  Content Delivery. To increase the speed of content delivery, our products
offer network-wide capabilities to create the shortest and most reliable path
between the end-user and the content. This is accomplished through advanced
traffic management using a broad range of Internet routing protocols. Our
products' layer 4 to 7 capabilities allow service providers to efficiently
manage content distribution and access without compromising network
performance.

 Flexible Service Delivery Platform

  We design our products to operate and adapt to the rapidly evolving demands
of our customers' network infrastructure. Our open application programming
interface allows our products to be easily integrated with customers'
bandwidth management, provisioning, accounting and billing, quality of service
and content delivery tools. Our Intelligent Service Router architecture scales
with the needs of service providers. Additional line cards can be inserted
into our modular chassis to increase bandwidth capacity. If bandwidth is
exhausted in one chassis, service providers can link multiple chassis together
to obtain additional capacity. Our RapidOS operating system can scale in the
face of increasing Internet traffic while continuing to manage bandwidth,
deliver routing throughput, and provide differentiated services. New
technology interfaces and RapidOS upgrades can be added to in-service chassis
without disrupting existing operations. The modular design of our products
enables the rapid and easy addition of new services without requiring re-
design of network architecture or replacement of existing infrastructure
equipment.

  Our products support optical and electrical interfaces to ensure that
services can be quickly provisioned across a broad range of media types. This
means that service providers using our routers can rapidly offer services
across almost any infrastructure. This broad range of support is delivered in
a single chassis, eliminating the need to purchase multiple solutions or
consume limited space.

 Cost-effective Infrastructure

  Our products allow service providers to start with a low initial capital
expenditure while retaining the ability to add bandwidth as demand increases.
Using our advanced provisioning capabilities, we believe service providers can
reduce their operating costs by eliminating the need to send crews out into
the field to provision service. Our products also offer high port density,
which means our chassis occupy less space in expensive hosting facilities.
Using our wide array of media interfaces, service providers have the
flexibility to choose the most appropriate telecommunications medium to
connect customers to their service.

Technology

  Our core technology consists of our Intelligent Service Router architecture,
our RapidOS software operating system, and our ASICs. These key elements of
our technology are incorporated into all of our switch router and web switch
products. By internally developing and maintaining the critical components for
our systems, we believe the performance and features of our systems are
superior to those of systems based upon third-party general purpose
components. Our modular system architecture, coupled with our core hardware
and software, enable us to create new products and solutions by rapidly
developing new interfaces, new features and new form factors or sizes.

  Intelligent Service Router Architecture. Our product architecture consists
of ASIC-based packet forwarding engines distributed on each line card and a
centrally located routing engine running our RapidOS operating system,
connected together by high-performance ASIC-based switching devices. Our
product architecture allows us to deliver the capacity, reliability and
features that we believe are necessary to build and expand our customers'
metropolitan networks.

  By distributing packet processing functions on ASICs located on each line
card, rather than on a centrally located general purpose CPU, we are able to
offer advanced functions while maintaining wirespeed performance. With this
architecture, our products can increase bandwidth by adding line cards without
degrading overall

                                       5
<PAGE>

performance. Our RS38000 platform can handle up to 90 million packets per
second when all of its line cards are installed.

  Programmable Hardware Architecture. Our line-card architecture, centered on
a wire-speed, programmable packet-processing engine, enables service providers
to implement new networking technologies as they are introduced in the market
through field upgrades. The first line cards to implement the new architecture
provide full Multi-Protocol Label Switching (MPLS) capabilities over a Gigabit
Ethernet interface.

  RapidOS Operating System. RapidOS, our standards-based software, controls
the features and functionality of our router platforms. We do not sell RapidOS
on a stand alone basis. We have continued to improve RapidOS since its
introduction in 1998 based upon feedback from a variety of service provider
customers. RapidOS incorporates a set of service enabling capabilities to meet
the demands of service providers, such as traffic engineering, bandwidth
control, network traffic classification and network security. RapidOS's
Internet Business Intelligence Gathering, or iBIG, feature allows service
providers to collect traffic statistics and billing data in real time. RapidOS
also supports all standard Internet class routing protocols, a complete set of
industry standards-based layer 2 features and MPLS. RapidOS provides traffic
load balancing and content management of electronic-commerce applications. Our
RapidOS is also capable of delivering network level redundancy at layer 2 and
layer 3.

  ASIC Technology. The switching devices and forwarding engines in our
products use internally developed ASICs that are designed specifically for our
Intelligent Service Router architecture. These ASICs implement service
enabling features such as network traffic classification, accounting, security
and bandwidth management. The ASICs are designed to facilitate the rapid
implementation of various electrical and optical network interfaces that
support transmission speeds from 1.5 megabits per second for a T1 line up to
10 gigabits per second for an optical carrier 192, or OC-192, line. We believe
our control over the design and development of ASICs and the close interaction
between our hardware and software teams have enabled us to achieve enhanced
performance.

Riverstone Products

  We offer a wide variety of products to effectively address the broad
metropolitan network needs for access, content delivery, aggregation and edge
routing applications.

  RS38000 Metro Aggregation Router. The RS38000 is our intelligent edge router
product. Intelligent edge routers aggregate and route network traffic at
carrier and service provider facilities before it is routed to the Internet
backbone. Intelligent edge routers are also used for aggregating and routing
network traffic in co-location centers. The RS38000 is capable of aggregating
traffic from a wide variety of network access technologies and is MPLS
enabled. The RS38000 provides high performance, high port density and high
reliability and has the capability to support OC-192 and 10 Gigabit Ethernet.
It can provide up to 90 million data packets per second routing performance.

  RS8000/8600 Metro Service Routers. The RS8000 and RS8600 are our metro
service router products. Metro service routers are used as the Internet access
or network traffic aggregation platform where small form factor and low power
consumption are required. Metro service routers must support a wide variety of
interfaces and service-enabling features. These products aggregate the network
traffic and pass it on to the intelligent edge router.

  The RS8000 and RS8600 are designed specifically to be service delivery
platforms across both the optical and electrical segments of the metro network
infrastructure. As an aggregation platform, the RS8000 and RS8600 offer high
port density in a small form factor. As an access platform, the RS8000 and
RS8600 are ideal for fiber optic cable connectivity in building backbones and
data center in co-location facilities. The RS8000 and RS8600 are capable of
aggregating traffic from a wide variety of access technologies. The RS8000 and
RS8600 use the same line cards, thus offering maximum flexibility for
upgrades.

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<PAGE>

  RS1000 and RS3000 Metro Access Routers. The RS1000 and RS3000 are our metro
access routers with hardware routing capability. Metro access routers are used
to connect end-users with metro aggregation facilities. Metro access routers
must support traditional connectivity and advanced optical modules for
Gigabit, ATM and Packet over SONET up-links.

  The RS1000 and RS3000 routers support traditional connectivity and advanced
optical modules. The RS1000 and RS3000 products incorporate all the routing,
switching, traffic engineering, accounting and security features of the rest
of our router platform but in a smaller, lower cost platform. The RS1000 and
RS3000 share the same line cards, thus offering maximum flexibility for
upgrades.

  IA1100/1200 Web Switches. Web switching products are used for content
balancing and web switching by content hosting providers. The IA1100 and
IA1200 are our web switches that support local server load balancing, global
site load balancing and web cache redirection functions. These web switch
products support a full-featured set of layer 2, 3 and 4 switching and routing
functions. They also support an extensive set of server testing to confirm
that servers are performing properly--from low level physical connectivity to
proper content presentation and database interaction.

 Wide Array of Supported Line Cards

  Our products include line cards that support all of the network technologies
identified in this table. All line cards contain all of the service enabling
features of Riverstone's Intelligent Service Router architecture.

<TABLE>
<CAPTION>
                                   RS38000 RS8000/8600 RS1000/3000 IA1100/1200
                                   ------- ----------- ----------- -----------
<S>                                <C>     <C>         <C>         <C>
10 Gigabit Ethernet...............     X
Packet over SONET OC-48c/STM-16...     X
Packet over SONET OC-12c/STM-4....     X         X
Packet over SONET OC-3c/STM-1.....     X         X           X
4 or 8 Gigabit WDM................     X
Gigabit GBIC-SX/LX/LLX............     X
  1000 Base-LH-70Km reach.........     X         X           X
  1000 Base-LX....................     X         X           X
  1000 Base-SX....................     X         X           X           X
1000 Base-T-copper GigE...........               X           X
ATM OC-12c........................     X         X
ATM OC-3c/DS3.....................               X           X
10/100 Base-TX....................     X         X           X           X
100 Base-FX.......................               X           X
Channelized T3 with CSU/DSU.......     X         X
High speed serial interconnect-
 HSSI.............................               X           X
Channelized T1 with CSU/DSU.......               X           X
Multi-rate serial WAN.............               X           X
Cable modem termination system-
 CMTS.............................               X
</TABLE>

  A checkmark indicates that the line card is available now for the listed
product.

Research and Development

  As of March 3, 2001, we employed 223 people in our engineering and research
and development organization with the majority located in our Santa Clara,
California corporate headquarters. We believe that our future success depends
on our ability to continually enhance our existing products and develop new
products. To achieve this goal, our research and development department is
organized into three teams that work in parallel to develop successive
generations of networking products. We have assembled a team of skilled
engineers with extensive experience in the fields of high-speed microprocessor
design, high-end computing, network system

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design, Internet routing protocols and embedded software. These individuals
have been drawn from leading computer, data networking and telecommunications
companies. The engineering team's collective experience ranges from building
complex hardware and software, to delivering very large, highly integrated
ASICs and scalable Internet software.

  We are using our fourth generation ASICs in our products. We are also
developing additional network interfaces targeted to our customer demands and
continuing to develop next generation technology to support the anticipated
growth in network size and service requirements, such as 10 Gigabit Ethernet,
OC-48 and OC-192. We continue to expand the functionality and scalability of
our RapidOS including advanced MPLS implementations.

Customers

  Our customers primarily consist of carriers, Internet service providers,
content hosting providers and metropolitan service providers. As of March 3,
2001, we had approximately 200 customers, the majority of which were ISPs and
MSPs located in the United States and Europe. The following customers each
accounted for at least $1 million in revenue for the year ended March 3, 2001:

<TABLE>
<S>                  <C>                                              <C>
British
 Telecommunications  NetRail                                          Tellabs
CAIS Internet        Network Value Components                         Telseon
IntelliSpace         New Technologies & Telecommunications Investment Terabeam
Interlan
 Communications      Saritel                                          Terayon
Itochu Techno
 Science             Soliton Systems                                  Verizon
MCI Worldcom         Telecom Italia                                   Vitts Network
Metricom             Telia
</TABLE>

  For fiscal year 1999, Adelphia Communications accounted for 46% of our net
revenue and Earthlink accounted for 20% of our net revenue. For fiscal year
2000, British Telecommunications accounted for 15% of our net revenue,
Earthlink accounted for 14% of our net revenue, Metricom accounted for 12% of
our net revenue and Vitts Networks accounted for 11% of our net revenue. For
fiscal year 2001, Telseon accounted for 11% of our net revenue. Although our
largest customers may vary from period to period, we anticipate that our
operating results for any given period will continue to depend significantly
on large orders from a small number of customers. We do not have binding
commitments from any of our customers, and if any of our large customers
cancel, reduce or delay purchases, our revenue and profitability would be
harmed.

Sales and Marketing

  We sell and market our products primarily through our direct sales
organization, value-added resellers and original equipment manufacturers. As
of March 3, 2001, we employed 169 people in our sales and marketing
organizations.

 Sales

  North American Sales. Our North American direct sales force, which is
divided into western and eastern regional operations, focuses on large service
providers. Account managers work as a team with account-focused systems
engineers to provide our customers with guidance and assistance on
incorporating our products into their network. Our systems engineers also help
in defining the features that are required for our products to be successful
in specific applications. Our sales team maintains contact with key
individuals who have service planning and infrastructure build-out
responsibility within our customers' organizations.

  Value-added Resellers. We have complemented our direct sales effort in the
United States with several highly focused value-added resellers. Our
arrangements with value-added resellers typically have been non-exclusive and
provide the value-added reseller with discounts based upon the volume of their
orders.

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  Strategic Relationships. To increase penetration into the cable operator
market, we have established strategic distribution relationships with Tellabs
Operations, Inc. and Terayon Communications Systems. We believe that both
Tellabs and Terayon offer products that complement ours, and each has
established customer relationships with cable operators and multiple system
operators, or MSOs. Our agreement with Tellabs and Cabletron's agreement with
Terayon, under which we operate, contain terms relating to the distribution,
manufacture, marketing and development of products and allow Terayon and
Tellabs to resell our products on a worldwide, non-exclusive basis with
discounts tied to contractual minimum volume purchases. The Tellabs agreement
has an initial term which, unless earlier terminated, expires on December 31,
2003 and is subject to annual renewals on specified conditions, and the
initial term of the Terayon agreement, unless earlier terminated, expires on
November 30, 2001. We intend to add and maintain a limited number of strategic
distribution relationships, including with key original equipment
manufacturers, or OEMs, who may offer products or distribution channels that
complement ours.

  International Sales. Our international sales are made through a combination
of direct and indirect sales efforts. Our European operation is headquartered
in London, with sales offices in Belgium, France, Germany, Italy, Spain and
Sweden. Our Asia Pacific operation is headquartered in Singapore with offices
in China, Japan and Korea. Our indirect sales are made through various
international network integrators including Telindus, CommVerge and ZTE
Corporation.

 Marketing

  Our marketing objectives include building market awareness and acceptance of
the Riverstone brand and our products, and creating qualified customer leads.
Our marketing activities include participation in tradeshows and technical
conferences, preparation of sales tools, business cases, competitive analyses
and other marketing collateral and sales training. Our marketing activities
also include the publication of press releases, new product information and
educational articles in industry journals, maintenance of our website and
direct marketing to prospective customers.

Service and Support

  We believe that a broad range of support services is critical to the
development of long-term relationships with customers. We are committed to
providing our customers with a high level of service and support through our
internal organization and arrangements with third parties. As of March 3,
2001, we employed 16 people in our customer service and support organization,
the majority of whom are located in our Santa Clara, California corporate
headquarters.

  We deliver our support services to customers using a three-tier support
model. Our first tier of support services is technical assistance through
telephone support, which was historically provided to us by Cabletron and
later Enterasys. We currently have an arrangement with Digital Equipment
(India) to provide these first call support services to our customers. The
outsourcing of this support allows us to maintain a small internal support
group focused on complex customer problems. We internally provide field
support services, our second tier of support services, to our customers when
telephone support is not sufficient to address an issue. We are considering
possible third party providers to enhance these services. If the first two
tiers of our customer service and support team are unable to resolve an issue
themselves, they obtain assistance from members of our engineering department
who serve as the third level of the customer support team. We have established
problem escalation guidelines to focus appropriate technical resources and
management attention on customers' problems in a timely manner.

Manufacturing

  We have out-sourced our manufacturing activities to Flextronics
International and its affiliates. Flextronics manufactures our products in San
Jose, California.

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<PAGE>

  Under our relationship with Flextronics, we design, specify and monitor all
of the tests that are required to meet internal and external quality
standards. Flextronics obtains materials, undertakes final assembly of
prototype and production products, tests our products and ships them to our
customers. Cabletron's agreement with Flextronics under which we operate has
an initial term which ends on March 1, 2002, unless earlier terminated under
the agreement, and continues for successive one year periods unless either
party elects not to renew the agreement. This strategic relationship allows us
to concentrate on further developing our offerings and eliminates the need to
dedicate resources to manufacturing activities. This arrangement also allows
us to adjust manufacturing volumes quickly to meet changes in demand.

  We design our ASICs and printed circuit boards and work closely with our
partners on future component selection and design support. All materials used
in our products are processed through a full qualification cycle and our
sourcing is controlled by the use of an approved vendor listing. We perform
extensive examinations of all printed circuit board assemblies, full
functionality verifications, 24 hour burn-in and power-cycling at maximum and
minimum configuration levels. Our ASICs are manufactured by NEC using its 0.35
micron process and Lucent using its 0.25 micron process. NEC and Lucent are
responsible for all aspects of the production of our ASICs using our
proprietary designs. We periodically evaluate these and other ASIC vendors to
identify the best fit with our ASIC technology needs.

Competition

  There is significant competition in the market for network equipment. This
market has historically been dominated by Cisco Systems. Other existing and
potential competitors are numerous and include established companies such as
Extreme Networks, Foundry Networks, Juniper Networks, Lucent, Nortel Networks
and Siemens, and other smaller public and private companies. Several of these
companies have been in business longer than us and have substantially greater
financial, marketing and development resources than we have, which we believe
may put us at a competitive disadvantage. Many of these competitors are in a
better position than us to provide customers total network infrastructure
solutions. Many of these competitors have announced plans to introduce or
develop new products that are likely to compete with our product offerings.
Future consolidation in our industry is a distinct possibility, and
acquisitions by, or mergers among, our competitors could expand their product
offerings and hasten their development of new technologies, providing them
with a competitive advantage.

  Our customers include carriers and service providers in the metropolitan
area network. We believe that the principal competitive factors in this market
include product performance, reliability, security, expandability, features
and cost-effectiveness. Our products provide:

  .high network reliability, security and performance;

  .the ability to allow carriers and service providers to offer
  differentiated services;

  .easy scalability and minimal network disruption;

  .interoperability with existing network designs and equipment vendors;

  .versatility of interfaces; and

  .cost-effective solutions for carriers and service providers.

We believe these capabilities, when combined with our exclusive focus on
carriers and service providers in the MAN, provide us with a competitive
advantage.

Intellectual Property

  Our ASICs are the key components in our router and web switch products. One
of our ASIC families is manufactured by NEC and the other by Lucent. Each
successive ASIC design has allowed faster network interfaces, greater service
provider functionality and increased port density. Both we and Enterasys share
the

                                      10
<PAGE>

basic technology embedded in the ASICs manufactured by NEC. However, we do not
share with Enterasys our later ASIC family manufactured by Lucent or our
service provider specific network interfaces.

  Our Intelligent Service Router architecture requires an operating system
that takes full advantage of the features in our ASICs system. While we also
share with Enterasys some of the basic technologies of our operating system,
we do not share with Enterasys enhancements and customizations of our RapidOS
operating system to address specific needs of the service providers in the
metropolitan area.

  To protect our intellectual property, we generally rely on a combination of
patent, copyright, trademark and trade secret laws and contractual
restrictions to establish and protect our technology. As of March 3, 2001, we
had 7 patents in the United States and 29 patents pending in the United States
and abroad. Our RapidOS operating system is protected by United States and
other trade secret and copyright laws. These legal protections provide only
limited protection. Further, the market for Internet infrastructure solutions
is subject to rapid technological change. While we intend to continue to
protect our proprietary rights where appropriate, we believe that our success
in maintaining a technology leadership position is more dependent on the
technical expertise and innovative abilities of our personnel than on these
legal protections.

  Despite our efforts to protect our proprietary technology, we cannot assure
you that the steps we take will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. The laws of
many countries do not protect our proprietary technology to as great an extent
as do the laws of the United States. We may need to resort to litigation in
the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of invalidity. We are also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. Any resulting litigation could result
in substantial costs and diversion of management and other resources and could
have a material adverse effect on our business and financial condition.

Employees

  As of March 3, 2001, we had 472 full-time employees, 223 of whom were
engaged in engineering, research and development, 169 in sales and marketing,
28 in manufacturing, 16 in customer support and 36 in finance, administration
and operations. None of our employees is represented by a labor union. We have
not experienced any work stoppages and we consider our relations with our
employees to be good.

ITEM 2. Properties

  Our principal administrative, sales, marketing and research and development
facilities are located in an approximately 129,200 square foot facility
located in Santa Clara, California. Cabletron Systems Sales and Service, Inc.
entered into a lease for this facility in January of 1999, and assigned this
lease to us on August 28, 2000 following our separation from Cabletron. The
initial term of the lease expires on February 28, 2006. Under our services
agreement with Cabletron, approximately 35 of our employees, including
engineers and sales personnel, occupy space at Cabletron's headquarters in
Rochester, New Hampshire. Our services agreement with Cabletron also allows us
to occupy space in Cabletron facilities in various other geographic locations,
including Andover, Massachusetts; Atlanta, Georgia; Dallas, Texas; Denver,
Colorado; New York, New York; Reading, United Kingdom and other international
locations where principally sales and service personnel and engineers are
based.

  The commercial real estate market in the San Francisco bay area is volatile
and unpredictable in terms of available space, rental fees, occupancy rates
and preferred locations. We cannot be certain that additional space will be
available when we require it, or that it will be affordable or in a preferred
location.

                                      11
<PAGE>

ITEM 3. Legal Proceedings

  A consolidated class action lawsuit raising claims against Cabletron and
some officers and directors of Cabletron was filed in the United States
district court for the district of New Hampshire and, following transfer, is
pending in the district of Rhode Island. The complaint alleges that Cabletron
and several of its officers and directors made materially false and misleading
information about Cabletron's operations and acted in violation of Section
10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 during the
period between March 3, 1997 and December 2, 1997. The complaint also alleges
that Cabletron's accounting practices resulted in the disclosure of materially
misleading financial results during the same period. More specifically, the
complaint challenged Cabletron's revenue recognition policies, accounting for
product returns, and the validity of some 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. The
plaintiffs served a second consolidated class action complaint, and Cabletron
has filed a motion to dismiss this second complaint. In a ruling dated May 23,
2001, the district court dismissed this complaint with prejudice. The
plaintiffs may choose to appeal this ruling to the First Circuit Court of
Appeals. If the plaintiffs were to appeal, prevail on appeal, and ultimately
prevail on the merits of the case, Cabletron could be required to pay
substantial damages.

  We have not assumed any liabilities from Cabletron for this litigation. We
have not been named as a defendant in this litigation and none of our officers
or directors is named as a defendant to this litigation. However, the
plaintiffs might attempt to involve us in this litigation or might seek to
have us pay damages if Cabletron has insufficient assets to cover any
resulting damages. Any involvement in this litigation could be protracted and
may result in a diversion of management and other resources. The payment of
substantial legal costs or damages, or the diversion of our management and
other resources, could have a material adverse effect on our business,
financial condition or results of operations.

  We have granted options to purchase shares of our common stock under our
2000 equity incentive plan to our employees and employees of Cabletron and its
affiliates and to our advisors and consultants. As a result of the nature of
the persons who received these options and the vesting provisions of these
options, we may have violated the California state securities laws because we
did not qualify options granted prior to February 22, 2001 under California
state securities laws. Because these option grants were not qualified under
California state securities laws, persons residing in California who received
these options may have a claim against us. Accordingly, we are offering to
repurchase outstanding options to purchase shares of our common stock granted
under our 2000 equity incentive plan prior to February 22, 2001 to persons who
resided in California at the time of grant. As of May 29, 2001, there were
26,984,550 shares of common stock underlying such outstanding options.
Cabletron has agreed to indemnify us for any amounts paid or expenses incurred
in connection with the rescission offer.

  We are not aware of any legal proceedings against us that, individually or
in the aggregate, would have a material adverse effect on our business,
operating results or financial condition. We may in the future be party to
litigation arising in the course of our business, including claims that we
allegedly infringe third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.

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

  During the fourth quarter of fiscal year 2001, we submitted two matters to
Cabletron, our sole stockholder at the time, for stockholder approval. On
February 14, 2001, our sole stockholder acted by written consent to adopt our
Amended and Restated Certificate of Incorporation and to designate our board
of directors into classes. On this occasion, Cabletron voted, through giving
its written consent, all of its shares of common stock for approval of the
matters before it. Because Cabletron was our sole stockholder at the time,
there were no votes cast against or withheld, and there were no abstentions or
broker non-votes, as to these matters.

