SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

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

                   For the fiscal year ended February 28, 1998

                                       OR

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

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

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


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

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

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

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


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

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

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

                                YES X NO

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

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



<PAGE>

This  Amendment on Form 10-K/A  amends Items 3, 6, 7, 8 and 14 of the  Company's
Annual  Report on Form 10-K  previously  filed for the year ended  February  28,
1998.  This  Annual  Report  on Form  10-K/A  is  filed in  connection  with the
Company's   restatement  of  its  financial   statements.   Financial  statement
information  and related  disclosures  included in this amended filing  reflect,
where  appropriate,   changes  as  a  result  of  the  restatements.  All  other
information contained in this Annual Report on Form 10-K/A is as the date of the
original filing.



                                TABLE OF CONTENTS



                                     PART I


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

     3.  Legal Proceedings                                                 2


                                     PART II


     6.  Selected  Financial  Data                                      4 - 5
     7.  Management's  Discussion  and Analysis  of  Financial
         Condition  and  Results  of  Operations                        6 - 16
     8.  Consolidated Financial  Statements  and  Supplementary  Data  17 - 37





                                     PART IV

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



<PAGE>


                                     PART I


ITEM 3.  Legal Proceedings

Since October 24, 1997, nine  stockholder  class action lawsuits have been filed
against  Cabletron and certain officers and directors of Cabletron in the United
States District Court for the District of New Hampshire.  The complaints  allege
that Cabletron and several of its officers and directors disseminated materially
false and  misleading  information  about  Cabletron's  operations  and acted in
violation of Section  10(b) and Rule 10b-5 of the Exchange Act during the period
between  March 3, 1997 and  December 2, 1997.  The  complaint  also alleges that
certain of the Company's alleged accounting practices resulted in the disclosure
of  materially  misleading  financial  results  during  the  same  period.  More
specifically,   the  complaint  challenged  the  Company's  revenue  recognition
policies, accounting for product returns, and the validity of certain sales. The
complaint  does not specify the amount of damages sought on behalf of the class.
On March 3, 1998,  the United  States  District  Court for the  District  of New
Hampshire  granted the motion to  consolidate  the nine class action  complaints
against  Cabletron  and its officers and directors  into one class  action.  The
legal costs  incurred by  Cabletron  in  defending  itself and its  officers and
directors  against  this  litigation,  whether  or not  it  prevails,  could  be
substantial,  and in the event that the plaintiffs  prevail,  Cabletron could be
required to pay substantial  damages.  This litigation may be protracted and may
result in a diversion  of  management  and other  resources  of  Cabletron.  The
payment of  substantial  legal costs or damages,  or the diversion of management
and other  resources,  could  have a  material  adverse  effect  on  Cabletron's
business, financial condition or results of operations.


<PAGE>

ITEM 6. Selected Financial Data

CABLETRON SYSTEMS, INC.

Statement of Operations Data:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>

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

                                        February 28,   February 28,  February 29,  February 28,  February 28,
                                            1998           1997          1996          1995          1994
                                        ------------   ------------  ------------  ------------  ------------
                                         (Restated)     (Restated)
<S>                                   <C>            <C>            <C>           <C>           <C>

Net sales ...........................   $ 1,377,330    $ 1,406,552   $ 1,100,349   $   833,218   $   602,486
Cost of sales .......................       676,291        595,407       448,699       340,424       246,154
Research and development ............       181,777        161,674       127,289        89,129        61,456
Selling, general and administrative .       373,789        301,469       223,083       166,649       118,373
Special charges .....................       234,285         21,724        94,343           ---           ---
                                        -----------    -----------   -----------   -----------   -----------
Income (loss)  from operations ......       (88,812)       326,278       206,935       237,016       176,503
Interest income .....................        18,578         19,422        17,891         5,572         5,948
                                        -----------    -----------   -----------   -----------   -----------
Income (loss) before taxes ..........       (70,234)       345,700       224,826       242,588       182,451
Income tax expense (benefit) ........       (35,273)       119,621        80,341        86,014        64,130
                                        -----------    -----------   -----------   -----------   -----------
Net income (loss) ...................   ($   34,961)   $   226,079   $   144,485   $   156,574   $   118,321
                                        ===========    ===========   ===========   ===========   ===========
Net income (loss) per share - basic .   ($     0.22)   $      1.46   $      0.95   $      1.08   $      0.82
                                        ===========    ===========   ===========   ===========   ===========
Net income (loss) per share - diluted   ($     0.22)   $      1.42   $      0.93   $      1.07   $      0.81
                                        ===========    ===========   ===========   ===========   ===========
Weighted average number of shares
    outstanding - basic .............       157,686        155,207       151,525       145,125       143,692
                                        ===========    ===========   ===========   ===========   ===========
Weighted average number of shares
    outstanding - diluted ...........       157,686        158,933       155,171       147,017       146,567
                                        ===========    ===========   ===========   ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                                            FISCAL YEAR ENDED
(in thousands, except per share data)        ---------------------------------------------