                                      12
<PAGE>

ITEM 4A. Executive Officers of the Registrant

  The executive officers of the Company as of March 3, 2001 are as follows:

<TABLE>
<CAPTION>
Name                     Age Position
----                     --- --------
<S>                      <C> <C>
Romulus Pereira.........  35 President, Chief Executive Officer and Director
Robert Stanton..........  48 Chief Financial Officer and Executive Vice President, Finance
Sam Boyd................  53 Executive Vice President, Operations and Quality
Suresh Gopalakrishnan...  37 Executive Vice President, Engineering
</TABLE>

  Romulus Pereira has served as our chief executive officer and as a director
since March 2000. From September 1999 to February 2000, he served as chief
operating officer at Cabletron, where he was responsible for directing
Cabletron's engineering, sales, services and marketing organizations. From
December 1998 to September 2000, he also served as general manager of
Cabletron's service provider business. From September 1996 to March 1998, Mr.
Pereira was one of three founders of Yago Systems, Inc., where he served as
chief technology officer and vice president of engineering. Before co-founding
Yago, Mr. Pereira was employed by Cisco Systems, Inc., where he served in
various capacities, including technical leader.

  Robert Stanton has served as our chief financial officer since August 2000.
From May 1996 to July 2000, he held various positions at Intel Corporation,
including group controller for worldwide materials and system manufacturing,
group controller for worldwide sales and marketing and investor relations
manager. From May 1989 to April 1996, Mr. Stanton served as senior finance
director of Apple Computer, Inc.

  Sam Boyd has served as our executive vice president of operations and
quality since March 2000. From December 1998 to February 2000, Mr. Boyd served
as vice president of service planning and quality for Cabletron, where he was
responsible for worldwide service and quality functions. From February 1997 to
November 1998, Mr. Boyd was vice president of quality and business operations
at Newbridge Networks Corporation. From February 1982 to February 1997, Mr.
Boyd served in various capacities at Tandem Computers, including plant
manager, Silicon Valley facilities, director of manufacturing and quality,
director of service planning and quality, and, at UB Networks, a subsidiary of
Tandem, vice president of manufacturing operations and vice president of
operations and quality.

  Suresh Gopalakrishnan has served as our executive vice president of
engineering since March 2000. From July 1999 to March 2000, Mr. Gopalakrishnan
was the director of corporate strategy at Cabletron, responsible for
restructuring engineering and streamlining sales operations. Before joining
Cabletron, Mr. Gopalakrishnan was the co-founder and chief executive officer
of Ligent Inc. from February 1999 to July 1999. From June 1996 to February
1999, Mr. Gopalakrishnan worked at ZSP Corporation, holding the positions of
director of engineering and vice president of engineering. From December 1994
to June 1996, he served as an engineering manager at Sun Microsystems, Inc.

                                      13
<PAGE>

                                    PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

  Our common stock commenced trading on The Nasdaq National Market on February
16, 2001 and is traded under the symbol "RSTN". Prior to this time, there was
no public market for our stock. As of May 29, 2001, there were approximately
22 holders of record of our common stock. We believe that the number of
beneficial holders of our common stock as of that date was substantially
higher. The following table sets forth for the periods indicated the high and
low closing sale prices for the common stock as reported on The Nasdaq
National Market.

<TABLE>
<CAPTION>
Fiscal 2001                                                        High   Low
-----------                                                       ------ ------
<S>                                                               <C>    <C>
Fourth Quarter (Feb. 16, 2001 to March 3, 2001).................. $14.50 $10.50
</TABLE>

 Dividend Policy

  We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings for funding growth and do not expect to
pay any dividends in the near future.

Unregistered Securities Sold in Fiscal Year 2001

  On August 28, 2000, we issued 92,088,135 shares of our Series A Preferred
Stock as consideration for the assignment to us by Cabletron of certain assets
and liabilities pursuant to an asset contribution agreement. The assets
contributed by Cabletron as consideration for the shares were valued at
$66,735,000. All 92,088,135 shares of Series A Preferred Stock issued to
Cabletron were converted to common stock in connection with our initial public
offering.

  On August 30, 2000, we granted to Silver Lake Partners, L.P. and its
affiliates and to an affiliate of Morgan Stanley Dean Witter rights to
purchase shares of our common stock.

  Concurrent with our initial public offering, the strategic investors
exercised their purchase rights to purchase an aggregate of 5,401,970 shares
of our common stock for aggregate cash consideration of $46.6 million. Certain
of the stock purchase rights were exercised through the conversion of a
portion of the rights into a number of shares of our common stock having a
market value equal to the difference between the aggregate market value of and
the aggregate exercise price for the shares of our common stock subject to the
converted portion of the stock purchase rights.

  As of March 3, 2001, the shares acquired by the strategic investors upon
exercise of the stock purchase rights represented ownership of 5.0% of our
outstanding common stock.

  Additionally, because the gross price per share of common stock issued in
our initial public offering multiplied by the number of shares of common stock
outstanding immediately after the offering on a fully diluted basis exceeded
$1.62 billion, we were required to issue to the strategic investors warrants
to purchase 104,167 shares of our common stock, representing $1.25 million
divided by the gross price per share paid in the offering. The exercise price
for these warrants is $12 per share and these warrants will expire on February
22, 2004.

  Concurrently with a distribution by Cabletron of our capital stock to its
stockholders, we are required to issue warrants to the strategic investors to
purchase a number of shares equal to the number of shares that the investors
would have received in such distribution if the investors had exercised the
Cabletron warrants they held immediately prior to the record date related to
the distribution. As of March 3, 2001 there were 188,511,262 shares of
Cabletron's capital stock outstanding and the strategic investors held
warrants to purchase 450,000 shares of Cabletron common stock. Assuming no
change in these amounts from March 3, 2001 through the date of distribution
and that as of the distribution Cabletron owns 92,088,235 shares of our common
stock, we would

                                      14
<PAGE>

be required to issue warrants to the strategic investors to purchase
approximately 219,300 shares of our common stock. These new warrants will have
an aggregate exercise price that bears the same relationship to the aggregate
exercise price for the Cabletron warrants as the equity value of Riverstone
bears to the equity value of Cabletron at the time we issue the new warrants.

  The issuances described in this Item 15 were deemed to be exempt from
registration in reliance upon Section 4(2) of the Securities Act of 1933, as
amended, as a transaction by an issuer not involving any public offering.

 Use of Proceeds from Sales of Registered Securities

  On February 16, 2001, in connection with our initial public offering of our
common stock, $0.01 par value, a Registration Statement on Form S-1 (No. 333-
45958) was declared effective by the Securities and Exchange Commission
registering 11,500,000 shares for an aggregate estimated maximum offering
price of $161,000,000. The offering commenced on February 22, 2001 and
10,000,000 shares were offered and sold for our account at a price of $12.00
per share, generating gross offering proceeds of $120,000,000. After deducting
approximately $11,200,000 in underwriting discounts and other expenses, the
net proceeds of the offering were approximately $108,800,000. The managing
underwriters for our initial public offering were Morgan Stanley & Co.
Incorporated.

  We expect to use the net proceeds of the offering for working capital and
for other general corporate purposes. We will use our working capital to fund
our operating expenses including our increased research and development costs
and the expansion of our sales and marketing force.

  We may use a portion of the net proceeds to acquire complementary products,
technologies or businesses. However, we have no commitments or agreements for
any specific acquisitions and are not in negotiations for any acquisition
transactions.

  Until the use of the net proceeds from our initial public offering as
described above, we plan to invest the net proceeds in short-term, investment
grade, interest bearing obligations.

ITEM 6. Selected Consolidated Financial Data

  The following tables present our selected consolidated financial data for
the five years ended March 3, 2001. You should read the information below with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
to those statements included in this Form 10-K. Our consolidated statements of
operations data for the years ended February 28, 1999, February 29, 2000 and
March 3, 2001 and the consolidated balance sheet data as of February 29, 2000
and March 3, 2001 are taken from our audited consolidated financial statements
included in Item 8 of Part II of this Form 10-K. Our consolidated statement of
operations data for the year ended February 28, 1998 and the consolidated
balance sheet data for the year ended February 28, 1999 have been derived from
the audited financial statements contained in our prospectus dated February
15, 2001.

  The consolidated statements of operations data for the year ended February
28, 1997 and the consolidated balance sheet data as of February 28, 1997 and
1998 are taken from our unaudited consolidated financial data that is not
included in this Form 10-K.

  We have prepared the accompanying table to reflect our historical
consolidated financial information in a manner consistent with stand-alone
operations by reflecting transactions of Cabletron and balances attributable
to us in our financial statements for all periods presented. The historical
financial information may not be indicative of our future performance and does
not necessarily reflect what our financial position and results of operations
would have been had we operated as a separate, stand-alone entity during the
periods covered.

                                      15
<PAGE>

<TABLE>
<CAPTION>
                                             Years Ended
                         -------------------------------------------------------
                         Feb. 28,  Feb. 28,  Feb. 28,    Feb. 29,      Mar. 3,
                           1997      1998      1999        2000         2001
                         --------  --------  ---------  -----------  -----------
                         (in thousands, except share and pro forma per share
                                                data)
<S>                      <C>       <C>       <C>        <C>          <C>
Consolidated Statement
 of Operations Data:
Net revenues............ $    --   $     59  $   3,284  $    23,076  $    98,258
Cost of revenues........      --          7      3,009       11,976       43,271
Stock-Based
 Compensation...........      --        --         --           --           197
                         --------  --------  ---------  -----------  -----------
  Total cost of
   revenues.............      --          7      3,009       11,976       43,468
                         --------  --------  ---------  -----------  -----------
  Gross profit..........      --         52        275       11,100       54,790
Operating Expenses:
  Research and
   development..........    8,606    12,013     26,647       30,691       41,959
  Sales and marketing...      --      1,962      3,188        9,279       35,578
  General and
   administrative.......    7,147     3,053      5,025        8,534       14,042
  Stock-based
   compensation.........      --        --         --           --        31,126
  Special charges.......    2,756       --     150,382          --           --
                         --------  --------  ---------  -----------  -----------
    Total operating
     expenses...........   18,509    17,028    185,242       48,504      122,705
                         --------  --------  ---------  -----------  -----------
    Operating loss......  (18,509)  (16,976)  (184,967)     (37,404)     (67,915)
Interest
 expense/(income).......      --        --          28           27       (2,139)
                         --------  --------  ---------  -----------  -----------
    Net loss............ $(18,509) $(16,976) $(184,995) $   (37,431) $   (65,776)
                         ========  ========  =========  ===========  ===========
Net loss per share:
  Basic and diluted.....  (185.09)  (169.76) (1,849.95)     (374.31)      (13.96)
Weighted average number
 of common shares
 outstanding:
  Basic and diluted.....      100       100        100          100    4,711,995
Pro forma net loss per
 share:
  Basic and diluted.....                                $      (.41) $      (.71)
Pro forma weighted
 average number of
 common shares
 outstanding:
  Basic and diluted.....                                 92,088,235   92,763,390
<CAPTION>
                         Feb. 28,  Feb. 28,  Feb. 28,    Feb. 29,      Mar. 3,
                           1997      1998      1999        2000         2001
                         --------  --------  ---------  -----------  -----------
                                           (in thousands)
<S>                      <C>       <C>       <C>        <C>          <C>
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............ $    --   $    --   $     --   $       --   $   167,949
Working capital.........     (639)     (348)     3,762       11,425      196,287
Total assets............    2,453     2,961     24,529       33,248      264,043
Accounts payable,
 related party..........      --        --         --           --         4,583
Accounts payable........      --        --         --           --        19,931
Stockholder's equity....    1,340     2,337     22,919       27,028      218,782
</TABLE>

                                       16
<PAGE>

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

  You should read together the following discussion and the consolidated
financial statements and related notes of Riverstone appearing elsewhere in
this Form 10-K. The discussion below contains forward-looking statements that
involve risks and uncertainties, including statements relating to anticipated
costs and expenses, mix of revenues and plans for introducing new products or
services. Our actual results could differ materially from the results
discussed in these forward-looking statements.

Overview

  We are a leading provider of metropolitan area Internet infrastructure
solutions that enable service providers to deliver advanced products and
services to their customers. Our products consist of advanced routers that
enable service providers to offer a wide range of products and services that
increase revenue and maintain customer loyalty.

  Riverstone was created by the combination of two businesses previously
acquired by Cabletron. These businesses are Zeitnet, which Cabletron acquired
in 1996, and Yago Systems, which Cabletron acquired in 1998. The majority of
our net revenues comes from sales of our switch routers and web switches. In
fiscal year 2000, British Telecom accounted for 15% of our net revenues,
Earthlink accounted for 14% of our net revenues, Metricom accounted for 12% of
our net revenues, and Vitts Networks accounted for 11% of our net revenues. In
fiscal year 2001, Telseon accounted for 11% of our net revenues. We began
shipping products outside the United States in fiscal year 2000, and these
shipments accounted for 23% of our net revenues during fiscal year 2000 and
32% of our net revenues during fiscal year 2001.

  Our industry has experienced erosion of average selling prices. We
anticipate that the average selling prices of our products will decrease in
the future in response to competitive pricing pressures, which may reduce our
gross margins or revenues. We expect our quarterly gross margins to fluctuate
with changes in our product mix. Most of our sales within the United States
have been through direct sales channels. On November 17, 2000 we entered into
a strategic alliance agreement which allows Tellabs to resell our products on
a worldwide, non-exclusive basis. The agreement requires that Tellabs purchase
minimum quantities of products if specified conditions are met. We intend to
add and maintain a limited number of strategic distribution relationships,
including with key original equipment manufactures, or OEMs, who may offer
products or distribution channels that complement ours. International sales
are made through a combination of direct and indirect sale efforts. We have
recently initiated sales and marketing efforts internationally, focusing
initially on Europe and Asia. As part of this effort, we have negotiated
separate reseller agreements with various distributors and network integrators
in Europe and Asia.

  Revenue Recognition. We generally recognize revenue upon shipment of
products, provided that there is no uncertainty of customer acceptance, there
is a contract or a purchase order, the sales price is fixed and determinable
and we believe collectibility is probable. If uncertainties exist, revenue is
recognized when these uncertainties are resolved. Revenues from service and
maintenance contracts are deferred and recognized ratably over the period the
services are performed, typically twelve months or less. We accrue estimated
warranty costs and sales returns and allowances at the time of shipment based
on contractual rights and historical experience. We recognize software license
revenue on our resale of Aprisma software upon the delivery of the software
provided that there is persuasive evidence of an arrangement, there are no
uncertainties relating to customer acceptance, the fee is fixed and
determinable, and collection of the resulting receivable is probable. We do
not sell our RapidOS operating system software on a stand alone basis.

  Lease Financing. We enter into transactions in which customers receive
financing for the purchase of our equipment from third party leasing
organizations that in turn remit payment to us. In some transactions, we have
guaranteed a portion of our customer's lease payments to be made to the
lessor. We record these transactions consistent with Statement of Financial
Accounting Standards No. 13, Accounting for Leases and related
interpretations. Substantially all of our leasing transactions are accounted
for by our customers as capital leases.

                                      17
<PAGE>

When we provide a financing guarantee, we record revenue at the time of
shipment, but maintain a sales reserve. We base the amount of the reserve on a
percentage of the guaranteed lease payments, based on specific customer
analysis supplemented with industry experience.

  Cost of Revenues. Cost of revenues include costs of raw materials, direct
labor, manufacturing overhead and amounts paid to third-party contract
manufacturers, and other costs related to warranty and contractual obligations
and customer service and support.

  Research and Development. Research and development expenses consist
primarily of salaries and related personnel expenses, consultants and outside
service provider fees, non-recurring engineering charges and prototype costs
related to the development, testing and enhancement of our ASICs and software,
and the depreciation of property and equipment related to these activities.
Our research and development efforts can require significant expenditures, the
timing of which can cause quarterly variability in our expenses. We believe
continued investment in product enhancements and new product development are
critical to attain our strategic objectives, and we expect research and
development expenses to continue to increase in absolute dollars.

  Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in marketing,
sales and customer support functions, and trade shows, advertising and
promotional expenses. We intend to expand our worldwide direct and indirect
sales organizations substantially by hiring additional sales personnel and
establishing additional sales offices. We plan to initiate additional
marketing programs to support our existing and new products and to build brand
awareness of the Riverstone name. We believe that continued investment in
sales and marketing is critical to our success and expect these expenses to
increase in absolute dollars in the future.

  General and Administrative. General and administrative expenses consist
primarily of employee compensation and related expenses, professional and
contractor fees, finance, legal, facilities, human resources and provisions
for doubtful accounts. Included in general and administrative expenses are
expenses for services provided by Cabletron under our services agreement with
them. Before the effective date of the services agreement, March 1, 2000,
Cabletron allocated to us general and administrative expenses that it incurred
on our behalf, based on headcount and revenue. We expect general and
administrative expenses to increase in absolute dollars over the next year as
we begin to build our own administrative infrastructure, while continuing to
make payments to Cabletron under our services agreement.

  Additional Option and Warrant Obligation. When Cabletron completes its
planned distribution of its Riverstone stock, we will be obligated to issue
additional options and warrants to acquire shares of our common stock to some
holders of Cabletron stock options and the strategic investors at the time of
the distribution.

  Stock-Based Compensation--Twelve Months Ended March 3, 2001. In May and
August 2000, we granted some employees of Cabletron and Enterasys, including
Piyush Patel, Cabletron's president and chief executive officer and a director
of Riverstone, Eric Jaeger, Cabletron's executive vice president and a
director of Riverstone and David Kirkpatrick, Cabletron's chief financial
officer and chief operating officer, options to purchase an aggregate of
2,658,550 shares of our common stock. Because these individuals are not
employees of Riverstone, we had accounted for these options as variable
options. These options were accelerated to become fully vested in November
2000, and become exercisable on the day after the date Cabletron distributes
its Riverstone common stock to its stockholders, upon a sale of us, or April
1, 2004, whichever occurs first. These options are generally nontransferable
except at death or, in the case of the options granted to Mr. Patel, Mr.
Jaeger and Mr. Kirkpatrick, for the benefit of some family members. The shares
of common stock underlying options granted to Mr. Patel, Mr. Jaeger and Mr.
Kirkpatrick are similarly nontransferable, except that these restrictions
lapse for 25% of the shares on April 1, 2001 and, for the remaining shares,
ratably on a monthly basis through April 1, 2004. However, if before that time
any of Mr. Patel, Mr. Jaeger or Mr. Kirkpatrick is no longer employed by
Cabletron, Aprisma, GNTS, Enterasys, us, or any subsidiary, successor or
assign, any restriction on the transfer of shares not then lapsed for that
individual will remain in effect until April 1, 2005. The options granted to
Mr. Patel,

                                      18
<PAGE>

Mr. Kirkpatrick and Mr. Jaeger also provide that the restrictions on transfer
of the underlying shares will lapse on an accelerated basis for an additional
6.25% of the shares upon a distribution by Cabletron of its Riverstone common
stock, and for accelerated release of restrictions on underlying shares upon a
sale of Riverstone. In specified circumstances involving a substitution of
Cabletron options for options to acquire Riverstone common stock, the options
granted to employees of Cabletron and Enterasys would become immediately
exercisable. Under applicable accounting principles, we took a one-time
compensation charge in the amount of approximately $24.9 million in our third
quarter of fiscal year 2001 because of the acceleration of the vesting of
these options. This amount represented the fair value of the options using the
Black-Scholes option pricing model less the compensation charges previously
recorded through the end of our second quarter ended September 2, 2000.

  We have also issued stock options to consultants in exchange for services
during the twelve months ended March 3, 2001. We calculated the fair value of
the stock options granted using the Black-Scholes option pricing model. We
believe that the fair value of the stock options granted to consultants is
more reliably measurable than the fair value of the services received. We
incurred approximately $2.1 million during the twelve months ended March 3,
2001 for the fair value of the options granted to consultants. As the majority
of these options have fully vested and the related services have been
performed, we do not expect to incur any significant future compensation
expenses for these options granted to consultants.

  We recorded approximately $11.1 million of unearned stock-based compensation
for stock option grants to employees based on the excess of the determined
fair market value over the exercise price at date of grant and for an
individual who changed employee status from Cabletron to Riverstone during the
twelve month period ended March 3, 2001. This compensation expense is being
recognized over the options' vesting period of four years. We recognized
stock-based compensation expense of $1.4 million for the twelve month period
ended March 3, 2001. These option grants made through March 3, 2001 are
amortized on a straight-line basis and we expect to recognize stock-based
compensation expenses of $2.7 million, $2.7 million, $2.7 million and $1.6
million during our fiscal years 2002, 2003, 2004 and 2005.

Basis of Presentation

  Our fiscal year 2000 ended on February 29, 2000, and previous fiscal years
ended on the last calendar day of February. Effective March 1, 2000, we
changed our year-end to a 52-53 week fiscal year, ending on the Saturday
closest to the last calendar day in February. This change is not expected to
have a significant impact on our consolidated financial results.

  Our consolidated financial statements have been taken from the consolidated
financial statements of Cabletron using historical results of operations and
historical bases of the assets and liabilities attributable to our operations.
The consolidated financial statements also include allocations to us of
Cabletron corporate expenses, including centralized legal, accounting,
treasury, real estate, information technology, distribution, customer
services, sales, marketing, engineering and other corporate services and
infrastructure costs. All of the allocations and estimates in our financial
statements are based upon assumptions that our management and Cabletron's
management believe to be reasonable reflections of the cost of services
provided or benefit received by us.

  The financial information presented in this Form 10-K is not indicative of
our financial position, results of operations or cash flows in the future, nor
is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
company for the periods presented. The financial information presented in this
Form 10-K does not reflect the many significant changes that will occur in our
funding and operations due to our becoming a stand-alone company and this
offering.

                                      19
<PAGE>

Results of Operations

  The following table shows consolidated statements of operations data
expressed as a percentage of net revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                             Year Ended
                                                      --------------------------
                                                      Feb. 28,  Feb. 29, Mar. 3,
                                                        1999      2000    2001
                                                      --------  -------- -------
<S>                                                   <C>       <C>      <C>
Net revenues.........................................     100%     100%    100%
Cost of revenues.....................................      92       52      44
                                                       ------     ----     ---
  Gross profit.......................................       8       48      56
                                                       ------     ----     ---
Operating expenses
  Research and development...........................     811      133      43
  Sales and marketing................................      97       40      36
  General and administrative.........................     153       37      14
  Stock-based compensation...........................     --       --       32
  Special charges....................................   4,579      --      --
                                                       ------     ----     ---
    Total operating expenses.........................   5,640      210     125
                                                       ------     ----     ---
    Operating loss...................................  (5,632)    (162)    (69)
    Interest expense/(income)........................       1      --       (2)
                                                       ------     ----     ---
    Net Loss.........................................  (5,633)%   (162)%   (67)%
                                                       ======     ====     ===
</TABLE>

 Fiscal Years Ended March 3, 2001, February 29, 2000 and February 28, 1999

  Net Revenues. Net revenues were $98.3 million, $23.1 million and $3.3
million in fiscal year 2001, 2000 and 1999, respectively, representing
increases of $75.2 million or 326% from fiscal year 2000 to 2001, and $19.8
million or 603% from fiscal year 1999 to 2000. The increases in net revenues
were primarily due to the addition of new service provider customers both in
the United States and internationally.

  Cost of Revenues. Cost of revenues were $43.5 million, $12.0 million and
$3.0 million in fiscal years 2001, 2000 and 1999, respectively, representing
increases of $31.5 million or 261% from fiscal year 2000 to 2001, and $9.0
million or 298% from fiscal year 1999 to 2000. Cost of revenues were 44.2%,
51.9% and 91.6% of net revenues during fiscal years 2001, 2000 and 1999,
respectively. The increase in cost of revenues for all periods is primarily
related to the increase in net revenues. We expect cost of revenues to
continue to increase as net revenues increase. The improvements in gross
margins are primarily attributable to economies of scale achieved from
increased sales levels.