                                              February 28,   February 28,   February 29,
                                                  1998           1997           1996
                                              -------------- -------------- --------------
                                                (Restated)     (Restated)
<S>                                         <C>            <C>             <C>

Pro forma net income                             $108,339       $239,579       $205,285
Pro forma diluted net income per share           $   0.68       $   1.51       $   1.32
</TABLE>

<TABLE>
<CAPTION>

Balance Sheet Data:                           February 28,    February 28,   February 29,  February 28,  February 28,
(in thousands)                                    1998           1997           1996           1995          1994
                                              ------------   ------------    -----------   ------------  ------------
                                               (Restated)     (Restated)
<S>                                         <C>             <C>            <C>            <C>           <C>

Working capital                               $  593,046       $  679,056      $485,152      $381,758      $258,463
Total assets                                   1,682,048        1,310,809       996,908       702,200       502,377
Stockholders' equity                           1,085,075        1,085,452       809,886       593,942       425,719

</TABLE>

<PAGE>
As previously reported,  in its Form 10-Q filed on October 16, 1998, the Company
received comments from the staff of the Securities & Exchange Commission ("SEC")
on  the  Company's  financial  statements,  particularly  with  respect  to  the
accounting for recent acquisitions.  Based upon these comments,  the Company has
agreed  to make  certain  revisions  to the  consolidated  financial  statements
contained in this Amended Form 10-K for the  Company's  year ended  February 28,
1998.  The SEC has  indicated  that,  based upon the  revisions  the Company has
agreed  to  make,  it has no  further  comments  on  the  affected  consolidated
financial  statements.   The  revisions  relate  primarily  to  special  charges
associated  with the  acquisition  of the  Network  Products  Group  of  Digital
Equipment  Corporation  ("DNPG"),  during the  fourth  quarter of the year ended
February  28,  1998 and  special  charges  associated  with the  acquisition  of
ZeitNet, Inc. ("ZeitNet"),  during the second quarter of the year ended February
28, 1997. The Company has also  reclassified  certain other expenses  related to
the DNPG acquisition and to three acquisitions consummated during the year ended
February 28, 1997  (ZeitNet,  Network  Express,  Inc.  and  Netlink,  Inc.) from
special  charges  to cost of  sales  and  selling,  general  and  administrative
expenses. The reclassifications had no effect on net income (loss).

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


<PAGE>


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

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

Results of Operations

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


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

Net sales .........................      100.0%     100.0%    100.0%
Cost of sales .....................       49.1       42.3      40.8
                                         -----      -----     -----
Gross profit ......................       50.9       57.7      59.2
Research and development ..........       13.2       11.5      11.6
Selling, general and administrative       27.1       21.5      20.3
Special charges ...................       17.0        1.5       8.6
                                         -----      -----     -----
Income (loss) from operations .....       (6.4)      23.2      18.7
Interest income ...................        1.3        1.4       1.6
                                         -----      -----     -----
Income (loss) before income taxes .       (5.1)      24.6      20.3
                                         -----      -----     -----
Income tax expense (benefit).......       (2.6)       8.5       7.2
                                         -----      -----     -----
Net income (loss) .................       (2.5%)     16.1%     13.1%
                                         =====      =====     =====


Acquisitions

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

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

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

Revenues

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

<PAGE>

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

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

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

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

Costs, Expenses and Interest Income

Cost of sales was $676.3 million or 49.1% of net sales in fiscal 1998,  compared
to $595.4  million or 42.3% of net sales in fiscal  1997 and  $448.7  million or
40.8% of net sales in fiscal 1996. The increase in cost of sales as a percentage
of net sales is primarily attributable to (i) pricing pressures on the Company's
products,  especially in foreign  markets which  traditionally  carried a higher
margin,  which  resulted in a lower  selling  price per product and (ii) effects
from inventory  write-offs,  which increase the cost of sales as a percentage of
net sales. The Company was able to maintain its gross margins in fiscal 1997 and
1996 by introducing and selling  products with improved  functionality,  further
developing  its  service  maintenance  program  and  improving   purchasing  and
manufacturing efficiencies.

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

Selling,  general and  administrative  ("SG&A")  expenses were $373.8 million or
27.1% of net sales in fiscal  1998,  compared to $301.5  million or 21.4% of net
sales in fiscal  1997 and $223.1  million or 20.3% of net sales in fiscal  1996.
Increases  in SG&A  spending  resulted  from  expanding  the sales  and  support
workforce,   establishing   additional   office   locations   domestically   and
internationally,  the  addition  of  administrative  personnel  as a  result  of
acquisitions and increased  administrative spending primarily due to anticipated
increases in volume.  SG&A  expenses  increased as a percentage  of net sales in
fiscal 1998 primarily as a result of lower than expected sales.

In fiscal 1998 the Company had special charges of $234.3 million,  consisting of
(i) in-process research and development of $199.3 million in connection with the
acquisition of the DNPG and (ii) charges  relating to the Company's  realignment
of $35.0 million.  For fiscal 1997, a $21.7 million special charge was taken for
the  acquisitions of ZeitNet,  Network  Express,  Netlink and The OASys Group. A
portion of these  special  charges,  incurred  during  fiscal  1997,  related to
employee  severance costs related to small planned layoffs in each of the pooled
companies  primarily  in  the  areas  of  office  administration,   engineering,
marketing and senior  management.  In fiscal 1996 a $94.3 million special charge
was taken for the purchase of the ENBU of SMC and Fivemere Limited (purchased by
Network Express in fiscal 1996).
<PAGE>
Interest  income in fiscal 1998 was $18.5  million  compared to $19.4 million in
fiscal 1997 and $17.9 million in fiscal 1996.  The slight  decrease is primarily
the result of lower interest rates in fiscal 1998 than in fiscal 1997.

Realignment

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

Income (Loss)

Loss before  income taxes was $70.2 million or 5.1% of net sales in fiscal 1998,
compared to income before  income taxes of $345.7  million or 24.6% of net sales
in fiscal  1997 and  $224.8  million  or 20.3% of net sales in fiscal  1996.  In
fiscal  1998,  the Company had special  charges of $234.3  million,  compared to
$21.7 million in fiscal 1997 and $94.3  million in fiscal 1996.  The decrease in
income  before  income  taxes in fiscal 1998 was due in part to the  increase of
$212.6 million in special charges. The increase in income before income taxes in
fiscal  1997 was due in part to the  $72.6  million  decrease  in these  special
charges.  Excluding  special  charges,  income  before  income  taxes was $164.1
million in fiscal  1998,  $367.4  million in fiscal  1997 and $319.2  million in
fiscal 1996. In addition to the special  charges,  the decrease in income before
income  taxes in fiscal 1998 was also due to lower  revenues and the higher cost
of sales. The factors affecting  revenues and cost of sales are discussed above.
The tax benefit was calculated  using an effective tax rate of 50.2%,  in fiscal
1998,  compared to fiscal 1997 tax expense was calculated using an effective tax
rate of 34.6%. The tax benefit was a result of a loss before income taxes during
fiscal 1998.  Loss after taxes was $35.0 million  compared to income after taxes
of $226.1 million in fiscal 1997.