  Research and Development. Research and development expenses excluding stock-
based compensation were $42.0 million, $30.7 million and $26.6 million in
fiscal years 2001, 2000 and 1999, respectively, representing increases of
$11.3 million or 37% from fiscal year 2000 to 2001 and $4 million or 15% from
fiscal year 1999 to 2000. $3.7 million of the increase in research and
development expenses in fiscal 2001 related to Cabletron's transfer to us of
its research and development group based in Reading, England during the first
quarter of fiscal year 2001. Historically, these engineers worked on Enterasys
products. The remaining increases for all periods resulted from increased
personnel and related costs. Research and development expenses as a percentage
of net revenues were 43%, 133% and 811% of net revenues in fiscal year 2001,
2000 and 1999, respectively.

  Sales and Marketing. Sales and marketing expenses excluding stock-based
compensation were $35.6 million, $9.3 million and $3.2 million in fiscal years
2001, 2000 and 1999, respectively, representing increases of $26.3 million or
283% from fiscal year 2000 to 2001 and $6.1 million or 191% from fiscal year
1999 to 2000. The increases in sales and marketing expenses during these
periods resulted primarily from the addition of sales

                                      20
<PAGE>

and marketing personnel to support increased sales and marketing activities.
Sales and marketing expenses as a percentage of net revenues were 36%, 40% and
97% of net revenues in fiscal years 2001, 2000 and 1999, respectively.

  General and Administrative. General and administrative expenses excluding
stock-based compensation were $14.0 million, $8.5 million and $5.0 million in
fiscal years 2001, 2000 and 1999, respectively, representing increases of $5.5
million or 65% from fiscal year 2000 to 2001 and $3.5 million or 70% from
fiscal year 1999 to 2000. The increase from fiscal year 2000 to 2001 was
primarily due to the addition of personnel to support the increase in revenue
and general corporate expenses consistent with the increased scale of
operations. The increase from fiscal year 1999 to fiscal year 2000 was
primarily due to a $1.9 million increase in infrastructure costs and a $1.7
million increase in our provision for doubtful accounts. We perform specific
analysis of our customer balances on a regular basis and provide for doubtful
accounts based on the identification of collections risk. General and
administrative expenses as a percentage of net revenues were 14%, 37% and 153%
in fiscal year 2001, 2000 and 1999, respectively.

  Stock-based Compensation. We recorded total deferred compensation of $11.1
million during the twelve months ended March 3, 2001, related to stock option
grants to employees and an employee change in status, of which approximately
$1.4 million was expensed as stock-based compensation during that period. This
expense was classified as cost of revenues or operation expense depending upon
the classification of the respective employee. We recorded approximately $27.8
million of stock-based compensation expense during the twelve months ended
March 3, 2001, relating to stock option grants to employees of Cabletron and
Enterasys of which $24.9 million related to the acceleration of vesting of
these options during our third quarter. We also recorded approximately $2.1
million of compensation expense related to options granted to consultants.

  Special Charges. In March 1998, Cabletron acquired Yago Systems. The
purchase accounting for this has been pushed down by Cabletron to Riverstone.
The recorded cost of the Yago Systems acquisition was approximately $165.7
million, including direct costs of $2.6 million. Based on an independent
appraisal, approximately $150.0 million of the purchase price was allocated to
in-process research and development. We recorded special charges of $150.0
million for this in-process research and development at the date of
acquisition. Our consolidated results of operations include the operating
results of Yago Systems from the acquisition date.

  Income Taxes. Our operating results historically have been included in
Cabletron's consolidated United States federal and state income tax returns.
The provision for income taxes in these consolidated financial statements has
been determined on a separate return basis. We have not recognized any
deferred tax benefit for the net operating losses from the periods presented
because Cabletron used them during these consolidated tax return years and
they will not be available to us. Under the separate return method, we would
not have been able to recognize the tax benefit. We have recorded a full
valuation allowance against our deferred tax assets because our management
believes that, after considering all the available objective evidence, both
positive and negative, historical and prospective, with greater weight given
to historical evidence, it is more likely than not that these assets will be
realized.

  If we establish foreign subsidiaries in the future, our mix of income before
taxes in the various tax jurisdictions could cause our effective tax rate to
fluctuate. Our tax liability after the date of our separation and before the
date of Cabletron's distribution will be determined by our tax sharing
agreement with Cabletron and its affiliates. From the date of our separation,
Cabletron is required to reimburse us for any tax losses attributable to us
that are used by Cabletron, and we are required to reimburse Cabletron for any
tax liabilities attributable to us that are paid by Cabletron.

 Quarterly Results of Operations

  The following tables show our statement of operations data for our previous
twelve quarters, including these amounts expressed as a percentage of net
revenues. This unaudited quarterly information has been prepared on the same
basis as our audited financial statements and, in the opinion of our
management, reflects all adjustments,

                                      21
<PAGE>

consisting only of normal recurring entries, necessary for a fair presentation
of the information for the periods presented.

  The historical financial information may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-
alone entity during the periods presented.

<TABLE>
<CAPTION>
                                                                    Quarter Ended
                      ---------------------------------------------------------------------------------------------------
                       May 31,   Aug. 31,  Nov. 30,  Feb. 28,  May 31,  Aug. 31,  Nov. 30,  Feb. 29,  Jun. 3,   Sept. 2,
                        1998       1998      1998      1999     1999      1999      1999      2000      2000      2000
                      ---------  --------  --------  --------  -------  --------  --------  --------  --------  --------
                                                                    (in thousands)
 <S>                  <C>        <C>       <C>       <C>       <C>      <C>       <C>       <C>       <C>       <C>
 Net revenues....     $     110  $   284   $   933   $ 1,957   $ 2,480  $  2,843  $  4,992  $12,761   $ 15,778  $ 20,554
 Cost of
  revenues.......           209      374       870     1,556     1,525     1,930     2,428    6,093      7,271     9,157
 Stock based
  compensation...           --       --        --        --        --        --        --       --         --        --
                      ---------  -------   -------   -------   -------  --------  --------  -------   --------  --------
 Total cost or
  revenues.......           209      374       870     1,556     1,525     1,930     2,428    6,093      7,271     9,157
                      ---------  -------   -------   -------   -------  --------  --------  -------   --------  --------
 Gross profit....           (99)     (90)       63       401       955       913     2,564    6,668      8,507    11,397
 Operating
  expenses:
 Research and
  development....         6,504    7,465     6,887     5,791     6,949     8,373     7,964    7,405     10,177    10,328
 Sales and
  marketing......           774      716       886       812     1,315     1,713     2,431    3,820      7,295     7,595
 General and
  administrative..          922    1,333     1,406     1,364     1,574     2,398     2,577    1,985      3,281     3,030
 Stock-based
  compensation...           --       --        --        --        --        --        --       --         263     2,989
 Special
  charges........       150,000      --        --        382       --        --        --       --         --        --
                      ---------  -------   -------   -------   -------  --------  --------  -------   --------  --------
 Total operating
  expenses.......       158,200    9,514     9,179     8,349     9,838    12,484    12,972   13,210     21,016    23,942
                      ---------  -------   -------   -------   -------  --------  --------  -------   --------  --------
 Operating loss..      (158,299)  (9,604)   (9,116)   (7,948)   (8,883)  (11,571)  (10,408)  (6,542)   (12,509)  (12,545)
 Interest
  expense/(income)..          9        6         7         6         8         6         6        7          4      (770)
                      ---------  -------   -------   -------   -------  --------  --------  -------   --------  --------
 Net loss........     $(158,308) $(9,610)  $(9,123)  $(7,954)  $(8,891) $(11,577) $(10,414) $(6,549)  $(12,513) $(11,775)
                      =========  =======   =======   =======   =======  ========  ========  =======   ========  ========
<CAPTION>
                      Dec. 2,   Mar. 3,
                        2000     2001
                      --------- --------
 <S>                  <C>       <C>
 Net revenues....     $ 26,784  $35,142
 Cost of
  revenues.......       11,643   15,200
 Stock based
  compensation...          --       197
                      --------- --------
 Total cost or
  revenues.......       11,643   15,397
                      --------- --------
 Gross profit....       15,141   19,745
 Operating
  expenses:
 Research and
  development....       10,061   11,393
 Sales and
  marketing......       10,012   10,676
 General and
  administrative..       3,344    4,387
 Stock-based
  compensation...       27,410      464
 Special
  charges........          --       --
                      --------- --------
 Total operating
  expenses.......       50,827   26,920
                      --------- --------
 Operating loss..      (35,686)  (7,175)
 Interest
  expense/(income)..      (779)    (594)
                      --------- --------
 Net loss........     $(34,907) $(6,581)
                      ========= ========
</TABLE>
<TABLE>
<CAPTION>
                                                                   Quarter Ended
                      ------------------------------------------------------------------------------------------------------------
                      May 31,    Aug. 31,  Nov. 30, Feb. 28, May 31,  Aug. 31, Nov. 30, Feb. 29, Jun. 3, Sept. 2, Dec. 2,  Mar. 3,
                        1998       1998      1998     1999    1999      1999     1999     2000    2000     2000    2000     2001
                      --------   --------  -------- -------- -------  -------- -------- -------- ------- -------- -------  -------
 <S>                  <C>        <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
 Percentage of
  net revenues:
 Net revenues....          100%      100%     100%     100%    100%      100%     100%    100%     100%    100%     100%     100%
 Cost of
  revenues.......          190       132       93       80      61        68       49      48       46      45       43       43
 Stock based
  compensation...          --        --       --       --      --        --       --      --       --      --       --         1
                      --------    ------     ----     ----    ----      ----     ----     ---      ---     ---     ----      ---
 Total cost of
  revenues.......          190       132       93       80      61        68       49      48       46      45       43       44
                      --------    ------     ----     ----    ----      ----     ----     ---      ---     ---     ----      ---
 Gross profit....          (90)      (32)       7       20      39        32       51      52       54      55       57       56
 Operating
  expenses:
 Research and
  development....        5,913     2,629      738      296     280       295      160      58       65      50       38       33
 Sales and
  marketing......          704       252       95       41      53        60       49      30       46      37       37       30
 General and
  administrative..         838       469      151       70      63        84       52      16       21      15       13       13
 Stock-based
  compensation...          --        --       --       --      --        --       --      --         2      15      102        1
 Special
  charges........      136,364       --       --        20     --        --       --      --       --      --       --       --
                      --------    ------     ----     ----    ----      ----     ----     ---      ---     ---     ----      ---
 Total operating
  expenses.......      143,819     3,350      984      427     396       439      261     104      134     117      190       77
 Operating loss..     (143,909)   (3,382)    (977)    (407)   (357)     (407)    (210)    (52)     (80)    (62)    (133)     (21)
 Interest
  expense/(income)..         8         2        1      --      --        --       --      --       --       (2)      (3)      (2)
                      --------    ------     ----     ----    ----      ----     ----     ---      ---     ---     ----      ---
 Net loss........     (143,917)%  (3,384)%   (978)%   (407)%  (357)%    (407)%   (209)%   (52)%    (80)%   (60)%   (130)%    (19)%
                      ========    ======     ====     ====    ====      ====     ====     ===      ===     ===     ====      ===
</TABLE>


  While research and development expenses have increased year-over-year,
quarterly expenses have varied significantly. In the quarters ended August 31,
1998, November 30, 1998, August 31, 1999, and June 3, 2000, we incurred
increased levels of prototyping and certification expenses related to new
product introductions. In the quarter ended June 3, 2000, Cabletron
transferred to us its Reading, England research and development group
resulting in an additional $1.2, $1.1, $.6 and $.8 million in research and
development expenses in the quarters ended June 3, September 2, December 2,
2000 and March 3, 2001.

  The significant increase in general and administrative expenses for the
quarters ended May 31, 1999, August 31, 1999 and November 30, 1999, is
primarily due to an increase in our provision for doubtful accounts from
growth in our trade receivables and identified potentially uncollectible
accounts.

                                      22
<PAGE>

  The significant increase in sales and marketing expenses for the quarters
ended June 3, 2000 and December 2, 2000 is due to increases in our sales
force, particularly internationally.

Liquidity and Capital Resources

  Prior to our initial public offering, Cabletron has administered our cash.
We transferred cash receipts related to our business to Cabletron
periodically, and Cabletron has provided funds to cover our disbursements. We
have reported no cash or cash equivalents at February 29, 2000. On March 3,
2001 we reported cash of $31.2 million in our intercompany cash account.
Cabletron administers this intercompany account, as provided by our services
agreement with them. We completed our initial public offering on February 16,
2001 and realized net proceeds of $108.8 million. At completion of our initial
public offering, we also received $46.6 million from the exercise of stock
purchase rights by strategic investors. At March 3, 2001, we had cash and cash
equivalents of $136.8 million and short-term investments of $21.5 million,
which are managed by us. Cash equivalents consisted of government and non-
government debt securities and money market funds with original maturities of
less than three months. Short-term investments was comprised of U.S debt
securities and commercial paper with original maturities greater than three
months but less than one year.

  Cash used in operating activities was $22.8 million in fiscal year 2001,
$40.3 million in fiscal year 2000 and $37.0 million in fiscal year 1999. Cash
used by operating activities in these periods was primarily attributable to
general operating expenses, increases in accounts receivable resulting
primarily from the addition of new service provider customers, and increases
in inventories and other working capital items.

  Investing activities consisted of $14.1 million of capital expenditures and
$21.5 million in purchase of marketable securities in fiscal year 2001.
Investing activities consisted of capital expenditures of $4.1 million in
fiscal year 2000 and $3.8 million in fiscal year 1999. Capital expenditures
during all periods include production equipment, research and development
equipment, computers, enterprise resource planning software applications and
facility-related improvements.

  Cash provided by financing activities consisted primarily of net proceeds
from our initial public offering of $108.8 million and net transfers from
Cabletron under our cash administration arrangements with them of $64.0
million. We also received $7.2 million for the issuance of stock purchase
rights to the strategic investors and $46.6 million from exercise of the stock
purchase rights.

  Our principal administrative, sales, marketing and research and development
facilities are located in an approximately 129,200 square foot facility in
Santa Clara, California, under a lease that was assigned to us by a subsidiary
of Cabletron effective August 28, 2000. The initial term of the lease expires
on February 28, 2006. The lease provides for annual increases in rent.

  Our future capital requirements will depend on a number of factors,
including the timing and rate of the expansion of our business. We anticipate
a substantial increase in our capital expenditures to support growth in
operations and infrastructure. However, our underlying assumed levels of
revenues and expenses may prove to be inaccurate. We may need to raise
additional funds through public or private financing or other arrangements to:

  .  support more rapid expansion of our business than we anticipate;

  .  develop and introduce new or enhanced products or services;

  .  respond to competitive pressures;

  .  invest in or acquire businesses or technologies; or

  .  respond to unanticipated requirements or developments.

  Financing may not be available to us, if needed, on favorable terms or at
all. If we raise additional funds through the issuance of equity securities,
dilution to existing stockholders may result. If sufficient funds are not

                                      23
<PAGE>

available, we may be unable to introduce new products and services, expand our
sales force and service organization or compete effectively in our markets,
any of which could materially harm our business, financial condition and
results of operations.

  We intend to use the net proceeds of the offering and the exercise by the
strategic investors of their stock purchase rights for working capital and for
other general corporate purposes. We will use our working capital to fund our
operating expenses including our increased research and development costs and
the expansion of our sales and marketing force.

  We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
over the next 12 months.

Recent Accounting Pronouncements

  In June 1998, June 1999, and June 2000 the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities--
an amendment of FASB Statement No. 133. These statements require companies to
record derivatives 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
beginning the first quarter of fiscal year 2002. We believe that adoption of
these statements will not have a significant impact on our financial results.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. We have
adopted SAB 101 and the adoption did not have a material impact on our
financial statements.

  In September 2000, FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 140, Accounting for the Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, SFAS No. 140. SFAS No. 140 is
effective for transfers occurring after March 31, 2001 and for disclosures
relating to the securitization transactions and collateral for fiscal years
ending after December 15, 2000. The Company does not expect the adoption of
SFAS No. 140 to have a material impact on its financial position or results of
operations.

Risk Factors That May Affect Future Results and Market Price of Stock

 Risks Related to Riverstone

We have a general history of losses and there can be no assurance that we will
operate profitably in the future.

  We have not yet achieved profitability, and we cannot be certain that we
will realize sufficient revenue to achieve profitability in the future.
Portions of our historical financial data is based on Cabletron's financial
statements. During fiscal 2000 and 2001, we incurred net losses of $37.4
million and $65.8 million, respectively. We anticipate incurring significant
and increasing sales and marketing, product development and general and
administrative expenses, requiring us to realize significantly higher revenue
to achieve and sustain profitability. Future losses may require us to raise
additional funds through public or private financings or alternative
arrangements.

Our exclusive focus on sales to service provider customers subjects us to
risks that may be greater than those for providers with a more diverse
customer base.

  Our customers consist of Internet, content and metropolitan area service
providers whose businesses depend on the continuing demand for differentiated
services by their customers. If this demand does not continue or the

                                      24
<PAGE>

Internet does not continue to expand as a widespread communications medium and
commercial marketplace, the demand for our products could decline. Our
exposure to this risk is greater than other vendors who sell to a more
diversified customer base. We believe that there are risks arising from doing
business with service providers in these markets that may not be faced by our
competitors in their relationships with corporate and other customers,
including:

  .  any failure of a service provider's service to its customers that it
     attributes to our products, whether or not our products actually failed,
     which could lead to substantial negative publicity and undermine our
     efforts to increase our sales;

  .  the low level of brand loyalty demonstrated by service providers, which
     may cause them to switch to another supplier that provides, or that they
     believe provides, superior performance or cost-effectiveness;

  .  the introduction, or the planned introduction, of new products and
     product enhancements, which could cause service providers to cancel,
     reduce or delay existing orders; and

  .  service providers that are heavily dependent upon financing,
     particularly from the high yield debt market, to build out their
     infrastructure, who may decrease their infrastructure purchases if
     interest rates increase or if credit availability in these markets
     decreases.

  The occurrence of one or more of these events is likely to harm our
operating results.

Our quarterly revenue and operating results are likely to fluctuate,
particularly as we expand and if, as expected, our expenses rise, which could
cause us to miss quarterly revenue targets and result in a decline in our
stock price.

  We base our operating expenses on anticipated revenue trends. A high
percentage of our expenses remain relatively fixed despite changes in revenue,
including marketing, research and development and general administrative
expenses and expenses for employee compensation other than sales commissions.
This means that any failure to achieve anticipated revenues could cause our
quarterly operating results to fall below the expectations of public market
analysts or investors, which could cause the price of our common stock to
fall. As we expand, we expect our expenses to rise significantly, which
increases the magnitude of this risk.

  Our quarterly revenue and operating results may vary significantly in the
future due to a number of factors, including:

  .fluctuations in demand for our products and services;

  .  unexpected product returns or the cancellation or rescheduling of
     significant orders;

  .  our ability to develop, introduce, ship and support new products and
     product enhancements and manage product transitions;

  .  the timing and amount of non-cash stock based compensation charges;

  .  our ability and our suppliers' ability to attain and maintain production
     volumes and quality levels for our products; and

  .  the mix of products sold and the mix of distribution channels through
     which they are sold.

  Due to these factors, we believe that you should not rely on period-to-
period comparisons of our operating results as an indicator of our future
performance.

                                      25
<PAGE>

We generally do not have binding commitments from our customers and if
significant customers cancel, reduce or delay a large purchase, our revenues
may decline and the price of our stock may fall.

  Historically, a limited number of customers have accounted for a significant
portion of our revenue. For fiscal year 1999, Adelphia Communications
accounted for 46% of our net revenues and Earthlink accounted for 20% of our
net revenue. For fiscal year 2000, British Telecom accounted for 15% of our
net revenues, Earthlink accounted for 14% of our net revenues, Metricom
accounted for 12% of our net revenues and Vitts Networks accounted for 11% of
our net revenues. For fiscal year 2001, Telseon accounted for 11% of our net
revenue. Customers making large purchases from us are likely to vary over
time, due to changes in our product cycles, customer needs, competition or
economic circumstances. For example, Vitts Networks has recently filed for
bankruptcy and ceased operations. Although our largest customers may vary from
period to period, we anticipate that our operating results for any given
period will continue to depend significantly on large orders from a small
number of customers. We do not have binding commitments from any of our
customers other than Tellabs. The commitments of Tellabs are subject to
conditions which may not be satisfied. If any of our large customers cancel,
reduce or delay purchases, our revenue and profitability would be harmed
because of our dependence on large customers.

Because the purchase of our products often represents a significant decision
on the part of potential customers, we may expend significant resources on
potential customers without achieving actual sales.

  Purchases of our products often represent a significant strategic decision
and capital investment by our customers related to their communications
infrastructure and typically involve significant internal procedures involving
the evaluation, testing, implementation and acceptance of new technologies.
This evaluation process frequently results in a lengthy sales process, often
ranging from one month to longer than a year, and purchases of our products
are subject to a number of significant risks, including customer budgetary
constraints and internal acceptance reviews. During this time we may incur
substantial sales and marketing expenses and expend significant management
effort. The length of the sales cycle, and the magnitude of our investment in
the sales process, is more substantial for our service provider customers than
it would typically be with corporate customers. If sales forecasts from a
specific customer for a particular quarter are not realized in that quarter,
we may be unable to compensate for the shortfall, which could harm our
operating results.

We may be unable to expand our sales and direct and indirect distribution
channels, which may hinder our ability to target multiple levels of a
prospective customer's organization and increase sales and revenues.

  Our products and services require a sophisticated sales and marketing effort
targeted at several levels within a prospective customer's organization.
Unless we expand our sales force and maintain high levels of marketing
activity, we will be unable to increase revenues. Although we plan to continue
to hire additional sales personnel, competition for qualified sales personnel
is intense, and we may be unable to hire the sales personnel we require.

  Our sales and distribution strategy relies on value-added resellers,
original equipment manufacturers, or OEMs, our direct and indirect
international sales efforts and our ability to package our products into a
complete network infrastructure solution by working with other technology
vendors. We rely on Tellabs and Terayon to act as OEMs of our products for
sale to cable operators on a non-exclusive basis, and we expect to establish
additional OEM relationships. If we are unable to establish new value-added
reseller or OEM relationships, or if Tellabs or Terayon or our other OEMs and
valued-added resellers are unsuccessful in distributing our products, our
sales could suffer. Additionally, our agreement with Tellabs provides that
Tellabs may terminate the agreement upon a change of control of us to
specified parties. Because we are not a vertically integrated network
infrastructure provider, if we fail to maintain existing technology vendor
relationships or to establish new ones, we will be unable to satisfy our
customers' need for complete, fully-integrated solutions and our business
could suffer.

                                      26
<PAGE>

Many of our customers rely on us to supply or arrange and support financing
for our products, which subjects us to credit and market risks.

  Many of our customers do not have or do not wish to commit the financial
resources required to purchase our products without financing, and these
customers expect us to provide or arrange and support their financing. Many of
these financing arrangements expose us to our customers' credit risk and in
the past we have experienced customer defaults. If customers default on their
financing payments in the future, our recognition of revenue from those
customers will be harmed. Due to recent public market volatility, a number of
our current or prospective customers may be unable to raise funding through
the issuance of their equity securities or otherwise in a timely fashion. This
difficulty could result in an increased need for financing provided either by
us or with our assistance and an increased risk of customer default. In the
past, we have benefited from Cabletron's resources and credit in arranging
financing for our customers. As a result of our separation from Cabletron, we
will be a much smaller, stand-alone company, which could impair our ability to
provide or arrange and support customer financing. If third party financing
were to become less available due to credit market factors, our ability to
arrange third party financing for our customers could be significantly
limited, potentially resulting in reduced revenues.