1998 Acquisition

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

The Company has  historically  maintained  higher  levels of inventory  than its
competitors  in the  networking  industry  in order to  implement  its policy of
shipping  most  orders  requiring  immediate  delivery  within  24 to 48  hours.
Worldwide  inventories  were $309.7  million at February 28, 1998 or 157 days of
inventory, compared to $203.4 million or 109 days of inventory at the end of the
preceding fiscal year. The increase of days in inventory was the result of lower
sales and the  introduction  of a new product line,  the  SmartSwitch  family of
products.

Net cash  provided by  operating  activities  was $49.5  million in fiscal 1998,
compared to $188.8 million in fiscal 1997 and $151.3 million in fiscal 1996. The
decrease was primarily a result of higher accounts receivable and inventory.  In
the Company's  acquisition  of the DNPG,  part of the purchase price was paid in
$302.5 million of product credits which Digital can use through February 7, 2000
to purchase  certain  Cabletron  products  that are ordered  under the  Reseller
Agreement. As a result of these products credits, net cash provided by operating
activities  will not  increase  at the same rate of growth as net sales  through
February  7, 2000.  The use of products  credits by Digital  will not affect the
Company's income statement because the Company will recognize revenue as Digital
uses  product  credits.  See  Note  9  (Notes  to  the  Consolidated   Financial
Statements)  included  at  page  30 of  this  document  for  additional  details
regarding the product credits.

During fiscal 1998 capital expenditures were $74.2 million, which included $34.9
million in software and hardware products.  Capital expenditures for fiscal 1997
of $94.4 million  included $58.9 million for engineering  computer  hardware and
software and $3.3 million for leasehold improvements.  During fiscal 1996, $63.3
million of capital  expenditures  included  $9.8 million for  building  costs of
which $3.4  million  was for the  purchase  of an  engineering  building,  $21.4
million  for  engineering  computer  hardware  and  software,  $5.5  million for
manufacturing and related equipment and $19.0 million for expanding global sales
operations.

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

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

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

Business Environment and Risk Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New Accounting Pronouncements

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

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

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

<PAGE>

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

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



<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CABLETRON SYSTEMS, INC.

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

Assets                                                                             1998        1997
                                                                                   ----        ----
                                                                               (Restated)   (Restated)
<S>                                                                          <C>          <C>

Current assets:
    Cash and cash equivalents ..............................................   $  207,078   $  214,828
    Short-term investments (note 4) ........................................      116,979      165,396
    Accounts receivable, net of allowance for
      doubtful accounts ($21,043 and $15,476 in 1998
      and 1997, respectively) ..............................................      241,181      219,896
    Inventories (note 5) ...................................................      309,667      203,438
    Deferred income taxes (note 11) ........................................       81,161       55,061
    Prepaid expenses and other assets ......................................       89,396       34,691
                                                                               ----------   ----------
        Total current assets ...............................................    1,045,462      893,310
                                                                               ----------   ----------
Long-term investments (note 4) .............................................      123,272      188,081
Long-term deferred income taxes (note 11) ..................................      107,094       29,627
Property, plant and equipment, net (note 6) ................................      244,730      198,557
Intangible assets, net  ....................................................      161,490        1,234
                                                                               ----------   ----------
        Total assets .......................................................   $1,682,048   $1,310,809
                                                                               ==========   ==========


Liabilities and Stockholders' Equity

Current liabilities:
    Accounts payable .......................................................   $   79,969   $   68,604
    Current portion of long-term obligation (note 9) .......................      157,719          ---
    Accrued expenses (note 8) ..............................................      214,728      135,208
    Income taxes payable ...................................................          ---       10,442
                                                                               ----------   ----------
        Total current liabilities ..........................................      452,416      214,254
    Long-term obligation (note 8) ..........................................      132,500          ---
    Long-term deferred income taxes (note 11) ..............................       12,057       11,103
                                                                               ----------   ----------
        Total liabilities ..................................................      596,973      225,357
                                                                               ----------   ----------

Commitments and contingencies (notes 10 and 12)

Stockholders' equity:
    Preferred stock, $1.00 par value. Authorized
      2,000 shares; none issued                                                       ---          ---
    Common stock, $0.01 par value. Authorized
      240,000 shares; issued and outstanding 158,267
      and 156,305 shares in 1998 and 1997, respectively
                                                                                    1,583        1,563
    Additional paid-in capital .............................................      300,834      266,829
    Retained earnings ......................................................      781,878      816,839
                                                                               ----------   ----------
                                                                                1,084,295    1,085,231
    Cumulative translation adjustment ......................................          780          221
                                                                               ----------   ----------
        Total stockholders' equity .........................................    1,085,075    1,085,452
                                                                               ----------   ----------
        Total liabilities and stockholders' equity .........................   $1,682,048   $1,310,809
                                                                               ==========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.




<PAGE>
CABLETRON SYSTEMS, INC.

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


                                                                                       1998           1997          1996
                                                                                   -----------    -----------   -----------
                                                                                   (Restated)      (Restated)
<S>                                                                              <C>            <C>           <C>

Net sales ......................................................................   $ 1,377,330    $ 1,406,552   $ 1,100,349
Cost of sales ..................................................................       676,291        595,407       448,699
                                                                                   -----------    -----------   -----------
     Gross profit ..............................................................       701,039        811,145       651,650
Operating expenses:
     Research and development ..................................................       181,777        161,674       127,289
     Selling, general and administrative .......................................       373,789        301,469       223,083
     Special charges (note 3) ..................................................       234,285         21,724        94,343
                                                                                   -----------    -----------   -----------
         Income (loss)  from operations ........................................       (88,812)       326,278       206,935
Interest income ................................................................        18,578         19,422        17,891
                                                                                   -----------    -----------   -----------
         Income (loss) before income taxes .....................................       (70,234)       345,700       224,826
Income tax expense (benefit) (note 11) .........................................       (35,273)       119,621        80,341
                                                                                   -----------    -----------   -----------
         Net income (loss) .....................................................   ($   34,961)   $   226,079   $   144,485
                                                                                   ===========    ===========   ===========
Net income (loss) per share - basic ............................................   ($     0.22)   $      1.46   $      0.95
                                                                                   ===========    ===========   ===========
Net income (loss) per share - diluted ..........................................   ($     0.22)   $      1.42   $      0.93
                                                                                   ===========    ===========   ===========
Weighted average number of shares outstanding - basic ..........................       157,686        155,207       151,525
                                                                                   ===========    ===========   ===========
Weighted average number of shares outstanding - diluted ........................       157,686        158,933       155,171
                                                                                   ===========    ===========   ===========


</TABLE>









          See accompanying notes to consolidated financial statements.



<PAGE>

CABLETRON SYSTEMS, INC.

CONSOLIDATED  STATEMENTS OF  STOCKHOLDERS'  EQUITY
Years ended February 28, 1998 and 1997 and February 29, 1996
<TABLE>
<CAPTION>
<S>                                  <C>        <C>          <C>         <C>               <C>              <C>