We purchase several key components for our products from single or limited
sources and could lose sales if these sources fail to fulfill our needs.

  We purchase several key components used in the manufacture of our products
from single or limited sources and are dependent upon supply from these
sources to meet our needs. We have worked with NEC and Lucent to develop
several of our key proprietary application specific integrated circuits, or
ASICs. These proprietary ASICs are very complex, and NEC is and Lucent is our
sole source supplier for the specific types of ASICs that it supplies to us.
We do not have a long-term fixed price or minimum volume agreement with either
of these suppliers. Should we encounter problems with NEC or Lucent, we would
not be able to develop an alternate source in a timely manner, which could
hurt our ability to deliver our switch routers and web switches.

  We also purchase other critical components from single or limited sources.
We are likely to encounter shortages and delays in obtaining these or other
components in the future which could materially harm our ability to meet
customer orders.

  Recently, California has been experiencing a shortage of electric power
supply that has resulted in intermittent loss of power in the form of rolling
blackouts. While we have not encountered any shortages or delay in obtaining
key components as a result of this energy situation, continued or extended
blackouts could adversely affect our suppliers' ability to produce and deliver
key components on a timely basis.

We base our purchasing decisions on a forecast of anticipated orders of our
products, and if we miscalculate our needs or are not able to obtain necessary
components, we could be harmed.

  We use a forward-looking forecast of anticipated product orders to determine
our material requirements, and if customer orders do not match forecasts, we
may have excess or inadequate inventory of materials and components. In the
past, we have experienced shortages of some components, resulting in delays in
filling orders. For example, recent high demand in the cellular phone industry
for Tantalum capacitors, a component required to manufacture our products, has
led to shortages and price increases for these capacitors. We have also
experienced delays in the prototyping of our ASICs during initial product
development, which in turn has led to delays in product introductions. If we
cannot obtain necessary components, we may not be able to meet customer orders
and our business and results of operations could suffer.

We depend on a single contract manufacturer for substantially all of our
manufacturing requirements, and a failure by this contract manufacturer would
impair our ability to deliver products.

  We outsource all of our manufacturing to one company, Flextronics
International, Ltd., which manufactures our products in San Jose, California.
If the demand for our products grows, we will need to increase our material

                                      27
<PAGE>

purchases and our contract manufacturing capacity with Flextronics or add
additional contract manufacturers. Our existing and future contract
manufacturers may not meet our future requirements. We have experienced a
delay in product shipments from our contract manufacturers in the past, which
in turn delayed product shipments to our customers. We may in the future
experience similar and other problems, such as insufficient quantity of
product, which could materially harm our business and operating results. While
Flextronics has not experienced any power failures to date as a result of the
recent California energy shortage that have prevented its ability to
manufacture our products, continued or extended blackouts could adversely
affect Flextronics' ability to manufacture our products and meet scheduled
delivery needs. The inability of our contract manufacturer to provide us with
adequate supplies of high-quality products or the loss of our contract
manufacturer would cause a delay in our ability to fulfill orders while we
obtain a replacement manufacturer and would have a material adverse effect on
our business, operating results and financial condition.

Substantially all of our revenues come from sales of two product families,
making us dependent on widespread market acceptance of these products.

  Substantially all of our revenues result from sales of our router and web
switch product families. Continuing market acceptance of our two product
families is critical to our future success, and we are more dependent on the
market acceptance of individual product families than competitors with broader
product offerings. Factors that may affect the market acceptance of our
products include:

  .  adoption of advanced routing and switching products and technologies;

  .  the performance, price and total cost of ownership of our products;

  .  the availability and price of competing products and technologies;

  .  brand recognition of the Riverstone name; and

  .  the success and development of our sales and marketing organizations and
     resellers.

  If we fail to achieve market acceptance for our switch router and web switch
product families, our revenues may be harmed.

The market for network equipment is subject to rapid technological change and
if we fail to accurately predict and respond to market developments or
demands, we will be unable to compete successfully.

  The market for network equipment is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. Our future performance will depend on our
successful development and introduction and the market acceptance of new and
enhanced products that address customer requirements in a cost-effective
manner. We may be unsuccessful in completing the development or introduction
of these product enhancements or new products on a timely basis or at all. The
failure of these enhancements or new products to operate as expected could
delay or prevent future sales. Developments in routers and routing software
could also significantly reduce demand for our product. Alternative
technologies and customer requirements could achieve widespread market
acceptance and displace the technologies, protocols and service requirements
on which our product lines are based. Our technological approach may not
achieve broad market acceptance, and other technologies or devices may
supplant our approach.

If we and the third parties providing services for us are unable to deliver
the high level of customer service and support demanded by our customers, we
may lose customers and our operating results will suffer.

  Our customers demand a high level of customer service and support.
Historically, our customer service and support functions have been provided by
a combination of Cabletron's services organization, which is now a part of
Enterasys, and our internal product support group. We rely on Digital
Equipment (India) to provide initial

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<PAGE>

call support services. We may be unable to manage effectively those third
parties who provide support services for us and they may provide inadequate
levels of customer support.

Our products are very complex and undetected defects may increase our costs
and harm our reputation with our customers.

  Networking products are extremely complex and must operate successfully with
equally complex products of other vendors. These products frequently contain
undetected software or hardware errors when first introduced or as new
upgrades are released. Additionally, the pressures we face to be the first to
market new products, increases the possibility that we will offer products in
which we or our customers later discover errors. We have experienced new
product and product upgrade errors in the past and expect similar problems in
the future. These problems could result in our incurring significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems
and our stock price to fall.

We have limited ability to engage in acquisitions and other strategic
transactions using our equity because of the federal income tax requirements
for a tax-free distribution.

  For the distribution of our stock by Cabletron to qualify as tax-free to
Cabletron and its stockholders, Cabletron must own at least 80% of the voting
power of our voting stock and 80% of each class of nonvoting stock at the time
of the distribution. In light of our initial public offering and the issuance
of shares of our common stock to the strategic investors pursuant to purchase
rights relating to our common stock, we are limited in our ability to issue
additional equity as additional equity issuances could reduce Cabletron's
ownership below this 80% threshold. For any distribution of our stock by
Cabletron to qualify as tax-free to Cabletron, there must not be a change in
ownership of 50% or greater in either the voting power or value of either our
stock or Cabletron's stock that is considered to be part of a plan or series
of transactions related to the distribution. If there is a direct or indirect
acquisition of our or Cabletron's stock by one or more persons during the
four-year period beginning two years before and ending two years after the
distribution, it will be presumed to be part of a plan or series of related
transactions related to Cabletron's intended distribution of our stock. Unless
this presumption is successfully rebutted, the distribution will be taxable to
Cabletron.

  We have entered into a tax sharing agreement with Cabletron, Aprisma,
Enterasys and GNTS. This agreement requires us to indemnify Cabletron,
Aprisma, Enterasys and GNTS if the distribution by Cabletron of its Riverstone
shares does not qualify as tax-free due to actions we take or that otherwise
relate to us, including any change of ownership of us. The process for
determining whether a change of ownership has occurred under the tax rules is
complex. If we do not carefully monitor our compliance with these rules, we
might inadvertently cause a change of ownership to occur, triggering our
obligation to indemnify Cabletron and the other parties to the tax sharing
agreement. Our obligation to indemnify these parties if a change of ownership
causes the distribution not to be tax-free could discourage or prevent a third
party from making a proposal to acquire us.

  For the reasons described above, our ability to use our stock for
acquisitions and other similar strategic transactions or for compensation for
employees and others is restricted. Many of our competitors use their equity
to complete acquisitions, to expand their product offerings and speed the
development of new technology and to attract and retain employees and other
key personnel, giving them a potentially significant competitive advantage
over us.

We jointly own with Enterasys some of our intellectual property, and our
business could be harmed if Enterasys uses this intellectual property to
compete with us.

  In the transformation agreement among Cabletron, Enterasys, Aprisma, GNTS
and us and the related contribution agreements, Cabletron contributed to us
and to Enterasys, Aprisma and GNTS intellectual property related to the
products to be sold by us and by the other subsidiaries or used in our or the
relevant subsidiary's business. Intellectual property that relates to a family
of ASICs used in both our switch router product family

                                      29
<PAGE>

and Enterasys' Smart Switch Router product family was assigned jointly to us
and to Enterasys. Enterasys is primarily a provider of local area network
products for the enterprise market. There are no contractual provisions that
prohibit Enterasys from developing products that are competitive with our
products, including products based upon the jointly assigned intellectual
property. If Enterasys is acquired by one of our competitors, there are no
contractual provisions that would prohibit the combined company from
developing products competitive with our products.

Our limited ability to protect our intellectual property may hinder our
ability to compete.

  We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure of confidential information to protect our
intellectual property rights. We cannot assure you that any patents that we
hold will protect our intellectual property or will not be challenged by third
parties. Other parties may also independently develop similar or competing
products that do not infringe our patents. Although we attempt to protect our
intellectual property rights, we may be unable to prevent the misappropriation
of our intellectual property, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States.

We may be subject to claims that our intellectual property infringes upon the
proprietary rights of others, and a successful claim could harm our ability to
sell and develop our products.

  If other parties claim that our products infringe upon their intellectual
property we would be forced to defend ourselves or our customers,
manufacturers or suppliers against those claims. We could incur substantial
costs to prosecute or defend those claims. A successful claim of infringement
against us and our failure or inability to develop non-infringing technology
or license the infringed technology on acceptable terms and on a timely basis
could harm our business, results of operations and financial condition.

We have recently begun to expand our international sales effort, and marketing
and distributing our products outside of the United States may require
increased expenses and greater exposure to risks that we may not be able to
successfully address.

  Our growth strategy depends in part on the expansion of our international
sales and operations. International sales, which were negligible in fiscal
1999, increased to 23% of our revenue in fiscal 2000 and 32% in fiscal 2001.
The international market for our products is less mature than the market in
the United States, and our strategy of selling to service providers that
operate in the metropolitan area network may be unsuccessful on an
international basis. Operating internationally exposes us to risks such as
longer accounts receivable collection cycles, difficulties in staffing and
managing operations across disparate geographic areas and tariffs, export
controls and other trade barriers. We conduct our international sales in
either U.S. dollars or local currencies and a change in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets. We are also subject to fluctuations in exchange
rates between the U.S. dollar and the particular local currency. We may
determine to engage in hedging transactions to minimize the risk of
fluctuations and if we are not successful in managing hedging transactions, we
could incur losses.

If we fail to address the strain on our resources caused by our growth or if
we are unable to attract and retain qualified personnel, we may not be able to
achieve our objectives and our business could be harmed.

  We have experienced a period of rapid growth and expansion which has placed,
and continues to place, a significant strain on our management, operational
and financial resources. From February 28, 1999 to March 3, 2001, the number
of our employees increased from 163 to 472 and is expected to continue to
increase. Our management team has only been recently formed and has had
limited experience managing rapidly growing companies. Some members of our
management team have joined us only recently. Our success depends to a
significant degree upon the continued contributions of our key management,
engineering, sales and marketing, customer support and manufacturing
personnel, many of whom would be difficult to replace. In particular, we
believe that our future success is highly dependent on Romulus Pereira, our
president and chief executive officer.

                                      30
<PAGE>

  We believe our future success also depends on our ability to attract and
retain highly skilled managerial, engineering, sales and marketing, finance,
customer support and manufacturing personnel. Competition for these personnel
is intense, especially in the San Francisco bay area, and we have had
difficulty hiring employees in the timeframe we desire, particularly software
and hardware engineers. We may be unsuccessful in attracting and retaining
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and sales personnel, could make it
difficult for us to manage our business and meet key objectives, such as
timely product introductions.

We rely on independent service providers to supply our back-office functions,
and if they fail to deliver adequate services, our business will suffer.

  We rely on service providers to supply us with many of our operational and
back-office functions, including human resources applications, enterprise
resource management applications and customer relationship management
applications. Although these functions are critical to our business, we
neither own the software that performs these functions nor, in some cases, the
hardware on which these programs and our data reside. If there is a
significant degradation or failure in service, we may be unable to quickly and
cost-effectively transition to other service providers or provide the
necessary functionality ourselves and our business could be disrupted.

 Risks Related to Our Industry

Intense competition in the market for network equipment could prevent us from
increasing revenue and sustaining profitability.

  The market for network equipment is very competitive and has historically
been dominated by Cisco Systems. Other principal competitors include
established companies such as Extreme Networks, Foundry Networks, Juniper
Networks, Lucent, Nortel Networks and Siemens. We also experience competition
from a number of other smaller public and private companies. These competitors
may have developed or could in the future develop new technologies that
compete with our products or even make our products obsolete. Consolidation in
our industry is occurring and is likely to continue. Future acquisitions by,
and mergers among, our competitors and potential competitors could expand
their product offerings and accelerate their development of new technologies,
providing them with a competitive advantage.

  Many of our competitors have significantly more established customer support
and professional services organizations and substantially greater financial
resources than we do. Many of our competitors also have much greater name
recognition and have a more extensive customer base and broader customer
relationships and product offerings than we do. These companies can rely on
their customer bases and broader product offerings and adopt aggressive
pricing policies to gain market share. We expect that competitive pressures
may result in price reductions, reduced margins and loss of market share,
which would materially harm our business, results of operations and financial
condition.

We expect the average selling prices of our products to decrease rapidly,
which may reduce our gross margins or revenue.

  Our industry has experienced rapid erosion of average selling prices. We
anticipate that the average selling prices of our products will decrease in
the future in response to competitive pricing pressures, increased sales
discounts, new product introductions by us or our competitors and increasing
availability of relatively inexpensive standard microprocessors that can
perform some of our products' functionality. If we are unable to achieve
sufficient cost reductions and increases in sales volumes, this decline in
average selling prices will reduce our revenue and gross margins.

                                      31
<PAGE>

If our products do not comply with complex governmental regulations and
evolving industry standards, our products may not be widely accepted, which
may prevent us from sustaining our revenues or achieving profitability.

  The market for network equipment products is characterized by the need to
support industry standards as different standards emerge, evolve and achieve
acceptance. To be competitive, we must continually introduce new products and
product enhancements that meet these emerging standards. We have had to delay
the introduction of new products to comply with third party standards testing.
We may be unable to address compatibility and interoperability issues that
arise from technological changes and evolving industry standards. In the
United States, our products must comply with various governmental regulations
and industry regulations and standards, including those defined by the Federal
Communications Commission, Underwriters Laboratories and Networking Equipment
Building Standards, or NEBS. Internationally, products that we develop may be
required to comply with standards or obtain certifications established by
telecommunications authorities in various countries and with recommendations
of the International Telecommunications Union. If we do not comply with
existing or evolving industry standards or fail to obtain timely domestic or
foreign regulatory approvals or certificates, we will be unable to sell our
products where these standards or regulations apply, which may prevent us from
sustaining our revenues or achieving profitability.

 Risks Related to Our Separation from Cabletron

Although Cabletron has received a tax ruling from the Internal Revenue Service
relating to the distribution of our common stock, Cabletron is not obligated
to complete its distribution of our common stock, and Cabletron may continue
to control many aspects of our business and the liquidity of our stock may be
limited.

  On March 28, 2001, Cabletron announced that it had received a private letter
ruling from the Internal Revenue Service that its distribution of our common
stock that it holds to its stockholders will be tax free to Cabletron and is
stockholders and that, subject to prevailing market conditions and other
factors, Cabletron anticipated that it would complete the distribution within
four to seven months from the date of that announcement. The private letter
ruling is subject to potential amendments and compliance with representations
made by Cabletron to the Internal Revenue Service. Cabletron will not be able
to rely on the ruling if any of the representations or assumptions on which
the ruling is based are, or become, incorrect or untrue in any material
respect. Cabletron is not obligated to make the distribution, and it may not
occur.

  If the distribution is delayed or not completed, Cabletron would continue to
control many aspects of our business and the liquidity of our shares will be
constrained unless and until Cabletron elects to sell some portion of its
equity ownership in us. Our agreements with Cabletron do not prevent Cabletron
from selling its Riverstone common stock. The sale or potential sale by
Cabletron of Riverstone common stock, even of relatively small amounts, could
result in a lower trading price of our stock. Also, if Cabletron does not
distribute its shares, we may face significant difficulty hiring and retaining
key personnel, many of whom are attracted by the potential of operating our
business as a fully independent entity.

  Cabletron owns approximately 86% of our outstanding common stock. As long as
Cabletron owns a majority of our outstanding common stock, subject to its
independent director obligation described below, Cabletron will continue to be
able to elect our entire board of directors and to remove any director without
calling a special meeting. Cabletron has agreed that for so long as it owns
any of our stock, it will vote its shares to elect to our board of directors
the number of independent directors required to comply with the Nasdaq
National Market listing rules. Due to Cabletron's voting control, before
Cabletron's distribution or other disposition of our common stock, our
investors will be unable to affect the outcome of any stockholder vote and
Cabletron will control all matters affecting us, including:

  .  through its control of the composition of our board of directors, the
     determination of our business direction and policies, including the
     appointment and removal of officers;

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<PAGE>

  .  the allocation of business opportunities that may be suitable for us and
     Cabletron and its affiliates;

  .  any determinations relating to mergers or other business combinations;

  .  our acquisition or disposition of assets;

  .  our financing;

  .  changes to the agreements providing for our separation from Cabletron;

  .  the payment of dividends on our common stock; and

  .  determinations for our tax returns.

  Conflicts of interest may arise between Cabletron and us in a number of
areas relating to our past and ongoing relationships, including:

  .  labor, tax, employee benefit, indemnification and matters arising from
     our separation from Cabletron;

  .  employee retention and recruiting;

  .  sales or distributions by Cabletron of all or any portion of its
     ownership interest in us;

  .  the nature, quality and pricing of services Cabletron has agreed to
     provide us; and

  .  business opportunities that may be attractive to Cabletron or one of
     Cabletron's affiliates, such as Enterasys, and us.

  We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. There are no contractual agreements restricting Cabletron
or its affiliates, including Enterasys with whom we share important
technologies, from competing with us. Enterasys is a provider of local area
network products that are primarily sold to large corporations or
institutions, but is not restricted from selling network products to service
provider customers. In our certificate of incorporation we have renounced any
interest in business opportunities that are presented to Cabletron, its
subsidiaries other than us, or our officers or directors who are employees of
Cabletron or its subsidiaries other than us at the time the opportunity is
presented.

When Cabletron distributes the shares of our common stock that it owns to its
stockholders, we will issue options and warrants to purchase shares of our
common stock to holders of Cabletron options and warrants, which will dilute
our existing stockholders.

  When Cabletron distributes to its stockholders the Riverstone shares that it
owns, we will grant options to acquire shares of our common stock under our
2000 equity incentive plan to those persons holding Cabletron compensatory
stock options. We are obligated under our agreement with Cabletron to ensure
that sufficient shares are available under our 2000 equity incentive plan to
make these supplemental option grants. Similarly, Cabletron has issued
warrants to purchase shares of its common stock to the strategic investors. We
have agreed with Cabletron that upon any distribution by Cabletron of shares
of our common stock to its stockholders, we will issue warrants to the
strategic investors to purchase shares of our common stock. The strategic
investors will receive warrants to purchase the number of shares of our common
stock that they would have received from Cabletron in the distribution, had
they exercised their Cabletron warrants before the distribution.

  As of March 3, 2001, there were 188,511,262 shares of Cabletron's capital
stock outstanding, options outstanding to purchase 11,767,580 shares of
Cabletron common stock, and the strategic investors held warrants to purchase
450,000 shares of Cabletron common stock. Unvested Cabletron options held by
Riverstone employees as of the time of the distribution would terminate
because these employees would no longer be employed by a subsidiary of
Cabletron as of the time of the distribution. Cabletron's board of directors
has voted to accelerate, as of the time of the distribution, the vesting of
Cabletron options held by Riverstone employees which would vest by February
28, 2002. Not including portions of Cabletron options held by Riverstone

                                      33
<PAGE>

employees which vest after February 28, 2002, as of March 3, 2001, there were
options outstanding to purchase 11,022,102 shares of Cabletron common stock.
Assuming no change in these amounts from March 3, 2001 through the date of the
distribution and that as of the date of the distribution Cabletron owns
92,088,235 shares of our common stock, we would be required to:

  .  grant options to purchase approximately 5,384,400 shares of our common
     stock to holders of Cabletron stock options; and

  .  issue warrants to the strategic investors to purchase approximately
     219,300 shares of our common stock for warrants to purchase shares of
     Cabletron common stock.

  Our existing stockholders will suffer dilution upon the exercise of the
supplemental options and warrants that we issue. There are no restrictions on
the number of options to purchase Cabletron common stock that Cabletron may
issue before its distribution of our stock, and we cannot control the number
of supplemental options that we will be required to grant. Consequently, we
are unable to predict the extent of the dilution that our existing
stockholders will experience when Cabletron distributes the shares of our
common stock that it owns.

Our historical financial information may not be representative of our results
as a separate company.

  Our consolidated financial statements are based on the consolidated
financial statements of Cabletron, using the historical results of operations
and historical bases of the assets and liabilities of the Cabletron router and
switch business contributed to us. The historical financial information we
have included in this Report on Form 10-K does not necessarily reflect what
our financial position, results of operations and cash flows would have been
had we been a separate, stand-alone entity during the periods presented.
Cabletron did not account for us as a separate, stand-alone entity before June
3, 2000. Our costs and expenses include allocations from Cabletron for
centralized corporate services and infrastructure costs, including:

  .  customer service;

  .  sales;

  .  information technology;

  .  distribution;

  .  legal and accounting;

  .  real estate; and

  .  treasury.

  These allocations have been determined on bases that we and Cabletron
consider to be reasonable reflections of the utilization of services provided
to or the benefit received by us. The historical financial information is not
necessarily indicative of what our results of operations, financial position
and cash flows will be in the future. We have not made adjustments to our
historical financial information to reflect many significant changes that will
occur in our cost structure, funding and operations due to our separation from
Cabletron, including increased costs from reduced economies of scale,
increased marketing expenses related to building a company brand identity
separate from Cabletron and the increased costs of being a publicly traded,
stand-alone company.

We use Cabletron's operational and administrative infrastructure and Cabletron
provides us with numerous administrative services, and our ability to operate
our business may suffer if we do not successfully develop our own
infrastructure or if Cabletron elects not to provide these services to us.

  Under a services agreement, we use Cabletron's administrative infrastructure
and Cabletron provides us centralized corporate functions, including legal,
accounting, payroll and other services. Cabletron may not provide these
services at the same level as when we were part of Cabletron, and we may be
unable to obtain the

                                      34
<PAGE>

same benefits. These services arrangements generally have a term of less than
two years following the date of our separation from Cabletron. With sixty days
prior written notice, Cabletron may terminate the services agreement for any
or all of the services provided under the agreement. After the expiration of
these various arrangements, we may be unable to replace these services in a
timely manner or on terms and conditions, including cost, as favorable as
those received from Cabletron.

  Many of Cabletron's infrastructure systems used by us are proprietary to
Cabletron and are very complex. These systems have been modified, and are
being further modified, to enable us to separately track items related to our
business. These modifications, however, may result in unexpected system
failures or the loss or corruption of data. Any failure or significant
downtime in Cabletron's or our own information systems or termination of our
ability to use these systems before we have developed our own systems could
harm our business. To successfully implement and operate our own systems and
transition data from Cabletron's systems, we must be able to attract and
retain a significant number of highly skilled employees.