----------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)           ADDITIONAL                CUMULATIVE           NOTES            TOTAL
                                        COMMON      PAID-IN    RETAINED    TRANSLATION        RECEIVABLE       STOCKHOLDERS'
                                         STOCK      CAPITAL    EARNINGS     ADJUSTMENT       STOCKHOLDERS         EQUITY
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1995              $757     $147,885    $447,033       ($1,364)             ($369)          $593,942
----------------------------------------------------------------------------------------------------------------------------
Repayments of notes receivable,
     stockholders                          ---          ---         ---            ---                218               218
Issuance of common stock, net                9       41,765         ---            ---                ---            41,774
Issuance of common stock for
     Fivemere acquisition                    1        2,564         ---            ---                ---             2,565
Exercise of options for 1,453
     shares of common stock                  8       17,214         ---            ---                ---            17,222
Tax benefit for options exercised          ---        7,215         ---            ---                ---             7,215
Issuance of 154 shares under
employee
     stock purchase plan                     1        3,322         ---            ---                ---             3,323
Stock repurchased and retired              ---       (1,173)        ---            ---                ---            (1,173)
Effect of foreign currency                 ---          ---         ---            315                ---               315
translation
Net income                                 ---          ---     144,485            ---                ---           144,485
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996               776      218,792     591,518        (1,049)              (151)           809,886
----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net               15        8,562         ---            ---                ---             8,577
Exercise of options for 1,345
     shares of common stock                 10       18,012         ---            ---                ---            18,022
Repayment of notes receivable              ---          ---         ---            ---                151               151
Issuance of common stock for The
     OASys Group acquisition                 2        6,955         ---            ---                ---             6,957
Tax benefit for options exercised          ---        8,302         ---            ---                ---             8,302
Stock split                                758          ---        (758)           ---                ---               ---
Issuance of 197 shares under
employee
     stock purchase plan                     2        6,206         ---            ---                ---             6,208
Effect of foreign currency translation     ---          ---         ---          1,270                ---             1,270
Net income (Restated)                      ---          ---     226,079            ---                ---           226,079
----------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997*            1,563      266,829     816,839            221                ---         1,085,452
----------------------------------------------------------------------------------------------------------------------------
Exercise of options for 1,751
     shares of common stock                 18       17,291         ---            ---                ---            17,309
Tax benefit for options exercised          ---       10,469         ---            ---                ---            10,469
Issuance of 231 shares under
employee
     stock purchase plan                     2        6,245         ---            ---                ---             6,247
Effect of foreign currency                 ---          ---         ---            559                ---               559
translation
Net loss (Restated)                        ---          ---     (34,961)           ---                ---           (34,961)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998*           $1,583     $300,834    $781,878           $780                ---        $1,085,075
---------------------------------------------------------------------------------------------------------------------------
* Restated

</TABLE>










          See accompanying notes to consolidated financial statements.

<PAGE>
CABLETRON SYSTEMS, INC.

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

                                                                                     1998         1997         1996
                                                                                   ---------    ---------    ---------
                                                                                  (Restated)   (Restated)
<S>                                                                              <C>          <C>          <C>

Cash flows from operating activities:
     Net income (loss) .........................................................   ($ 34,961)   $ 226,079    $ 144,485
     Adjustments  to  reconcile  net  income  (loss)  to net  cash  provided  by
     operating activities:
        Depreciation and amortization ..........................................      66,358       49,704       32,738
        Provision for losses on accounts receivable ............................       5,668        9,140          435
        Loss (gain) on disposal of property, plant and equipment ...............        (285)          87           93
        Purchased research and development from acquisitions ...................     199,300          ---       67,750
        Deferred income taxes ..................................................    (111,425)     (22,933)     (38,766)
        Changes in assets and liabilities:
           Accounts receivable .................................................     (31,847)     (74,925)     (55,795)
           Inventories .........................................................     (91,412)     (41,623)     (46,500)
           Prepaid expenses and other assets ...................................       1,213       (1,709)     (17,508)
           Accounts payable and accrued expenses ...............................      83,471       52,661       60,688
           Income taxes payable ................................................     (36,591)      (7,653)       3,705
                                                                                   ---------    ---------    ---------
              Net cash provided by operating activities ........................      49,489      188,828      151,325
                                                                                   ---------    ---------    ---------

Cash flows from investing activities:
        Capital expenditures ...................................................     (74,264)     (94,368)     (63,322)
        Cash portion of business acquisition ...................................    (129,107)         ---      (74,645)
        Purchase of available-for-sale securities ..............................    (118,919)    (203,667)    (124,968)
        Purchase of held-to-maturity securities ................................     (37,228)    (247,855)    (205,852)
        Sales/maturities of marketable securities ..............................     269,344      424,308      236,393
                                                                                   ---------    ---------    ---------
              Net cash used in investing activities ............................     (90,174)    (121,582)    (232,394)
                                                                                   ---------    ---------    ---------