  Our arrangements with Cabletron were made in the context of a parent-
subsidiary relationship and were established in the overall context of our
separation from Cabletron. The prices charged to us may be lower than the
prices that we may be required to pay third parties for similar services or
the costs of similar services if we undertake them ourselves.

We cannot rely on Cabletron to fund our future capital requirements, and
financing from other sources may not be available on favorable terms or at
all.

  In the past, our capital needs have been satisfied by Cabletron. However,
following our separation, Cabletron is under no obligation to provide funds to
finance our working capital or other cash requirements or to support customer
financing. Financing or financial support from other sources, if needed, may
not be available on favorable terms or at all.

  We believe our capital requirements will vary greatly from quarter to
quarter. Capital expenditures, fluctuations in our operating results,
financing activities, acquisitions, investments and inventory and receivables
management may contribute to these fluctuations. We believe that the proceeds
from our initial public offering, and our future cash flow from operations,
will be sufficient to satisfy our working capital, capital expenditure and
research and development requirements for at least the next twelve months.
However, we may require or choose to obtain additional debt or equity
financing to finance acquisitions or other investments in our business. Future
equity financings may be dilutive to the existing holders of our common stock.
Future debt financings could involve restrictive covenants. We will likely not
be able to obtain debt financing with interest rates and other terms as
favorable as those that Cabletron could obtain.

The plaintiffs in Cabletron's outstanding class action suit might seek to add
us to this litigation or seek payment of any related damages.

  Since December 1997, Cabletron has been party to an outstanding class action
suit alleging that during the period of March 3, 1997 through December 2,
1997, Cabletron released false and misleading information about its operations
and that Cabletron's accounting practices resulted in the disclosure of
materially misleading financial results. The plaintiffs' complaint does not
specify the amount of damages, but if the plaintiffs prevail Cabletron could
be required to pay substantial damages. The plaintiffs in this matter might
seek to involve us in this litigation or, if they prevail in this litigation,
might seek to recover damages from us, particularly if Cabletron has
insufficient assets.

Conflicts of interest may arise because our directors and executive officers
have ownership interests in Cabletron, and our directors hold equity interests
in Aprisma, Enterasys and GNTS.

  Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in Cabletron common stock and options to
purchase Cabletron common stock. Our directors also hold options to purchase
stock of Aprisma, Enterasys and GNTS. Piyush Patel and Eric Jaeger serve on
our board of directors

                                      35
<PAGE>

and are both executive officers of Cabletron. Mr. Patel is also a board member
of Cabletron. These factors could create, or appear to create, potential
conflicts of interest when directors and officers are faced with decisions
that could have different implications for Cabletron, its affiliates, such as
Aprisma, Enterasys and GNTS, or us.

We could incur significant tax liability if the distribution does not qualify
for tax-free treatment, which could require us to pay Cabletron a substantial
amount of money.

  In addition to our liability under the tax sharing agreement with Cabletron,
Aprisma, GNTS and Enterasys, under United Stated Federal income tax laws, we
would be jointly and severally liable for the Federal income taxes of
Cabletron resulting from the distribution being taxable. This means that even
if we do not have to indemnify Cabletron under the tax sharing agreement
because we did not take any specific action to cause the distribution to fail
as a tax-free event, we may still be liable for any part of, including the
whole amount of, these liabilities and expenses if Cabletron fails to pay
them.

 Risks Related to Our Stock

Substantial sales of our common stock may result from Cabletron's proposed
distribution of our shares of common stock that it owns, which could cause our
stock price to decline.

  On March 28, 2001, Cabletron announced that it anticipated that, subject to
prevailing market conditions and other factors, it would complete the
distribution of our common stock that it holds to its stockholders within four
to seven months from the date of that announcement. Substantially all of these
shares will be eligible for immediate resale in the public market once
distributed. Significant amounts of common stock may be sold in the open
market in anticipation of, or following, this distribution, or by Cabletron if
the distribution does not occur. Additionally, a portion of Cabletron's common
stock is held by index funds tied to the Standard & Poor's 500 Index or other
stock indices. If we are not in these indices at the time of Cabletron's
distribution of our common stock but Cabletron is, these index funds will be
required to sell our stock. There may not be a sufficient number of buyers in
the market at that time. Any sales of substantial amounts of common stock in
the public market, or the perception that sales might occur, whether related
to this distribution or not, could harm the market price of our common stock.

Our stock price has been and may continue to be volatile, which could result
in substantial losses for individual stockholders.

  The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. For example, during the
first quarter of calendar year 2001, the Nasdaq Composite Index had a closing
low of 1820.57, representing 36.3% less than the closing high of 2859.15 for
the same period. The market price of our common stock has been volatile and we
expect that it will continue to be volatile. In addition, before Cabletron
distributes its Riverstone shares, relatively small trades of our stock will
have a disproportionate effect on our stock price. Accordingly, purchasers of
shares of our common stock may not be able to resell those shares at or above
the price paid, which could result in a substantial loss.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

  Interest Rate Risk. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive
from our investments without significantly increasing risk. Some of the
securities that we have invested in may be subject to market risk. This means
that a change in prevailing interest rates may cause the principal amount of
the investment to fluctuate. To minimize this risk, we maintain our portfolio
of cash equivalents and short-term investments in a variety of securities,
including commercial paper, government and non-government debt securities and
money market funds. In general, money market funds are not subject to market
risk because the interest paid on such funds fluctuates with the prevailing
interest rate.

                                      36
<PAGE>

The following table presents the market risk by range of expected maturity and
weighted-average interest rates as of March 3, 2001. This table does not
include money market funds because those funds are not subject to market risk.

<TABLE>
<CAPTION>
                                                              Maturing in
                                                       -------------------------
                                                       Three months Three months
                                                         or less    to one year
                                                       ------------ ------------
<S>                                                    <C>          <C>
Included in cash and cash equivalents.................   $15,155
Weighted average interest rate........................      5.40%
Included in short-term investments....................                $21,540
Weighted average interest rate........................                   4.77%
</TABLE>

  Under our services agreement with Cabletron, Cabletron provides us with a
centralized treasury function. As part of this function, Cabletron administers
our intercompany cash account. This account represents an amount, which may be
adjusted periodically for our receivables collected and payables paid and for
other appropriate credits and debits, which is payable on demand by Cabletron
to us in cash. The amount of cash we can demand from Cabletron is not affected
by any profit or loss Cabletron may realize from its cash management
activities, except that Cabletron does credit interest income to us based on
our weighted average cash balance at the same rate as Cabletron earns on
average on its holdings of cash, cash equivalents and other short-term
investments. As of March 3, 2001, our cash account with Cabletron totaled
$31.2 million. Based upon Cabletron's reported cash reserves, we do not
believe that there is any material risk that Cabletron would fail to pay us
upon demand.

  Foreign Currency Exchange Risk. Under our services agreement with Cabletron,
Cabletron manages our treasury risk management strategy. Cabletron's strategy
has been to use foreign exchange forward and option contracts to hedge some
balance sheet exposures and intercompany balances against future movements in
foreign exchange rates. Gains and losses on the forward and option contracts
are largely offset by gains and losses on the underlying exposure and
consequently a sudden or significant change in foreign exchange rates would
not have a material impact on future net income or cash flows. Cabletron
performed a sensitivity analysis as of March 3, 2001, which resulted in
immaterial fair value movements based on hypothetical exchange rate movements.
Consistent with that analysis, our foreign currency exchange risk, as it
relates to fair value, is immaterial. We are evaluating our exchange rate risk
management strategy. We do not now or in the future intend to use derivative
financial instruments for trading purposes.

                                      37
<PAGE>

ITEM 8. Consolidated Financial Statements and Supplementary Data

                           RIVERSTONE NETWORKS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                       Page(s)
                                                                       -------
<S>                                                                    <C>
Independent Auditors' Report..........................................    39

Consolidated Financial Statements

Consolidated Balance Sheets--February 29, 2000 and March 3, 2001......    40

Consolidated Statements of Operations--Years ended February 28, 1999,
 February 29, 2000, and March 3, 2001.................................    41

Consolidated Statements of Cash Flows--Years ended February 28, 1999,
 February 29, 2000, and March 3, 2001.................................    42

Consolidated Statements of Stockholders' Equity--Years ended February
 28, 1999, February 29, 2000, and March 3, 2001.......................    43

Notes to Consolidated Financial Statements............................    44
</TABLE>


                                       38
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders of
Riverstone Networks, Inc.:

  We have audited the accompanying consolidated balance sheets of Riverstone
Networks, Inc. (the "Company") as of February 29, 2000 and March 3, 2001 and
the related consolidated statements of operations, cash flows, and
stockholders' equity for each of the years in the three-year period ended
March 3, 2001. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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 the
Company as of February 29, 2000 and March 3, 2001 and the results of their
operations and their cash flows for the three-year period ended March 3, 2001,
in conformity with accounting principles generally accepted in the United
States of America.

                                          KPMG LLP

Mountain View, California
March 22, 2001, except as to note 23 which is as of March 28, 2001

                                      39
<PAGE>

                           RIVERSTONE NETWORKS, INC.

                          CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                         February 29, March 3,
                                                             2000       2001
                                                         ------------ --------
<S>                                                      <C>          <C>
                         Assets
Current Assets:
  Cash and cash equivalents.............................  $     --    $136,765
  Cash due from parent..................................        --      31,184
  Short-term Investments................................        --      21,540
  Accounts receivable, net of allowance for doubtful
   accounts ($1,672 and $3,371 at February 29, 2000 and
   March 3, 2001, respectively).........................      9,240     29,891
  Accounts receivable, related parties..................        --       1,241
  Inventories, net......................................      5,638     11,169
  Due from employees and officers.......................        220        374
  Prepaid expenses and other current assets.............      2,547      9,384
                                                          ---------   --------
    Total current assets................................     17,645    241,548
                                                          ---------   --------
  Due from employees and officers, long term............        216        600
  Property and equipment, net...........................      5,833     14,020
  Goodwill, net.........................................      9,554      7,875
                                                          ---------   --------
    Total assets........................................  $  33,248   $264,043
                                                          =========   ========
          Liabilities and Stockholders' Equity
Current Liabilities:
  Notes payable, current portion........................  $      98   $    --
  Accounts payable......................................        --      19,931
  Accounts payable, related parties.....................        --       4,583
  Deferred revenue......................................      2,429     10,550
  Accrued expenses......................................      3,693     10,197
                                                          ---------   --------
    Total current liabilities...........................      6,220     45,261
                                                          ---------   --------
Commitments and contingencies
Stockholders' equity:
  Series A Convertible Preferred Stock $.01 par value
   per share, 92,088,135 shares authorized, no shares
   issued and outstanding...............................        --         --
  Common Stock, $.01 par value per share, 250,000,000
   shares authorized, 107,490,205 shares issued and
   outstanding at March 3, 2001.........................        --       1,075
  Additional paid in capital............................        --     269,200
  Accumulated deficit...................................   (264,432)   (41,488)
  Cabletron Systems equity..............................    291,472        --
  Unearned stock-based compensation.....................        --      (9,708)
  Accumulated other comprehensive income................        (12)      (297)
                                                          ---------   --------
    Total stockholders' equity..........................     27,028    218,782
                                                          ---------   --------
Total liabilities and stockholders' equity..............  $  33,248   $264,043
                                                          =========   ========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       40
<PAGE>

                           RIVERSTONE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                     Years ended
                                         -------------------------------------
                                         February 28,  February     March 3,
                                             1999      29, 2000       2001
                                         ------------ -----------  -----------
<S>                                      <C>          <C>          <C>
Net revenues............................  $    3,284  $    23,076  $    98,258
Cost of revenues........................       3,009       11,976       43,271
Stock-based compensation................         --           --           197
                                          ----------  -----------  -----------
  Total cost of revenues................       3,009       11,976       43,468
                                          ----------  -----------  -----------
    Gross Profit........................         275       11,100       54,790
Operating expenses:
  Research and development (excludes
   stock-based compensation of $1,081
   for the twelve months ended March 3,
   2001)................................      26,647       30,691       41,959
  Sales and marketing (excludes stock-
   based compensation of $1,392 for the
   twelve months ended March 3, 2001)...       3,188        9,279       35,578
  General and administrative (excludes
   stock-based compensation of $28,653
   for the twelve months ended March 3,
   2001)................................       5,025        8,534       14,042
  Stock-based compensation..............         --           --        31,126
  Special charges.......................     150,382          --           --
                                          ----------  -----------  -----------
    Total operating expenses............     185,242       48,504      122,705
                                          ----------  -----------  -----------
    Operating loss......................    (184,967)     (37,404)     (67,915)
Interest expense/(income), net..........          28           27       (2,139)
                                          ----------  -----------  -----------
    Net loss............................  $ (184,995) $   (37,431) $   (65,776)
                                          ==========  ===========  ===========
Net loss per share:
  Basic and diluted.....................  $(1,849.95) $   (374.31) $    (13.96)
                                          ==========  ===========  ===========
Weighted average number of shares
 outstanding:
  Basic and diluted.....................         100          100    4,711,995
                                          ==========  ===========  ===========
Pro forma net loss per share
 (unaudited):
  Basic and diluted.....................              $      (.41) $      (.71)
                                                      ===========  ===========
Pro forma weighted average number of
 shares outstanding (unaudited):
  Basic and diluted.....................               92,088,235   92,763,390
                                                      ===========  ===========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       41
<PAGE>

                           RIVERSTONE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                        Years ended
                                             ----------------------------------
                                             February 28, February 29, March 3,
                                                 1999         2000       2001
                                             ------------ ------------ --------
<S>                                          <C>          <C>          <C>
Cash flows from operating activities:
Net Loss...................................   $(184,995)    $(37,431)  $(65,776)
Adjustments to reconcile net loss to net
 cash used in operating activities:
  Depreciation and amortization............       4,534        4,975      7,640
  Provision for losses on accounts
   receivable..............................          30        1,642      1,808
  Stock-based compensation.................         --           --      31,323
  Other non cash charges...................     150,382          --         --
  Changes in assets and liabilities (net of
   effects of acquisition of business):
    Accounts receivable and accounts
     receivable, related parties...........        (355)     (10,570)   (23,985)
    Inventories............................      (1,691)      (3,947)    (5,531)
    Prepaid expenses and other assets......      (2,461)         274     (7,375)
    Accrued expenses and accounts payable..      (2,458)       2,384     31,018
    Deferred revenue.......................          45        2,349      8,121
                                              ---------     --------   --------
      Net cash used in operating
       activities..........................     (36,969)     (40,324)   (22,757)
                                              ---------     --------   --------
Cash flows from investing activities:
Capital expenditures.......................      (3,790)      (4,071)   (14,148)
Purchase of short-term investments.........         --           --     (21,540)
                                              ---------     --------   --------
      Net cash used in investing
       activities..........................      (3,790)      (4,071)   (35,688)
                                              ---------     --------   --------
Cash flows from financing activities:
Principal payments on note payable.........         (96)        (123)       (98)
Cash used in acquisition of business, net
 of cash received..........................      (1,580)         --         --
Net transfer from Cabletron................      42,435       44,518     63,983
Proceeds from issuance of stock purchase
 rights....................................         --           --       7,168
Proceeds from issuance of common stock.....         --           --     155,341
                                              ---------     --------   --------
      Net cash provided by financing
       activities..........................      40,759       44,395    226,394
                                              ---------     --------   --------
Net increase in cash and cash equivalents..         --           --     167,949
Cash and cash equivalents, at beginning of
 period....................................         --           --         --
                                              ---------     --------   --------
Cash and cash equivalents, at end of
 period....................................   $     --      $    --    $167,949
                                              =========     ========   ========
Other cash flow information:
  Cash paid for interest...................   $      25     $     24   $      4
                                              =========     ========   ========
Non-cash investing and financing
 activities:
  Unearned stock-based compensation........   $     --      $    --    $ 11,099
                                              =========     ========   ========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       42
<PAGE>

                           RIVERSTONE NETWORKS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                           Series A                                                          Accumulated
                          Convertible        Additional             Cabletron    Unearned       Other
                           Preferred  Common  Paid in   Accumulated  Systems   Stock Based  Comprehensive
                             Stock    Stock   Capital     Deficit    Equity    Compensation     Loss       Totals
                          ----------- ------ ---------- ----------- ---------  ------------ ------------- ---------
<S>                       <C>         <C>    <C>        <C>         <C>        <C>          <C>           <C>
Balances, February 28,
 1998...................     $ --     $  --   $    --    $(42,006)  $  44,343    $    --        $ --      $   2,337
 Components of
  comprehensive loss:
 Net loss...............       --        --        --    (184,995)        --          --          --       (184,995)
 Total comprehensive
  loss..................       --        --        --    (184,995)        --          --          --       (184,995)
 Net transfers from
  Cabletron.............       --        --        --         --      205,577         --          --        205,577
                             -----    ------  --------   --------   ---------    --------       -----     ---------
Balances, February 28,
 1999...................       --        --        --    (227,001)    249,920         --          --         22,919
                             -----    ------  --------   --------   ---------    --------       -----     ---------
 Components of
  comprehensive loss:
 Net loss...............       --        --        --     (37,431)        --          --          --        (37,431)
 Accumulated translation
  adjustments...........       --        --        --         --          --          --          (12)          (12)
                             -----    ------  --------   --------   ---------    --------       -----     ---------
 Total comprehensive
  loss..................       --        --        --     (37,431)        --          --          (12)      (37,443)
 Net transfers from
  Cabletron.............       --        --        --         --       41,552         --          --         41,552
                             -----    ------  --------   --------   ---------    --------       -----     ---------
Balances, February 29,
 2000...................       --        --        --    (264,432)    291,472         --          (12)       27,028
                             -----    ------  --------   --------   ---------    --------       -----     ---------
 Components of
  comprehensive loss:
 Net loss...............       --        --        --     (65,776)        --          --          --        (65,776)
 Accumulated translation
  adjustments...........       --        --        --         --          --          --         (285)         (285)
                             -----    ------  --------   --------   ---------    --------       -----     ---------
 Total comprehensive
  loss..................       --        --        --     (65,776)        --          --         (285)      (66,061)
 Issuance of stock
  purchase rights to
  strategic investors...       --        --      7,168        --          --          --          --          7,168
 Issuance of common
  stock--initial public
  offering, net.........       --        100   108,664        --          --          --          --        108,764
 Exercise of stock
  purchase rights.......       --         54    46,523        --          --          --          --         46,577
 Unearned stock-based
  compensation related
  to stock option
  grants................       --        --     11,099        --          --      (11,099)        --            --
 Amortization of
  unearned stock-based
  compensation..........       --        --        --         --          --        1,391         --          1,391
 Compensation for stock
  option grants to non-
  employees.............       --        --     27,798        --          --          --          --         27,798
 Compensation for stock
  option grants to
  consultants...........       --        --      2,134        --          --          --          --          2,134
 Net transfers from
  Cabletron.............       --        --        --         --       63,983         --          --         63,983
 Transfer to preferred
  stock and additional
  paid in capital.......       921       --     65,814    288,720    (355,455)        --          --            --
 Conversion of preferred
  stock to common
  stock.................      (921)      921       --         --          --          --          --            --
                             -----    ------  --------   --------   ---------    --------       -----     ---------
Balances, March 3,
 2001...................     $ --     $1,075  $269,200   $(41,488)  $     --     $ (9,708)      $(297)    $ 218,782
                             =====    ======  ========   ========   =========    ========       =====     =========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       43
<PAGE>

                           RIVERSTONE NETWORKS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (in thousands, except share and per share amounts)

Note (1) Business Operations

  On February 10, 2000, Cabletron Systems, Inc. ("Cabletron") announced its
plan to create an independent publicly-traded company, Riverstone Networks,
Inc. ("Riverstone" or the "Company"), comprised of Cabletron's Internet
infrastructure solutions business for Internet service providers and other
service providers. After completion of Riverstone's initial public offering on
February 22, 2001, Cabletron owned 92,088,235 shares of common stock,
representing approximately 86% of Riverstone's outstanding common stock.

  On July 26, 1996, Zeitnet was acquired by Cabletron in a transaction
accounted for as a pooling of interests transaction and became a wholly owned
subsidiary of Cabletron. 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).

  On March 17, 1998, Yago was acquired by Cabletron in a purchase transaction
(discussed more fully in footnote 7) and became a wholly owned subsidiary of
Cabletron. Cabletron has renamed Yago to Riverstone.

  On June 3, 2000, Cabletron, Riverstone and certain related parties entered
into a Transformation Agreement, and Cabletron and Riverstone entered into a
Contribution Agreement. In accordance with the Transformation Agreement,
Cabletron transferred to Riverstone the Cabletron-owned assets and liabilities
which related to the Riverstone business on August 28, 2000 (the "Contribution
Date"). Zeitnet was also contributed to and then merged into Riverstone. These
accompanying financial statements reflect the historical basis of the
Cabletron-owned assets and liabilities which were transferred at the
Contribution Date.

  The Company designs and manufactures routers and switches that enable
service providers to convert electrical and optical bandwidth into value-added
services for their customers.

Note (2) Summary of Significant Accounting Policies

 (a) Principles of Consolidation and Basis of Presentation

  The consolidated financial statements of the Company reflect the historical
results of operations and cash flows of the Riverstone business during each
respective period. The consolidated financial statements have been prepared
using Cabletron's historical basis in the assets and liabilities and the
historical results of operations of Riverstone. Changes in Cabletron Systems
equity represent Cabletron's transfer of its net investment in Riverstone,
after giving effect to the net loss of Riverstone plus net cash transfers and
other transfers to and from Riverstone.

  The consolidated financial statements include allocations of certain
Cabletron expenses, including centralized legal, accounting, treasury, real
estate, information technology, distribution, customer service,

                                      44
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

advertising, sales, marketing, engineering and other Cabletron corporate
services and infrastructure costs. All of the allocations and estimates in the
financial statements are based upon assumptions that the Company's and
Cabletron's management believe to be reasonable reflections of the cost of
services provided or benefit received by Riverstone. However, these financial
statements do not necessarily indicate the financial position or results of
operations that would have occurred if the Company were a stand-alone entity
on the dates indicated. See note 18 for detailed explanations regarding
transactions with related parties.

 (b) Fiscal Year-End

  Prior to March 1, 2000, the Company's fiscal year ended on the last calendar
day of February. Effective March 1, 2000 the Company has changed its year end
to a 52-53 week fiscal year ending on the Saturday closest to the last
calendar day in February. This change has not had a significant effect on
consolidated financial results.

 (c) Cash, Cash Equivalents and Short-Term Investments

  Historically, Cabletron has managed cash and cash equivalents on a
centralized basis. Cash receipts associated with Riverstone's business have
been recorded by Cabletron on Riverstone's behalf and Cabletron has funded
Riverstone's disbursements.

  Beginning February 2001, after receipt of proceeds from the initial public
offering, Riverstone has managed a portion of its cash equivalents and short-
term investments. The Company considers all highly liquid investments with
original maturity dates of 90 days or less at the date of acquisition to be
cash equivalents. Cash equivalents and short-term investments consist of money
market funds, commercial paper, government securities, auction rate
securities, and corporate securities. All short-term investments are
classified as available-for-sale and are carried at fair value. Any unrealized
gains or losses are reported as a separate component of stockholders' net
investment when significant.

 (d) Inventories

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

 (e) Revenue Recognition

  The Company generally recognizes revenue upon shipment of products provided
that there are no uncertainties regarding customer acceptance, persuasive
evidence of an arrangement exists, the sales price is fixed and determinable
and collectibility is deemed probable. If uncertainties exist, revenue is
recognized when such uncertainties are resolved. Revenues from service and
maintenance contracts are deferred and recognized ratably over the period the
services are performed, typically twelve months or less. During the fiscal
years ending February 28, 1999, February 29, 2000 and March 3, 2001, service
and maintenance revenue was $84, $962 and $7,082, respectively. When the
Company provides a combination of products and services to a customer, revenue
is allocated based on the relative fair values. The Company does not currently
offer a right of return to its customers and through March 3, 2001 has not
recognized any related accruals. Estimated costs to repair or replace products
that may be returned under warranty are accrued at the time of shipment. The
Company's warranty period typically extends 12 months from the date of
shipment.

  Lease Financing. The Company enters into transactions in which customers
receive financing for the purchase of Company equipment from third party
leasing organizations, who in turn remit payment to the

                                      45
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

Company. In certain transactions, the Company has guaranteed a portion of the
customer's lease payments to be made to the lessor. The Company records these
transactions consistent with Statement of Financial Accounting Standards No.
13, Accounting for Leases ("SFAS 13") and related interpretations.
Substantially all of the Company's customer leasing transactions involve
capital leases. When the Company provides a financing guarantee, it records
revenue at the time of shipment, subject to a sales reserve. The Company bases
the amount of the reserve on a percentage of the guaranteed lease payments,
based on specific customer analysis supplemented with industry experience.
Accordingly, the Company has deferred revenue subject to this reserve that
will be recognized by the end of the respective lease terms if all lease
payments are made by end users. As of February 29, 2000 and March 3, 2001, the
Company had guaranteed payments associated with lease transactions of
approximately $3,077, and $10,138, respectively.

  Beginning in the quarter ended June 3, 2000, the Company began reselling
software licenses through its commercial agreement with Aprisma Management
Technologies, Inc., a wholly owned subsidiary of Cabletron. Software license
revenues, which related to sales of Aprisma's Spectrum licenses and other
third party software licenses, amounted to $4,934 during the twelve month
period ended March 3, 2001, and were recognized in accordance with American
Institute of Certified Public Accountants' ("AICPA") Statement of Position No.
97-2, Software Revenue Recognition ("SOP 97-2"), as modified by Statement of
Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition
("SOP 98-9"). Accordingly the Company recognizes license revenue upon the
delivery of the software provided that there is persuasive evidence of an
arrangement, there are no uncertainties regarding customer acceptance, the fee
is fixed and determinable and collection of the resulting receivable is
probable.

 (f) Property and Equipment

  Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets. 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. The Company compares the carrying value of long-lived assets to
undiscounted expected future cash flows. When the comparison indicates that
the carrying value of those assets is greater than the respective undiscounted
cash flows an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of the assets.

 (g) Goodwill

  Goodwill, which represents the excess of purchase price over fair value of
net assets acquired in a business combination, is recorded at cost less
accumulated amortization. Purchased in-process research and development
without alternative future use is expensed when acquired. Amortization of
goodwill is provided on a straight-line method over the estimated useful life
of the asset. The Company assesses the recoverability of goodwill quarterly or
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company will determine whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future cash flows of the acquired business. If the
goodwill amortization cannot be fully recovered, the amount of goodwill
impairment is based on projected discounted future cash flows or appraised
values, depending on the nature of the asset. In addition, the Company
continually evaluates the periods of amortization associated with goodwill not
identified with an impaired asset to determine whether events and
circumstances warrant revised estimates of useful lives.


                                      46
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

 (h) Advertising Costs

  The Company expenses advertising costs as incurred. Total advertising
expense was $1,969 for the fiscal year ending March 3, 2001. In prior years
advertising expenses were part of the allocated costs from Cabletron.

 (i) Research and Development Costs

  The Company expenses research and development costs as incurred.

 (j) Stock-Based Compensation Plans

  As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted to employees of the Company at fair market value until they
are exercised. Upon exercise, net proceeds, including income tax benefits
realized, are credited to equity. Expense associated with stock-based
compensation under APB 25 is being amortized on a straight-line basis over the
vesting period of four years. The pro forma impact on earnings has been
disclosed in the notes to the Consolidated Financial Statements as required by
SFAS 123. Equity instruments issued to non-employees are accounted for in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Abstract No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services
("EITF 96-18").

  In March 2000, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25 ("FIN 44"), which
must be applied prospectively to new stock option awards, exchanges of awards
in a business combination, modifications to outstanding awards and changes in
grantee status that occur on or after July 1, 2000. The Company adopted FIN 44
effective July 1, 2000 with no impact on its historical consolidated
statements and related disclosures.

 (k) Income Taxes

  Riverstone's operating results historically have been included in
Cabletron's consolidated U.S. and state income tax returns and in the tax
returns of certain Cabletron foreign subsidiaries. The provision for income
taxes in Riverstone's consolidated financial statements has been determined
using the separate company return method. 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.

 (l) Historical Net Loss Per Share

  Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128") for all periods presented. In accordance
with SFAS 128, basic net loss per common share has been calculated using the
weighted-average number of shares of common stock outstanding during the
period, which consists of Cabletron's 100 shares of common ownership for the
year ended February 29, 2000 and 4,711,995 shares for the year ended March 3,
2001. For the twelve month period ended March 3, 2001, Riverstone has excluded
all outstanding stock options as well as stock purchase rights held by private
investors from the calculation of diluted net loss per common share because
all such securities are anti-dilutive for that period.


                                      47
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

 (m) Unaudited Pro Forma Basic and Diluted Net Loss Per Share

  At March 3, 2001, options to purchase 35,686,730 shares of common stock of
the Company at an average exercise price of $5.01 per share have not been
included in the computation of diluted net loss per share as their effect
would have been anti-dilutive. In addition, in connection with Cabletron's
distribution of the Company's Common Stock, all holders of certain Cabletron
stock options that have not been exercised will receive additional Riverstone
options. The actual number of Riverstone stock options to be issued with
respect to outstanding Cabletron stock options will not be determined until
the distribution date. See note 15.

  As described in note 18, the Series A Convertible Preferred Stock
automatically converted into common stock at the 1:1 conversion rate upon the
closing of an underwritten firm commitment public offering of shares of the
common stock of the initial public offering of the Company. The unaudited pro
forma basic and diluted net loss per share information included in the
accompanying statements of operations for the years ended February 29, 2000
and March 3, 2001 reflects the impact on unaudited pro forma basic and diluted
net loss per share of such conversion as of the beginning of each period using
the if-converted method.

  The reconciliation of the numerators and denominators of the unaudited pro
forma basic and diluted loss per share computation for the Company's reported
net loss is as follows:

  Pro Forma Basic and Diluted Loss Per Share

<TABLE>
<CAPTION>
                                                            Year Ended
                                                      ------------------------
                                                       February     March 3,
                                                       29, 2000       2001
                                                      -----------  -----------
<S>                                                   <C>          <C>
Numerator:
  Net loss........................................... $   (37,431) $   (65,776)
                                                      -----------  -----------
Denominator
  Common stock.......................................         100      675,255
  Assumed conversion of preferred stock..............  92,088,135   92,088,135
                                                      -----------  -----------
  Weighted average number of diluted shares
   outstanding.......................................  92,088,235   92,763,390
                                                      -----------  -----------
Basic and diluted loss per share..................... $      (.41) $      (.71)
                                                      ===========  ===========
</TABLE>

 (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. See also
note 18.

 (o) 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 reporting period.
Resulting translation adjustments are reported in accumulated other
comprehensive income, a component of stockholder's equity. Where the U.S.
dollar is the functional

                                      48
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

currency, amounts are recorded at the exchange rates in effect at the time of
the transaction, and any resulting translation adjustments, which were not
material, are recorded in the Statement of Operations.

 (p) Software Development Costs

  Costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional development costs would be
capitalized in accordance with Financial Accounting Standards Board Statement
No. 86, Computer Software To Be Sold, Leased, or Otherwise Marketed ("SFAS
86"). The Company believes its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility; accordingly, no costs have been capitalized to date.

 (q) New Accounting Pronouncements

  In June 1998, the FASB issued Financial Accounting Standards Board Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), that establishes accounting and reporting requirements for derivative
instruments and for hedging activities. FAS 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position at fair value.

  In June 1999, the FASB issued Financial Accounting Standards Board Statement
No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133 ("SFAS 137") which
delayed the effective date of SFAS 133 by one year to fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Financial Accounting
Standards Board Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of FASB Statement No.
133 ("SFAS 138"), which will be adopted concurrently with SFAS 133. SFAS 138
amends the accounting and reporting standards of SFAS 133 for certain
derivative instruments and hedging activities and incorporates decisions made
by the FASB related to the Derivatives Implementation Group process. We
believe that adoption of these statements will not have a significant impact
on our results of operations and financial position.

  In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, ("SAB 101"). SAB 101 summarizes the SEC's views of applying
generally accepted accounting principles to revenue recognition. The adoption
of SAB 101 had no significant impact on our revenue recognition policy or
results of operations.

Note (3) Cash Equivalents and Short-Term Investments

  At March 3, 2001, the fair value of the Company's cash equivalents and
short-term investments approximated cost. Accordingly, the difference between
the cash equivalents and short term investment portfolio's fair value and its
cost has not been presented as a separate component of stockholder's net
investment. Cash equivalents and short-term investments managed by Riverstone
consist of the following at March 3, 2001 :

<TABLE>
   <S>                                                                 <C>
   Money market funds................................................. $ 77,369
   Commercial paper...................................................   25,904
   Government securities..............................................    9,376
   Corporate notes....................................................    1,415
                                                                       --------
                                                                       $114,064
                                                                       ========
   Included in cash and cash equivalents..............................   92,524
   Included in short-term investments.................................   21,540
                                                                       --------
                                                                       $114,064
                                                                       ========
</TABLE>

                                      49
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
               (in thousands, except share and per share amounts)


Note (4) Inventories

  Inventories consist of the following at February 29, 2000 and March 3, 2001:

<TABLE>
<CAPTION>
                                                           February 29, March 3,
                                                               2000       2001
                                                           ------------ --------
   <S>                                                     <C>          <C>
   Raw materials..........................................    $2,764    $ 2,473
   Finished goods.........................................       205      3,557
   Consignment............................................     2,669      5,139
                                                              ------    -------
     Total inventories....................................    $5,638    $11,169
                                                              ======    =======
</TABLE>

Note (5) Prepaid Expenses and Other Assets

  Prepaid expenses and other assets consist of the following at February 29,
2000 and March 3, 2001:

<TABLE>
<CAPTION>
                                                           February 29, March 3,
                                                               2000       2001
                                                           ------------ --------
   <S>                                                     <C>          <C>
   Due from vendor........................................    $2,159    $ 3,703
   Due from customers.....................................       --       3,593
   Other..................................................       388      2,088
                                                              ------    -------
     Total................................................    $2,547    $ 9,384
                                                              ======    =======
</TABLE>

  Due from vendor represents amounts due from the Company's contract
manufacturer for inventory that the Company has purchased from third parties
and transferred to its contract manufacturer.

  Due from customers represents amounts due from the Company's customers
related to Enterasys sales to those customers as explained in more detail in
note 18.

Note (6) Property and Equipment

  Property and equipment consist of the following at February 29, 2000 and
March 3, 2001:

<TABLE>
<CAPTION>
                                           February 29, March 3,   Estimated
                                               2000       2001    useful lives
                                           ------------ --------  ------------
   <S>                                     <C>          <C>       <C>
   Equipment..............................   $13,270    $ 26,400   3-5 years
   Furniture and fixtures.................       238       1,256   5-7 years
                                             -------    --------
                                             $13,508    $ 27,656
   Less accumulated depreciation and
    amortization..........................    (7,675)    (13,636)
                                             -------    --------
                                             $ 5,833    $ 14,020
                                             =======    ========
</TABLE>

Note (7) Business Combinations

  Intangible assets consist of the following at February 29, 2000 and March 3,
2001:

<TABLE>
<CAPTION>
                                                                       Estimated
                                                February 29, March 3,   useful
                                                    2000       2001      life
                                                ------------ --------  ---------
   <S>                                          <C>          <C>       <C>
   Goodwill....................................   $13,568    $13,568    8 years
   Less accumulated amortization...............    (4,014)    (5,693)
                                                  -------    -------
                                                  $ 9,554    $ 7,875
                                                  =======    =======
</TABLE>

                                       50
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


  On March 17, 1998, Cabletron acquired Yago, a privately held manufacturer of
wire speed routing and layer-4 switching products and solutions. Under the
terms of the 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 25% of Yago's capital stock,
calculated on a fully diluted basis. Cabletron also agreed, pursuant to the
terms of the 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 did not attain a market value of $35 per share
eighteen months after the closing of the transaction. However, the agreement
did not guarantee a minimum value to be received by Yago shareholders. On
September 8, 1999, Cabletron issued approximately 5.2 million shares of
Cabletron common stock to the former shareholders of Yago, pursuant to the
terms of the merger agreement.

  Cabletron renamed Yago to Riverstone. The purchase accounting for the
acquisition of Yago has been pushed down by Cabletron to Riverstone.

  Riverstone recorded the cost of the acquisition of Yago at approximately
$165.7 million, including direct costs of $2.6 million, based on the market
value as of the acquisition date of shares issued and the maximum number of
shares that could be issued. This acquisition has been accounted for under the
purchase method of accounting. Riverstone's consolidated results of operations
include the operating results of Yago from the acquisition date. Based on an
independent appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. Accordingly, Riverstone
recorded special charges of $150.0 million for this in-process research and
development at the date of acquisition. The value assigned to in process
research and development 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 Yago's next-generation switching router family of products and
technologies. 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 in progress had no
alternative future uses. Accordingly, Cabletron expensed these costs as of the
acquisition date.

  The excess of cost over the estimated fair value of net assets acquired of
$16.3 million was allocated to goodwill and is being amortized on a straight-
line basis over a period of eight years. The amount allocated to goodwill was
decreased during the year ended February 29, 2000 due to the recognition of
Yago pre-acquisition net operating losses as a result of a change in the
federal separate return limitation year rule.

  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. All of Yago's
efforts since its 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.

  The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally related to the completion of all
planning, designing, prototyping, high-volume verification, and testing

                                      51
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

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 two years following the acquisition
and Cabletron expected to begin generating the economic benefits from the
technologies in the second half of fiscal 1999. Expenditures to complete the
MSR technology were expected to total approximately $10.0 million two years
following the acquisition.

  At the time of the acquisition, Cabletron anticipated generating significant
increases in revenues and undiscounted cash flows from the acquisition of Yago
with a projected peak in 2003 and then a decline as other new products and
technologies were projected to enter the market. To date, the results
generated from Yago-based projects have not differed materially from the
original forecast assumptions. As noted in note 1, the Company makes up
Cabletron's Internet infrastructure solutions business for Internet service
providers and other service providers. Cabletron also maintains a significant
enterprise market business. The Yago-based products began generating
significant revenue for the enterprise markets during Cabletron's fiscal year
ended February 28, 1999. This began with the release of a fully featured
MSR8000 in July 1998 and continued with the release of the MSR16000 product.
Cabletron continued to increase sales of products based on the Yago in-process
projects in the enterprise market during the fiscal year ended February 29,
2000 based on additional, successful product introductions including the
MSR8600, MSR2000 and Wide Area Network interfaces. Based on Riverstone's
markets the Company began to experience significant revenue growth from the
Yago products beginning in the third and fourth quarters of the fiscal year
ended February 29, 2000. This reflected the growth of the service provider
marketplace and acceptance of the underlying Yago technology as it pertained
to the service provider market.

  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. As of the valuation date,
Yago had no existing products and accordingly all revenue growth in the first
several years was related to the in-process technologies.

  The estimated revenues for the in-process projects 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. Selling, general and administrative expenses were
projected to remain constant. Research and development expenses were projected
to decrease as a percentage of sales as the in-process projects were
completed.

  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% to 50% were used for the
business enterprise and for the in-process research and development. Cabletron
believed 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 were unknown at that time.

                                      52
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


  The projected and actual results to date have been materially consistent.
The majority of the projects in-process at the time of the acquisition have
been completed reasonably consistently with the planned schedule and the
initial products have been brought to market. The Company continued to work
toward the completion of some of the projects underway at Yago at the time of
the acquisition as well as the follow-on projects based on the underlying
technology associated with the acquired in-process projects. Research and
development expenditures since the acquisition have not differed materially
from expectations. The risks associated with these continued efforts,
including the follow-on projects, are still considered significant, and no
assurance can be made that the Company's upcoming products will meet market
expectations. The Company expects to continue their support of these efforts
and believes the Company has a reasonable chance of successfully completing
the research and development programs.

  Such factors as efforts to achieve technical viability, uncertainty
regarding standards required for new products, the rapid pace of changing
technology inherent in the industry the Company customers operates, as well as
competitive threats contribute to the significant risks of completing the
development of these technologies. The nature of the efforts to develop the
acquired technologies into commercially viable products consist principally of
planning, designing, and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner
could result in a loss of market share or a lost opportunity to capitalize on
emerging markets and could have a material adverse impact on the Company's
business and operating results and a portion of the value of the in-process
research and development might never be realized.

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

<TABLE>
   <S>                                                                 <C>
   Cash paid for acquisitions......................................... $  1,897
   Less cash acquired.................................................      317
                                                                       --------
   Net cash paid for acquisition......................................    1,580
   Common stock issued................................................  163,142
   Assumed liabilities................................................      933
                                                                       --------
     Purchase price................................................... $165,655
                                                                       ========
</TABLE>

  The following is a supplemental disclosure of noncash transactions in
connection with the Yago acquisition for the year ended February 28, 1999:

<TABLE>
   <S>                                                                <C>
   Fair value of asset acquired...................................... $  17,602
   In-process research and development...............................   150,000
   Assumed liabilities...............................................    (2,880)
   Common stock issued...............................................  (163,142)
                                                                      ---------
     Cash portion of acquisition..................................... $   1,580
                                                                      =========
</TABLE>

  During the year ended February 29, 2000, Cabletron realized approximately
$2.9 million in tax benefit from utilization of net loss carryforwards that it
acquired in the acquisition of Yago. Goodwill was reduced by $2.9 million at
February 29, 2000 and amortization expense decreased from approximately $510
thousand per quarter to $380 thousand per quarter as a result.

                                      53
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


Note (8) Accrued Expenses

  Accrued expenses consist of the following at February 29, 2000 and March 3,
2001:

<TABLE>
<CAPTION>
                                                           February 29, March 3,
                                                               2000       2001
                                                           ------------ --------
   <S>                                                     <C>          <C>
   Payroll and related expenses...........................    $2,758    $ 4,071
   Sales tax payable......................................       --         898
   Product warranty.......................................       584        533
   Offering costs.........................................       --         600
   Other..................................................       351      4,095
                                                              ------    -------
     Total................................................    $3,693    $10,197
                                                              ======    =======
</TABLE>

Note (9) Notes Payable

  The Company maintained a note payable associated with a financing
arrangement to provide equipment financing assumed as part of the Yago
acquisition. Borrowings under this arrangement carried interest at an
effective rate of 9%, were repayable over 36 months and were secured with the
assets purchased. The note was paid in full during the twelve month period
ended March 3, 2001.

Note (10) Income Taxes

  No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. The following
is a reconciliation of the effective tax rates to the statutory federal tax
rate:

<TABLE>
<CAPTION>
                                           February 28, February 29, March 3,
                                               1999         2000       2001
                                           ------------ ------------ --------
   <S>                                     <C>          <C>          <C>
   Statutory federal income tax (benefit)
    rate..................................    (35.0)%      (35.0)%    (35.0)%
   Nondeductible goodwill and intangi-
    bles..................................     28.8          2.0        0.8
   Other..................................     (0.1)        (1.1)      (3.0)
   Stock based compensation...............      0.0          0.0       15.5
   Unbenefitted losses....................      6.3         34.1       21.7
                                              -----        -----      -----
                                                0.0%         0.0%       0.0%
                                              =====        =====      =====
</TABLE>

  The Company's operating results have been included in Cabletron's
consolidated U.S. and state income tax returns and in tax returns of certain
Cabletron foreign subsidiaries. Cabletron has utilized, or is expected to
utilize, a portion of the Company's net operating losses and research credits.
Through the Contribution Date, no deferred tax benefit has been recognized for
the net operating losses utilized by Cabletron because they will not be
available to Riverstone, and, under the separate return method, Riverstone
would not have been able to recognize the tax benefit. Effective as of the
Contribution Date, Cabletron is required to reimburse the Company for any tax
losses attributable to the Company that are utilized by Cabletron and the
Company is required to reimburse Cabletron for any tax liabilities
attributable to the Company that is paid by Cabletron. For the period from the
Contribution Date through March 3, 2001 Riverstone has received no
reimbursement from Cabletron under this agreement. The Company has recorded a
full valuation allowance against its deferred tax assets since management
believes that, after considering all the available objective evidence, both
positive and negative, historical and prospective, with greater weight given
to historical evidence, it is not more likely than not that these assets will
be realized. No income tax benefit has been recorded for all periods presented
because of the valuation allowance.

                                      54
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


  For the year ended February 28, 1999, Riverstone recorded a special charge
of $150 million for in-process research and development relating to the
acquisition of Yago. This charge was not deductible for tax purposes which
decreased the Company's taxable loss by the $150 million.

  Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                          February 29, March 3,
                                                              2000       2001
                                                          ------------ --------
   <S>                                                    <C>          <C>
   Deferred tax assets:
     Accounts receivable.................................   $   832    $  1,800
     Accrued expenses....................................       404         --
     Accruals and other reserves.........................       386       1,478
     Loss and tax credit carryforwards...................       458      24,815
     Depreciation and amortization.......................       162         247
     Inventory...........................................     1,065       2,103
     Stock based compensation............................       --          864
     Capitalized R&D.....................................     1,086         519
                                                            -------    --------
       Total gross deferred tax assets...................     4,393      31,826
     Less valuation allowance............................    (4,393)    (31,826)
                                                            -------    --------
       Net deferred tax assets...........................       --          --
   Deferred tax liabilities:
     Depreciation and amortization.......................       --          --
                                                            -------    --------
       Total gross deferred liabilities..................       --          --
                                                            -------    --------
       Net deferred tax assets...........................   $   --     $    --
                                                            =======    ========
</TABLE>

  Valuation allowance decreased by $6.7 million and increased by $27.4 million
for the years ended February 29, 2000 and March 3, 2001, respectively. A
portion of the increase in valuation allowance for the year ended March 3,
2001 in the amount of $11.6 million relates to the contribution of tax
attributes available to Riverstone under the tax sharing agreement.

  As of March 3, 2001, the Company has $50.8 million of net operating loss
carryforwards, which will expire in fiscal years 2009 through 2020, of which
$4.1 million represents deductions from exercises of stock options and $12.3
million are limited pursuant to Internal Revenue Code Section 382. As of March
3, 2001, the Company has $4.6 million of tax credit carryforwards which will
expire in fiscal years 2009 through 2020, of which $0.5 million are related to
acquired subsidiaries and are limited pursuant to Internal Revenue Code
Section 382. The tax benefits relating to the exercise of incentive stock
options by Riverstone employees will result in a benefit to additional paid in
capital and a reduction to the valuation allowance when realized. The tax
benefits related to the tax credits from acquired subsidiaries, when realized,
will be recorded as a decrease in goodwill and other non-current intangible
assets. The utilization of these tax credits are limited pursuant to Internal
Revenue Code Section 382, which imposed an annual limitation on the
utilization of loss carryforwards following prior ownership changes. An
ownership change is generally defined as a change in more than 50 percent of
the ownership of the company.

                                      55
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


Note (11) Financial Instruments and Concentration of Credit Risk

  The carrying amounts of trade receivables, amounts due from employees and
officers, prepaid expenses and other assets, deferred revenue, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these financial instruments. Financial instruments that
potentially subject the Company to concentration of credit risk consist
primarily of trade receivables. The Company's end-user customers, which
include carriers, Internet service providers, content hosting providers, and
metropolitan service providers, some of which can be thinly capitalized start-
up companies. The Company also guarantees certain lease payments that its
customers make to third party leasing companies. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral or other security against trade receivable balances;
however, it does maintain an allowance for potential credit losses and such
losses have been within management's expectations. Due to recent public market
volatility, a number of the Company's current or prospective customers may be
unable to raise funding through the issuance of their equity securities or
otherwise in a timely fashion. This difficulty could result in an increased
need for financing provided either by the Company or with the Company's
assistance and an increased risk of customer default.

  The following individual customers accounted for 10% or more of total
revenue and accounts receivable for the periods indicated:

<TABLE>
<CAPTION>
                                              Years Ended
                                   ---------------------------------- ----------
                                                                          At
                                   February 28, February 29, March 3,  March 3,
                                       1999         2000       2001      2001
                                   ------------ ------------ -------- ----------
                                                Revenue                Accounts
                                                                      Receivable
   <S>                             <C>          <C>          <C>      <C>
   Customer A.....................     -- %          11%       -- %      -- %
   Customer B.....................     --            15        --        --
   Customer C.....................      20           14        --        --
   Customer D.....................     --            12        --        --
   Customer E.....................      46          --         --        --
   Customer F.....................     --           --          11        28
</TABLE>

                                      56
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


Note (12) Segment and Geographical Information

  Financial Accounting Standards Board Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131") establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision maker in making decisions how to allocate resources
and assess performance. To date, the chief operating decision maker has viewed
the Company's operations as principally one segment, Cabletron's Internet
infrastructure solutions business for Internet service providers and other
service providers. Revenue amounts are based on product shipment destination.
Revenues from unaffiliated customers by geographic region are as follows:

<TABLE>
<CAPTION>
                                          Years Ended
                               ----------------------------------
                               February 28, February 29, March 3,
                                   1999         2000       2001
                               ------------ ------------ --------
   <S>                         <C>          <C>          <C>
   Sales to unaffiliated
    customers (trade):
     United States...........     $3,284      $17,673    $63,705
     United Kingdom..........        --         3,472      7,079
     Other...................        --         1,931     23,484
                                  ------      -------    -------
   Total trade sales.........      3,284       23,076     94,268
   Sales to related parties..        --           --       3,990
                                  ------      -------    -------
   Total sales...............     $3,284      $23,076    $98,258
                                  ======      =======    =======
</TABLE>

  Substantially all of the Company's assets are located in the United States.

Note (13) Legal Proceedings

  A consolidated class action lawsuit raising claims against Cabletron and
some officers and directors of Cabletron was filed in the United States
district court for the district of New Hampshire and, following transfer, is
pending in the district of Rhode Island. The complaint alleges that Cabletron
and several of its officers and directors made materially false and misleading
information about Cabletron's operations and acted in violation of Section
10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 during the
period between March 3, 1997 and December 2, 1997. The complaint also alleges
that Cabletron's accounting practices resulted in the disclosure of materially
misleading financial results during the same period. More specifically, the
complaint challenged Cabletron's revenue recognition policies, accounting for
product returns, and the validity of some 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. The
plaintiffs timely served a second consolidated class action complaint, and
Cabletron filed a motion to dismiss this second complaint. The district court
has dismissed this complaint with prejudice. The plaintiffs may choose to
appeal this ruling to the First Circuit Court of Appeals. If the plaintiffs
were to appeal, prevail on appeal, and ultimately prevail on the merits of the
case, Cabletron could be required to pay substantial damages.

  The Company has not assumed any liabilities from Cabletron for this
litigation. The Company has not been named as a defendant in this litigation
and none of its officers or directors is named as a defendant to this
litigation. However, the plaintiffs might attempt to involve the Company in
this litigation or might seek to have

                                      57
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

the Company pay damages if Cabletron has insufficient assets to cover any
resulting damages. Any involvement in this litigation could be protracted and
may result in a diversion of management and other resources. The payment of
substantial legal costs or damages, or the diversion of Company management and
other resources, could have a material adverse effect on its business,
financial condition or results of operations.

  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
condition or results of operations of the Company.

Note (14) Common Stock

  On February 22, 2001, Riverstone completed an initial public offering of
10,000,000 shares of common stock at a price of $12 per share. Concurrently
with initial public offering, all outstanding shares of preferred stock were
converted to a total of 92,088,135 shares of common stock. Proceeds from the
offering were approximately $108,764 net of offering costs.

  After the Company's registration statement relating to the initial public
offering had been declared effective, the strategic investors elected to
exercise stock purchase rights such that the Company issued 5,401,970 shares
of its common stock in respect of such rights. Net proceeds from the purchase
rights exercise were approximately $46,577. See note 20.

Note (15) Stock Plans

 (a) Riverstone 2000 Equity Incentive Plan

  Riverstone's board of directors has adopted the Riverstone 2000 Equity
Incentive Plan ("2000 Plan"), which provides for the grant of awards to
employees or directors of, or consultants or advisors to, the Company as well
as to certain employees of Cabletron and its subsidiaries. Awards under the
2000 Plan may consist of stock options (incentive or non-statutory),
restricted and unrestricted stock awards, stock appreciation rights, deferred
stock awards, performance awards, other stock-based awards and loans and
supplemental grants. A total of 45,000,000 shares of common stock have been
reserved for issuance under the 2000 Plan. No participant may be granted
options or stock appreciation rights in any calendar year with respect to more
than 8,500,000 shares of common stock. Under the 2000 Plan, no more than
5,000,000 shares may be awarded to any participant as a stock based
performance award in any three-year period, and no more than $5 million may be
paid to any participant for any year under a cash performance award. The 2000
Plan is administered by Riverstone's board of directors or by a committee of
the board, which determines the terms of awards subject to the terms of the
2000 Plan, subject to action by the compensation committee of the board of
directors of Cabletron in the event of certain awards to executive officers.

  The Company has granted stock options under the 2000 Plan that provide for
provisional vesting as to one-quarter of the shares subject to the options
after one year (April 1, 2001 in the case of the initial grants) with monthly
provisional vesting of the remainder ratably over the next three years. Actual
vesting of these options, which have a maximum term of ten years, is not
scheduled to occur earlier than at the end of four years (April 1, 2004 in the
case of the initial grants) or, if earlier, upon a distribution by Cabletron
of its shares of stock of the Company or upon a sale or other change in
control of the Company. In the event of a sale or other change in control of
the Company, vesting would also accelerate by ten months. The exercise price
of these options has been set at the fair market value of the Company's stock
on the date of grant, as determined by the board. Upon termination of
employment, the unvested portion of these options would terminate and the
remainder would remain exercisable for up to ninety days, with special rules
applicable in the case of death. Consistent with the

                                      58
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

terms of the 2000 Plan, the Company has also agreed that, upon the
distribution by Cabletron to its shareholders of the Company stock owned by
Cabletron, the Company will grant stock options to persons then holding
options to acquire Cabletron stock, as described in more detail below. The
Company had not issued any stock options through February 29, 2000.

  The following table reflects activity and exercise prices of stock options
under this plan for the twelve months ended March 3, 2001.

<TABLE>
<CAPTION>
                                                     Number    Weighted Average
                                                   of Shares    Exercise Price
                                                   ----------  ----------------
   <S>                                             <C>         <C>
   Options outstanding, beginning of period.......        --        $ --
   Granted........................................ 36,888,330        4.98
   Exercised......................................        --          --
   Cancelled...................................... (1,201,600)       4.31
                                                   ----------       -----
   Options Outstanding, March 3, 2001............. 35,686,730        5.01
                                                   ----------       -----
   Options Exercisable, March 3, 2001.............        --        $ --
                                                   ==========       =====
</TABLE>

  The following table summarizes information concerning currently outstanding
Riverstone options as of March 3, 2001. Based on the vesting schedule
discussed above, there were no options exercisable as of March 3, 2001.

<TABLE>
<CAPTION>
    Range of                            Weighted-average
    exercise          Options         remaining contractual       Weighted-average
     prices         Outstanding           life (years)             exercise price
    --------        -----------       ---------------------       ----------------
  <S>               <C>               <C>                         <C>
  $0.01 -  3.50     27,384,200                 9.2                     $3.50
   3.51 -  7.00      1,135,500                 9.3                      7.00
   7.01 -  9.50      4,746,805                 9.4                      9.50
   9.51 - 12.50      2,420,225                 9.3                     12.30
                    ----------                ----                     -----
                    35,686,730                9.24                     $5.01
                    ==========                ====                     =====
</TABLE>

  In connection with certain stock option grants to employees, the Company
recorded approximately $11,099 of unearned stock-based compensation for the
excess of the deemed fair market value over the exercise price at date of
grant and the change in status of one individual from a Cabletron employee to
a Riverstone employee during the twelve month period ended March 3, 2001. The
compensation expense is being recognized over the options' vesting period of
four years. As a result, the Company recorded stock-based compensation expense
of $1,391 for the twelve month period ended March 3, 2001. For these options
the Company expects to recognize stock-based compensation expenses of
approximately $2,655, $2,655, $2,655 and $1,743 during its fiscal years 2002,
2003, 2004 and 2005.

  The Company granted approximately 2.8 million options to non-employees of
the Company, primarily three officers of Cabletron and other employees of
Cabletron and Enterasys. Because these individuals are not employees of the
Company, the options have been subject to variable accounting. By approval of
the Company's Board of Directors, these options were accelerated to become
fully vested in November 2000, and become exercisable at the time Cabletron
distributes its Company common stock to Cabletron stockholders, in connection
with a sale of the Company or April 1, 2004, whichever occurs first. These
individuals are generally restricted from transferring these options and in
the case of the options granted to the three officers of Cabletron noted
above, additional transfer restrictions apply to the underlying shares. Based
on this acceleration the Company recorded compensation charges of
approximately $24,937 which represented the fair value of the options using

                                      59
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

the Black-Scholes option pricing model less the compensation charges
previously recorded of $2,861 through the end of the Company's second quarter
ended September 2, 2000 for total compensation for the twelve months ended
March 3, 2001 of $27,798.

  The Company has also issued stock options to certain consultants in exchange
for services during the twelve months ended March 3, 2001. The Company
calculated the fair value of the stock options granted using the Black-Scholes
option pricing model. The Company believes that the fair value of the stock
options granted to consultants is more reliably measurable than the fair value
of the services received. The Company incurred approximately $2,134 of
compensation expense during the twelve months ended March 3, 2001 related to
those options.

 (b) Cabletron Equity Incentive Plan

  The Company's employees have been eligible to participate in Cabletron's
stock option plans. Under those plans Riverstone employees held approximately
3,179,885 and 2,895,115 stock options, as of February 29, 2000 and March 3,
2001, respectively, 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.

  Upon the distribution by Cabletron to its shareholders of the Company stock
owned by Cabletron, the Company and Cabletron have agreed that the Company
will grant to the then-holders of Cabletron stock options, including but not
limited to Company employees holding Cabletron options, additional options
under the 2000 Plan. The same distribution ratio of Company shares that
applies in Cabletron's distribution to its shareholders will be used to
determine the number of shares of Company stock subject to the additional
Company options granted to holders of Cabletron options. The exercise price of
the Cabletron options will be adjusted after the distribution, and the
exercise price of the additional Company options will be determined, such that
(1) the aggregate amount of intrinsic value (that is, the difference between
exercise price and stock value) in the two options immediately after the
distribution does not exceed the intrinsic value in the Cabletron options
immediately before the distribution and (2) the ratio of the exercise price
per option to the market value per share is not reduced. The additional
Company options will have the same vesting and exercisability provisions as
the Cabletron options to which they relate, subject to special rules in the
event of a sale or merger of the Company. The total number of Cabletron
options outstanding at March 3, 2001 was 11,767,580.

                                      60
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


  A summary of Riverstone employee option transactions under the current
Cabletron plans are follows:

<TABLE>
<CAPTION>
                                                         Cabletron Options
                                                    ----------------------------
                                                    Number of   Weighted-Average
                                                     Options     Exercise Price
                                                    ----------  ----------------
   <S>                                              <C>         <C>
   Options outstanding at February 28, 1998........  3,566,210        15.61
                                                    ----------
   Options exercisable at February 28, 1998........    290,209        18.48
                                                    ----------
   Granted and assumed.............................  2,861,759         7.84*
   Exercised.......................................    (54,390)        1.13
   Cancelled....................................... (3,166,886)       15.93*
                                                    ----------
   Options outstanding at February 28, 1999........  3,206,693         8.60
                                                    ----------
   Options exercisable at February 28, 1999........    602,550        10.05
                                                    ----------
   Granted and assumed.............................    947,550        14.02
   Exercised.......................................   (298,660)        7.99
   Cancelled.......................................   (675,698)       10.15
                                                    ----------
   Options outstanding at February 29, 2000........  3,179,885         9.78
                                                    ----------
   Options exercisable at February 29, 2000........    619,166         8.76
                                                    ----------
   Granted and assumed.............................    168,643        13.86
   Exercised.......................................   (235,383)        7.08
   Cancelled.......................................   (218,030)       10.01
                                                    ----------
   Options outstanding at March 3, 2001............  2,895,115       $10.22
                                                    ==========
   Options exercisable at March 3, 2001............  1,019,632       $10.27
                                                    ==========
</TABLE>

*In December 1997, employees holding outstanding stock options with a value
exceeding $14.6875 per option were given the right to have their options
canceled and repriced to $14.6875 per option. The repriced options will vest
over a period of one to five years. In 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.

  The following table summarizes information concerning currently outstanding
and exercisable Cabletron options held by Riverstone employees as of March 3,
2001:

<TABLE>
<CAPTION>
                      Weighted-average
Range of                 remaining
exercise    Options     contractual    Weighted-average   Options   Weighted-average
 prices   Outstanding   life (years)    exercise price  exercisable  exercise price
--------  ----------- ---------------- ---------------- ----------- ----------------
<S>       <C>         <C>              <C>              <C>         <C>
$  .06 -
   6.30       51,007         6.5            $ 0.19          34,544       $ 0.18
  6.31 -
  7.85     1,773,636         6.8              7.25         613,363         7.25
  7.86 -
  9.85        70,710         8.1              8.85           8,190         8.76
  9.86 -
 11.85        40,530         6.4             10.89          20,367        10.59
 11.86 -
 13.85       685,151         8.1             13.60         235,425        13.54
 13.86 -
 23.85       159,080         8.4             17.78          55,774        17.55
 23.86 -
 33.85        96,501         7.2             28.28          48,723        29.42
 33.86 -
 49.25        18,500         9.0             42.57           3,246        39.73
           ---------        ----            ------       ---------       ------
           2,895,115        7.26            $10.22       1,019,632       $10.27
           =========        ====            ======       =========       ======
</TABLE>

                                      61
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


  The weighted average estimated fair values of stock options granted and
assumed during the years ended February 28, 1999, February 29, 2000 and March
3, 2001 were $7.84, $14.02 and $13.86 per share, respectively.

  The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25") and related interpretations in
accounting for its stock option and employee stock purchase plans and,
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
Financial Accounting Standards Board Statement No. 123, Accounting for Stock-
based Compensation ("SFAS 123") the Company's net loss would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                            February 28, February 29, March 3,
                                                1999         2000       2001
                                            ------------ ------------ --------
   <S>                                      <C>          <C>          <C>
   Net loss
     As reported..........................   $(184,995)    $(37,431)  $(65,776)
     Pro forma............................    (190,753)     (43,117)   (89,943)
   Loss per share
     Net loss per share basic and diluted,
      as reported.........................   (1,849.95)     (374.31)    (13.96)
     Net loss per share basic and diluted,
      as adjusted.........................   (1,907.53)     (431.17)    (19.09)
     Pro forma net loss per share, as
      reported (unaudited)................         --      $   (.40)  $   (.71)
     Pro forma net loss per share, as
      adjusted (unaudited)................         --      $   (.46)  $   (.97)
</TABLE>

  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 under the Cabletron Equity Incentive
Plan 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, 1998, 1999, February 29, 2000 and March 3, 2001:

<TABLE>
<CAPTION>
                                            February 28, February 29,  March 3,
                                                1999         2000        2001
                                            ------------ ------------ ----------
   <S>                                      <C>          <C>          <C>
   Risk-free interest rates................      5.11%        6.59%        5.75%
   Expected option lives...................  6.5 years    6.5 years   5.43 years
   Expected volatility.....................      76.3%        70.1%        83.2%
   Expected dividend yields................       0.0%         0.0%         0.0%
</TABLE>

  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because Cabletron options held by Riverstone employees and directors have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of these
options.

  The fair value of each stock option grant under the Riverstone 2000 equity
plan has been estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for

                                      62
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

the twelve months ended March 3, 2001, volatility of 83.2%; risk-free interest
rate of 5.75%; 5.43 life of options and 0% dividend yield. The weighted
average fair value per share of options granted during the twelve months ended
March 3, 2001 was $5.20.

 (c) Employee Stock Purchase Plans

  Under Cabletron's two Employee Stock Purchase Plans (ESPP), options were
granted to eligible Company employees twice yearly and are exercisable through
the accumulation of employee payroll deductions from 2% to 10% of employee
compensation as defined in the plan, for each plan. Accumulated payroll
deductions may be used to purchase stock at 85% of the fair market value of
the common stock at the beginning or end of the option period, whichever
amount is lower, to a maximum of $12,500 in value determined at the beginning
of the option period for each plan. In the years ended February 28, 1999,
February 29, 2000 and March 3, 2001, 44,336 shares at a weighted average price
of $9.01, 97,316 shares at $7.57 and 145,046 shares at $15.01, respectively,
were purchased for Company employees.

Note (16) Employee Benefit Plan

  Through February 28, 2001, the Company's eligible employees participated in
a plan known as the Cabletron Systems, Inc. 401(k) Plan ("the 401(k) Plan")
which provides retirement benefits to the eligible employees of participating
employers. As allowed under Section 401(k) of the Internal Revenue Code, the
401(k) Plan provides tax-deferred salary deductions for eligible employees.
Participants may elect to contribute from 1% to 18% of their annual
compensation to the 401(k) Plan each year, limited to a maximum annual amount
as set periodically by the Internal Revenue Service. In addition, unless
determined otherwise by the Cabletron Systems Inc. board of directors, the
401(k) plan provides for a basic matching contribution each quarter on behalf
of each eligible participant equal to the lesser of $250 or 50% of the
participant's elective contributions for the quarter. The 401(k) plan also
provides for a quarterly supplemental matching contribution equal to the
lesser of $250 or 50% of the participant's elective contributions if
Cabletron's performance meets a specified threshold. The 401(k) plan also
provides for make-up matching contribution to address specified circumstances
where fluctuations in a participant's level of deferrals result in lower basic
or supplemental matching contributions than would be the case with a level
rate of deferrals. Employees become vested in the matching contributions
according to a three-year vesting schedule based on initial date of hire. The
Company's expense related to matching contributions to the 401(k) Plan for the
years ended February 28, 1999, February 29, 2000 and March 3, 2001 was $0,
$115 and $117, respectively. On March 1, 2001, the Company established its own
401(k) plan with comparable features in which its eligible employees may
participate.

                                      63
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)


Note (17) Quarterly Financial Data

<TABLE>
<CAPTION>
                                             Net Sales  Gross Profit  Net Loss
                                            ----------- ------------ -----------
                                            (unaudited) (unaudited)  (unaudited)
   <S>                                      <C>         <C>          <C>
   2000
   First Quarter...........................   $ 2,480     $   955     $ (8,891)
   Second Quarter..........................     2,843         913      (11,577)
   Third Quarter...........................     4,992       2,564      (10,414)
   Fourth Quarter..........................    12,761       6,668       (6,549)
                                              -------     -------     --------
     Total Year............................   $23,076     $11,100     $(37,431)
                                              =======     =======     ========
   2001
   First Quarter...........................   $15,778     $ 8,507     $(12,513)
   Second Quarter..........................    20,554      11,397      (11,775)
   Third Quarter...........................    26,784      15,141      (34,907)
   Fourth Quarter..........................    35,142      19,745       (6,581)
                                              -------     -------     --------
     Year to date..........................   $98,258     $54,790     $(65,776)
                                              =======     =======     ========
</TABLE>

  The first quarter of fiscal 1999 includes $150.0 million of in-process
research and development charges related to the acquisition of Yago.

Note (18) Transactions With Cabletron and Related Parties

  The consolidated financial statements include allocations of certain
Cabletron expenses, including centralized legal, accounting, treasury, real
estate, information technology, distribution, customer service, advertising,
sales, marketing, engineering and other Cabletron corporate services and
infrastructure costs. All of the allocations and estimates in the financial
statements are based upon assumptions that the Company's and Cabletron's
management believe to be reasonable reflections of the cost of services
provided or benefit received by Riverstone. Allocations are based on
headcount, revenue, square footage, usage and other appropriate methods.
Allocated costs included in the accompanying consolidated statements of
operations are as follows:

<TABLE>
<CAPTION>
                                                         Years Ended
                                              ----------------------------------
                                              February 28, February 29, March 3,
                                                  1999         2000       2001
                                              ------------ ------------ --------
   <S>                                        <C>          <C>          <C>
     Cost of revenues........................    $  132       $  464     $   15
     Sales and marketing.....................       120        1,167        120
     Research and development................       539          469        102
     General and administrative..............     2,196        3,496      3,103
</TABLE>

  During the years ended February 28, 1999, February 29, 2000 and March 3,
2001, the Company had sales to three customers of $236, three customers of
$3,233 and fifteen customers of $11,547 respectively, in which Cabletron
maintains investments in private debt and equity securities accounted for
under the cost method of

                                      64
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

accounting. The Company recognized revenue based on the fair value of the
products sold to these companies. For those customers from which Cabletron
received equity in lieu of cash, the Company recorded revenues equal to the
fair value of the products sold to their customer. The revenues recorded by
the Company relating to these transactions for the years ended February 28,
1999 and February 29, 2000 and March 3, 2001 were $22, $413 and $1,668
respectively.

  During the twelve months ended March 3, 2001, the Company began reselling
Aprisma products in accordance with the terms reflected in the commercial
agreement. The Company recorded revenues in the amount of $4,934 during the
period. The Company recorded costs of sales of $3,850 associated with these
revenues for the amount due to Aprisma related to these transactions. As of
March 3, 2001, $92 is reflected in accounts payable related parties.

  On January 1, 2000, Cabletron issued a note to Romulus Pereira, our
President and Chief Executive Officer, in the amount of $125. Mr. Pereira
repaid the note in full on September 13, 2000.

  On April 12, 2000, Cabletron issued an additional note to Mr. Pereira in the
amount of $400 to be applied to the payment of certain taxes owed by Mr.
Pereira with respect to Cabletron shares that he received in connection with
Cabletron's acquisition of Yago Systems, Inc. in 1998. The note bears interest
at the rate of 6.46% per annum and is due in full on April 12, 2002.

  The Company has issued additional notes to some employees of the Company.
These notes do not typically incur an interest charge and are normally for a
term of twenty four (24) months. The outstanding principal amount of the note
is payable twenty four (24) months from the commencement date, unless the
employment is canceled by either the employee or the Company, then the amount
outstanding is immediately due.

  Pursuant to the Services Agreement with Cabletron, the Company occupies
space in Cabletron facilities in; Andover, Massachusetts; Atlanta, Georgia;
Dallas, Texas; Denver, Colorado; New York, New York; Reading, United Kingdom
and other international locations where principally sales and service
personnel and engineers are based. A Cabletron subsidiary assigned to the
Company its rights under the lease relating to the Company's Santa Clara,
California facility, effective as of August 28, 2000.

  In connection with the transformation, effective March 1, 2000, certain
Cabletron customers were identified and assigned to each of the other related
parties, including the Company. As a result, the Company received certain
accounts receivable balances and the related allowance for doubtful accounts
that were not necessarily reflected in the Company's receivable balances at
February 29, 2000.

  In accordance with the terms reflected in the commercial agreement with
Enterasys, during the twelve months ended March 3, 2001 the Company received
revenue in the form of referral fees from Enterasys of $2,898. This amount
reflects the Company's commission revenue from Enterasys for sales of
Enterasys products to the Company's customers. Of this amount, $215 is
reflected in the accounts receivable from related parties and the remaining
$2,683 was paid by Enterasys as of March 3, 2001.

  In accordance with the commercial agreement, the accounts receivable balance
stemming from the revenue recorded by Enterasys for its sales to the Company's
customers will be collected by the Company and subsequently remitted to
Enterasys. Reflected in the Company's prepaid expenses and other current
assets at March 3, 2001 is $3,593 for amounts due from the Company's customers
related to Enterasys sales to those customers.


                                      65
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

  For purposes of governing certain of the ongoing relationships between
Riverstone and Cabletron and other related parties at and after the
contribution date and to provide for an orderly transition, Riverstone has
entered into or will enter into various agreements with Cabletron and other
related parties, which were reflected in the financial statements starting
March 1, 2000. A brief description of each of the agreements follows.

 Transformation Agreement

  The Transformation Agreement contains key provisions relating to the
separation of the Company and other related parties from Cabletron, as well as
the initial public offering and the distribution of shares of the Company and
other related parties to Cabletron stockholders. The agreement lists the
documents and items that the parties delivered in order to accomplish the
transfer of assets and liabilities from Cabletron to the Company, effective on
the contribution date. The agreement also provides that the Company will not
commence the initial public offering without the approval of Cabletron and
Cabletron shall, in its sole and absolute discretion, determine whether to
consummate the distribution. The agreement also contains covenants relating to
exchange of information, auditing practices, resolution of disputes and other
matters.

 Asset Contribution Agreement

  The Asset Contribution Agreement identifies the assets that Cabletron
transferred to the Company and the liabilities that the Company assumed from
Cabletron on the contribution date. The agreement also describes when and how
these transfers and assumptions were to occur.

  Pursuant to the Asset Contribution Agreement, as consideration for the
contribution of assets to the Company, Cabletron received 92,088,135 shares of
Series A Convertible Preferred Stock of the Company. The Series A Convertible
Preferred Stock was senior to the common stock of the Company and had a
liquidation preference equal to $7.00 per share. The Series A Convertible
Preferred Stock was convertible into common stock of the Company at a 1:1
ratio (subject to adjustment for stock splits and other recapitalization
events) and automatically converted into common stock of the Company upon the
completion of the initial public offering of shares of the Company's common
stock on February 22, 2001.

  Pursuant to the services agreement described below, an intercompany account
will be maintained and administered by Cabletron which will track the
intercompany amount ("I/C Amount"). The asset contribution agreement, provided
that Cabletron contribute or deduct an amount from the I/C Amount on the
contribution date such that Riverstone's net working capital, defined as
combined current assets minus combined current liabilities, as of June 3,
2000, pro forma to give effect to the separation, including the contribution
to or deduction from the I/C Amount as of that date, was $60,000.

  In association with the transformation, beginning on June 3, 2000, the
Cabletron central treasury began to administer the cash account of each
subsidiary. The subsidiaries each receive an interest income allocation
consistent with the return on the portfolio managed by Cabletron. The interest
is based on the average cash balance attributable to each subsidiary. In
accordance with this method, for the twelve months ended March 3, 2001,
Riverstone received an interest allocation of approximately $1,994 based on an
average portfolio return of 6.1%.

 Commercial Agreements with Related Parties

  Riverstone has entered into commercial agreements with Aprisma, GNTS and
Enterasys (collectively known as "other related parties") to govern the
relationships between Riverstone and the other related parties. These
agreements establish the prices and other terms and conditions under which
Riverstone will provide and obtain

                                      66
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

products and services to and from the other related parties. Each of these
agreements provide that their terms will remain operative for three years or
until a more definitive inter-company operating agreement between the parties
is executed and becomes effective.

 Services Agreement

  The Company and Cabletron have entered into a services agreement that
formalizes the terms and conditions under which Cabletron provides services to
the Company. The services to be provided by Cabletron thereunder include
information technology support services for functions including accounting,
treasury and financial and cash account administration, tax, payroll,
stockholder and public relations, legal, human resources, and other
administrative functions.

  Pursuant to the services agreement, the Company maintains an intercompany
account with Cabletron. Cabletron administers this account as part of the
treasury services provided to the Company under the services agreement.

  The services agreement also allows the Company's eligible employees to
continue to participate in Cabletron's benefits plans on comparable terms and
conditions as existed prior to the contribution date until the date of the
distribution by Cabletron of the common stock of the Company it holds to its
stockholders or until the Company establishes benefit plans for its employees,
or elects not to establish comparable plans, if it is not legally or
financially practical. The services agreement also describes the manner in
which Cabletron will share with the Company its owned and leased properties
and office space.

  The services agreement permits Cabletron to engage subcontractors to perform
all or any portion of the services described therein. The agreement allows the
Company and Cabletron to adjust from time to time the nature and level of
services provided by Cabletron to the Company thereunder. The services
agreement specifies charges for the services provided by Cabletron to the
Company. The initial term of the services agreement expires on August 28,
2002. The Company may terminate the services agreement with respect to all or
any of the services provided under the agreement by providing written notice
of at least a full fiscal quarter prior to such termination, provided that the
Company may not terminate certain basic services for so long as it is a
majority owned subsidiary of Cabletron. The Company is responsible for any
additional costs imposed by third parties against Cabletron that result from
such a termination. Cabletron may terminate the services agreement with
respect to any or all of the services provided under the agreement by
providing the Company at least sixty days prior written notice.

 Tax Sharing Agreement

  The tax sharing agreement provides that for periods through and including
the distribution by Cabletron of the Company's capital stock held by Cabletron
to its stockholders, Cabletron will file all consolidated, combined or unitary
income tax returns required to be filed by Cabletron with respect to the
Company. For all periods beginning before the Company's distribution, the
Company agreed to file all other income tax returns required to be filed by
the Company and to be responsible for all taxes due in respect of such
returns. For periods through and including the Company's distribution, the
Company agreed to file all other tax returns required to be filed by it, and
to be responsible for all taxes due with respect to such returns. The
agreement also requires Cabletron to pay all taxes due on returns filed by
Cabletron. The Company is required to pay Cabletron an amount equal to its tax
liability for periods covered by such returns, determined on a separate return
basis, as determined by Cabletron in its sole discretion. The agreement also
requires Cabletron to pay the Company for any benefits realized by Cabletron
or other related parties from the use of the Company's tax attributes. The
agreement also

                                      67
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

provides that Cabletron is required to pay any tax due and will receive all
refunds arising from adjustments in respect of returns filed by it, and the
Company must reimburse Cabletron for taxes to the extent attributable to it or
its business.

  The indemnity obligations of the Company and other related parties include
taxes and any interest and penalties thereon for which the Company and other
related parties are liable pursuant to the terms of the Tax Sharing Agreement.

  If the distribution of the Company, or of another related party to the
agreement, to Cabletron's stockholders fails to qualify as a tax-free
transaction, and such failure is the sole responsibility of the party whose
stock is being distributed, or if such failure results from the stock of such
party being acquired by one or more persons such that it is no longer treated
as "qualified property" under section 355(c)(2) of the Internal Revenue Code,
the party whose stock is being distributed shall indemnify each other party
against any resulting taxes or other damages. If the Company's distribution,
or the distribution of another related party to the agreement, fails to
qualify as a tax-free transaction, and such failure is the responsibility both
of the party whose stock is being distributed and of Cabletron, the party
whose stock is being distributed and Cabletron shall severally indemnify each
other party against any resulting taxes or other damages, each in proportion
to its market value. If the Company's distribution, or the distribution of
another related party to the agreement, fails to qualify as a tax-free
distribution, and such failure is the sole responsibility of Cabletron, or if
such failure results from the stock of Cabletron being acquired by one or more
persons such that the stock that is being distributed is no longer treated as
"qualified property" under section 355(c)(2) of the Internal Revenue Code,
Cabletron shall indemnify each other party against any resulting taxes or
other damages.

  Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, the Company and other related parties to the agreement could be
required to pay a deficiency in the group's federal income tax liability for a
period during which the Company and other related parties were members of the
group event if the Tax Sharing Agreement allocates that liability to Cabletron
or another member.

  The agreement also assigns responsibilities for certain administrative
matters such as the filing of returns, payment of taxes due, retention of
records, and the conduct of audits, examinations or similar proceedings.

  On August 28, 2000, the closing of the transactions contemplated by the
transformation agreement and contribution agreement described above occurred
and the Company's separation from Cabletron became effective.

Note (19) Manufacturing and Key Suppliers

  The Company does not have internal manufacturing capacity. The Company
currently outsources all manufacturing to one company, Flextronics
International, Ltd., which manufactures its RS and IA products in San Jose,
California.

  If the demand for products grows, the Company will need to increase material
purchases and contract manufacturing capacity with Flextronics or add
additional contract manufacturers. The Company intends to regularly introduce
new products and product enhancements, which will require that the Company
rapidly achieve volume production by coordinating efforts with those of
suppliers and contract manufacturers.

  The Company currently purchases several key components used in the
manufacture of products from single or limited sources and is dependent upon
supply from these sources to meet our needs. The Company has worked

                                      68
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

with two suppliers to develop several key proprietary application specific
integrated circuits ("ASICs") which are custom designed integrated circuits
built to perform a specific function more rapidly than a general purpose
microprocessor. These proprietary ASICs are very complex and each supplier is
currently the sole source supplier for the specific types of ASICs that it
supplies to the Company. The Company does not have a long-term fixed price or
minimum volume agreement with either of these suppliers.

Note (20) The Strategic Investors

  Stock Purchase Rights Issued. On August 29, 2000, Cabletron entered into an
amended securities purchase agreement with Silver Lake Partners, L.P. and
granted to the strategic investors rights to purchase shares of the Company's
common stock. In the transformation agreement, the Company agreed with
Cabletron to perform its obligations under the securities purchase agreement.
The stock purchase rights provide for an adjustment so that if the Company
issues additional stock options to directors, officers, employees or
consultants, shares subject to the stock purchase right will be issuable at
the same aggregate purchase price for a number of shares sufficient to
maintain approximately the same fully-diluted percentage ownership level of
the Company's common stock as if such additional stock options had not been
issued. As adjusted through February 15, 2001, the strategic investors held
rights to purchase:

  .  up to 980,998 shares of common stock at a purchase price of $7.95 per
     share;

  .  up to an additional 1,961,996 shares of common stock at a purchase price
     of $7.95 per share;

  .  up to 1,961,996 shares of common stock at a purchase price of $9.17 per
     share; and

  .  up to 653,999 shares of common stock at a purchase price of $11.62 per
     share.

  According to the terms of these stock purchase rights, these stock purchase
rights were each adjusted to 90% of the gross price paid per share in the
Company's initial public offering if that resulted in a purchase price lower
than the purchase price stated above, except in the case of the 1,961,996
shares with an initial purchase price of $7.95 per share. The Company had the
right to require the strategic investors to purchase the 980,998 shares with
an initial purchase price of $7.95 per share. The stock purchase rights also
permitted the exercise of these rights through the conversion of all or a
portion of the rights into a number of shares of the Company's common stock
having a market value equal to the difference between the aggregate market
value of and the aggregate exercise price for the shares of the Company's
common stock subject to the converted portion of the stock purchase rights.
Upon effectiveness of the Company's registration statement relating to its
initial public offering, the strategic investors elected to exercise stock
purchase rights such that the Company issued 5,401,970 shares of its common
stock. The proceeds to the Company were approximately $46,577.

  IPO Valuation Warrants. Because the gross price per share of common stock
issued in the Company's initial public offering multiplied by the number of
shares of common stock outstanding immediately after the offering on a fully
diluted basis exceeded $1.672 billion, the Company was required to issue to
the strategic investors 104,167 warrants to purchase shares of the Company's
common stock representing $1.25 million divided by the gross price of per
share paid in the offering. The exercise price for these warrants is $12 per
share and they will expire on the third anniversary of the date of issuance.

  Spin-Off Warrants. Concurrently with a distribution by Cabletron of the
Company's capital stock to its stockholders, the Company is required to issue
to the strategic investors warrants to purchase a number of shares equal to
the number of shares that the investors would have received in the
distribution if the investors had exercised the Cabletron warrants they hold
immediately prior to the record date for the distribution. Subject to the
adjustments provided in the Cabletron warrants as of March 3, 2001, the
warrants represent the right to buy

                                      69
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

250,000 shares of Cabletron common stock at an exercise price of $45 per share
and the right to buy an additional 200,000 shares of Cabletron common stock at
an exercise price of $35 per share. Based upon Cabletron's ownership of common
stock of the Company as of March 3, 2001, the strategic investors' current
holding of Cabletron warrants, and assuming no change in the number of
outstanding shares of Cabletron capital stock outstanding from the 188,511,262
shares outstanding at March 3, 2001, the total number of shares subject to the
new warrants that the Company would issue to the investors relating to a
distribution by Cabletron of the Company's capital stock to its stockholders
would be approximately 219,300. These new warrants will have an aggregate
exercise price that bears the same relationship to the aggregate exercise
price for the Cabletron warrants as the equity value of the Company bears to
the equity value of Cabletron at the time the Company issues the new warrants.
The warrants expire on the later of August 30, 2007 and the third anniversary
of the distribution by Cabletron of the Company's capital stock to its
stockholders.

  In addition, the strategic investors have purchased preferred stock and
warrants in Cabletron and rights to acquire common stock of each of Aprisma,
Enterasys and GNTS. After deducting transaction fees and expense fees payable
by Cabletron to the strategic investors, the strategic investors paid $87,750
for all of the above-mentioned instruments. Of this aggregate consideration,
Cabletron paid to the Company $7,168, which was determined to be equal to the
portion of the aggregate consideration allocated to the purchase rights, IPO
valuation warrants and spin-off warrants issued or to be issued by the
Company. The allocated purchase price has increased the cash and additional
paid in capital of the Company.

Note (21) Contingencies

  The Company has granted options to purchase shares of its common stock to
its employees and to employees of Cabletron and its affiliates and to
consultants and advisors. As a result of the nature of the persons who
received these options and the vesting provisions of these options, the
Company may have violated the California state securities laws because it did
not qualify option grants prior to February 22, 2001 under California state
securities laws. Accordingly, the Company is offering to repurchase
outstanding options to purchase shares of its common stock granted prior to
February 22, 2001 to persons who resided in California at the time of grant.
As of May 29, 2001, there were 26,984,550 shares of common stock underlying
such options. Cabletron has agreed to indemnify the Company for any amounts
paid and any expenses incurred in connection with the rescission offer.

Note (22) Leases

  The Company's principal administrative, sales, marketing and research and
development facilities are located in an approximately 129,200 square foot
facility located in Santa Clara, California. A subsidiary of Cabletron entered
into a lease with respect to this January of 1999, and assigned this lease to
the Company effective August 28, 2000 in connection with the Company's
separation from Cabletron. The initial term of the lease expires on February
28, 2006.

  Future minimum payments as of March 3, 2001 under the operating leases
consist of the following:

<TABLE>
<CAPTION>
                                                                        Fiscal
                                                                         Year
                                                                        -------
      <S>                                                               <C>
      2002.............................................................   2,941
      2003.............................................................   3,063
      2004.............................................................   3,183
      2005.............................................................   3,305
      2006.............................................................   3,431
                                                                        -------
        Total minimum lease payments................................... $15,923
                                                                        =======
</TABLE>

                                      70
<PAGE>

                           RIVERSTONE NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              (in thousands, except share and per share amounts)

  Rental expenses for years ended February 28, 1999, February 29, 2000 and
March 3, 2001 were $1,886, $1,390 and $2,906, respectively.

Note (23) Subsequent Event

  On March 28, 2001, Cabletron announced that it received a private letter
ruling from the Internal Revenue Service indicating that the distribution of
Cabletron's shares of our common stock to Cabletron's stockholders will be
tax-free to Cabletron and its stockholders. The private letter ruling is
subject to potential amendments and to compliance with representations made by
Cabletron to the Internal Revenue Service. Cabletron will not be able to rely
on the ruling if any of the representations or assumptions on which the ruling
is based are, or become, incorrect or untrue in any material respect. On March
28, 2001, Cabletron also announced that it anticipated that, subject to
prevailing market conditions and other factors, the distribution will be
completed within four to seven months from the date of the announcement.
Cabletron is not obligated to complete the distribution, and there can be no
assurance that the distribution will occur. Cabletron will, in its sole
discretion, determine the timing, structure and all terms of its distribution
of our common stock that it owns.


                                      71
<PAGE>

                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                (in thousands)

<TABLE>
<CAPTION>
                             Balance at                           Balance at
                            the beginning  Charged     Amounts      the end
Description                 of the period to expense written off of the period
-----------                 ------------- ---------- ----------- -------------
<S>                         <C>           <C>        <C>         <C>
Allowance for doubtful
 accounts:
  February 28, 1999........    $  --        $   30      $ --        $   30
  February 29, 2000........        30        1,727        (85)       1,672
  March 3, 2001............     1,672        1,933       (234)       3,371
Inventory reserves:
  February 28, 1999........    $  --        $  473      $ --        $  473
  February 29, 2000........       473        1,692       (243)       1,922
  March 3, 2001............     1,922        3,315       (806)       4,431
</TABLE>

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

  None.

                                   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 "Proposal 1: Election of Class I Directors," appearing in the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders, 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.

ITEM 11. Executive Compensation

  See the information set forth in the section entitled "Executive
Compensation," appearing in the Company's Proxy Statement for its 2001 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 "Securities Ownership
of Certain Beneficial Owners and Management," appearing in the Company's Proxy
Statement for its 2001 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 2001 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. Financial statements--See Index to Consolidated Financial Statements at
Item 8 on page 38 of this Report on Form 10-K.


                                      72
<PAGE>

  2. Financial Statement Schedules--The following financial statement schedule
of Riverstone Networks, Inc. is filed as part of this Report on Form 10-K and
can be found on page 72 of this Report on Form 10-K: Schedule II - Valuation
and Qualifying Accounts.

  3. Exhibits--The following exhibits are filed as part of, or incorporated by
reference into, this Report on Form 10-K:

<TABLE>
<CAPTION>
  Exhibit
    No.                                 Description
  -------                               -----------
 <C>       <S>
   2.1#**  Amended and Restated Transformation Agreement effective as of June
           3, 2000 among Cabletron, Aprisma, Enterasys, GNTS and the
           Registrant.

   2.2#**  Amended and Restated Asset Contribution Agreement effective as of
           June 3, 2000 between Cabletron and the Registrant.

   2.3**   Tax Sharing Agreement dated as of June 3, 2000 among Cabletron,
           Aprisma, Enterasys, GNTS and the Registrant.

   2.4**   Memorandum of Agreement regarding Aprisma-Riverstone Inter-Company
           Operations dated June 3, 2000.

   2.5**   Memorandum of Agreement regarding Enterasys-Riverstone Inter-Company
           Operations dated June 3, 2000.

   2.6**   Memorandum of Agreement regarding GNTS-Riverstone Inter-Company
           Operations dated June 3, 2000.

   2.7**   Services Agreement between Cabletron and the Registrant dated August
           28, 2000.

   2.8**   Distribution-Related Option Agreement among Cabletron, Aprisma,
           Enterasys, GNTS and the Registrant.

   3.1**   Amended and Restated Certificate of Incorporation of the Registrant.

   3.2**   Amended and Restated By-Laws of the Registrant.

   4.1**   Form of the Registrant's Common Stock Certificate.

   4.2**   Amended and Restated Security Purchase Agreement between Cabletron
           and Silver Lake, dated August 29, 2000.

   4.3**   Assignment Agreement among Silver Lake and the Investors named
           therein, dated August 29, 2000.

   4.4**   Form of Stock Purchase Right.

   4.5**   Form of Warrant.

   4.6**   Registration Rights Agreement between the strategic Investors and
           the Registration, dated August 29, 2000.

   4.7**   Standstill Agreement between Cabletron and Silver Lake Partners
           dated August 29, 2000.

  10.1-**  Riverstone Networks, Inc. 2000 Equity Incentive Plan.

  10.2-**  Riverstone Networks, Inc. Form of Option Grant.

  10.3-**  Form of the Company's Change-In-Control Severance Benefit Plan for
           Key Employees.

  10.4     [Intentionally omitted.]

  10.5     [Intentionally omitted.]

  10.6     [Intentionally omitted.]

  10.7     [Intentionally omitted.]
</TABLE>

                                      73
<PAGE>

<TABLE>

<CAPTION>
  Exhibit
    No.                                Description
  -------                              -----------
 <C>       <S>
  10.8+**  Flextronics International Manufacturing Services Contract dated as
           of March 1, 2000.

  10.8.1** Enterasys-Riverstone FMA Products Agreement dated as of September
           29, 2000.

  10.9-**  Promissory Note dated April 12, 2000 of Romulus Pereira.

  10.10**  Lease Agreement between WMP II Real Estate Limited Partnership and
           Cabletron Systems Sales and Service, Inc., dated January 6, 1999,
           together with Estoppel Certificate dated June 13, 2000.

  10.11**  Assignment of Lease effective August 28, 2000 between Cabletron
           Systems Sales and Service, Inc.

  10.12+** Strategic Alliance Agreement between the Registrant and Tellabs
           Operations, Inc. dated November 17, 2000.

  10.16-** Riverstone Networks, Inc. 2000 Equity Incentive Plan Nonstatutory
           Stock Option granted to Piyush Patel.

  10.17-** Riverstone Networks, Inc. 2000 Equity Incentive Plan Nonstatutory
           Stock Option granted to David Kirkpatrick.

  10.18-** Riverstone Networks, Inc. 2000 Equity Incentive Plan Nonstatutory
           Stock Option granted to Eric Jaeger.

  21.1**   Subsidiaries of the Registrant.

  23.1     Consent of Independent Auditors.
</TABLE>
--------
-   Indicates management contract or compensatory plan or arrangement.
**  Incorporated by reference to the same numbered exhibit to the Registrant's
    Registration Statement on Form S-1, File No. 333-45958, originally filed
    with the Commission on September 18, 2000, as amended.
#  The Registrant agrees to furnish supplementally to the Commission a copy of
   any omitted schedule or exhibit to the agreement upon request by the
   Commission.
+  Confidential treatment has been granted by the Commission for portions of
   this exhibit. An unredacted version of this exhibit has been filed
   separately with the Commission.


                                      74
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements 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.

                                          Riverstone Networks, Inc.

                                                  /s/ Romulus Pereira
                                          By: _________________________________
                                                      Romulus Pereira
                                                 President, Chief Executive
                                                    Officer and Director

            June 1, 2001
__________________________________
                Date

  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.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
       /s/ Romulus Pereira             President, Chief Executive    June 1, 2001
______________________________________  Officer and Director
           Romulus Pereira              (principal executive
                                        officer)
        /s/ Robert Stanton             Executive Vice President      June 1, 2001
______________________________________  of Finance and Chief
            Robert Stanton              Financial Officer
                                        (principal financial and
                                        accounting officer)
         /s/ Piyush Patel              Chairman of the Board         June 1, 2001
______________________________________
             Piyush Patel
         /s/ Eric Jaeger               Secretary and Director        June 1, 2001
______________________________________
             Eric Jaeger
          /s/ C. Lee Cox               Director                      June 1, 2001
______________________________________
              C. Lee Cox
      /s/ Jorge A. del Calvo           Director                      June 1, 2001
______________________________________
          Jorge A. del Calvo
     /s/ Christopher Paisley           Director                      June 1, 2001
______________________________________
         Christopher Paisley
</TABLE>

                                      75