Cash flows from financing activities:
        Repayment of notes receivable from stockholders ........................         ---          151          218
        Repurchase of common stock .............................................         ---          ---       (1,173)
        Tax benefit of options exercised .......................................      10,469        8,302        7,215
        Proceeds from sale of common stock .....................................         ---        8,577       41,774
        Common stock issued to employee stock purchase plan ....................       6,247        6,208        3,323
        Proceeds from exercise of stock options ................................      17,309       18,022       17,222
                                                                                   ---------    ---------    ---------
              Net cash provided by financing activities ........................      34,025       41,260       68,579
                                                                                   ---------    ---------    ---------
     Effect of exchange rate changes on cash ...................................      (1,090)         220          159
                                                                                   ---------    ---------    ---------
     Net (decrease) increase in cash and cash equivalents ......................      (7,750)     108,726      (12,331)
     Cash and cash equivalents, beginning of year ..............................     214,828      106,102      118,433
                                                                                   ---------    ---------    ---------
     Cash and cash equivalents, end of year ....................................   $ 207,078    $ 214,828    $ 106,102
                                                                                   =========    =========    =========
     Cash paid during the year for:
        Income taxes ...........................................................   $  57,941    $ 132,291    $ 142,733
                                                                                   =========    =========    =========

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note (1)    Business Operations

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

Note (2)    Summary of Significant Accounting Policies

(a)  Principles of Consolidation

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

(b)  Investments

Held-to-maturity  securities  are those  investments  which the  Company has the
ability  and  intent to hold until  maturity.  Held-to-maturity  securities  are
recorded at amortized cost, adjusted for amortization of premiums and discounts,
which approximates market value. Available-for-sale securities are also recorded
at amortized  cost,  adjusted for  amortization  of premiums and discounts.  The
Company's  investments  consist  principally  of high grade  obligations  of the
United States  government and various state,  county,  and municipal  government
notes  and  bonds.  Due to the  nature  of the  Company's  investments  and  the
resulting low volatility,  the difference  between fair value and amortized cost
is not material.

(c)  Inventories

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

(d)  Property, Plant and Equipment

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

(e)  Income Taxes

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

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

(f) Net Income (Loss) Per Share

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

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



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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


(g)  Foreign Currency Translation and Transaction Gains and Losses

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

(h)  Statements of Cash Flows

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

(i)  Revenue Recognition

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

(j)  Derivatives

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

(k) Reclassifications

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

(l) Use of Estimates

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






<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(m)  New Accounting Pronouncements

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

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

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

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

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

(n)      Restatements and Reclassifications

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

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

As a result,  the  Company  reduced  the  amount of its  charge  for  in-process
research and  development in connection with the acquisition of DNPG from $325.0
million to $199.3 million and, correspondingly,  increased the amounts allocated
to  intangible  assets  by  $125.7  million.  The  $125.7  million  increase  to
intangible   assets  was  allocated  as  follows  ($97.0  million  for  customer
relations,   $14.1   million  for  goodwill  and  $14.6  million  for  developed
technology)  and is being amortized by a non-cash charge to income over a period
of 5 - 10  years.  The  impact  for the year  end was  February  28,  1998 was a
decrease to special charges of $125.7 million and increased tax expense of $49.9
million.  The impact of this additional  amortization expense for the year ended
February 28, 1998 was  increased  SG&A of $1.1 million and increased tax benefit
of $0.4 million.

The Company has also reduced the amount of its special  charges  recorded in the
fourth  quarter of the year  ended  February  28,  1998 in  connection  with the
acquisition of DNPG by $33.2 million.  The reduction of special  charges related
to expenses recorded for contract  employee  benefits and contract  compensation
write-offs of $12.5 million,  software licenses and software tools costs of $7.0
million,  professional  fees and some facility  costs  reclassified  to purchase
price of $3.2  million,  customer  warranty  and  stock  rotation  costs of $3.0
million and other costs  reductions  in estimates  and  classifications  of $7.5
million.  The impact for the year ended February 28, 1998 was decreased  special
charges by $33.2 million and increased tax expense of $11.3 million.

To the extent  that a portion of these  costs  were  incurred  in the year ended
February  28, 1998,  the amounts are  included in the restated  results for this
year. The impact for the year ended February 28, 1998 was increased SG&A of $1.5
million and increased tax benefit of $0.5 million.
<PAGE>

The Company has also reduced the amount of its write down of inventory  recorded
in the year ended February 28, 1997 relating to the ZeitNet  acquisition by $6.0
million and has  recorded  the write down in the year ended  February  28, 1998,
upon disposal of the inventory.  The impact for the year ended February 28, 1998
was an  increase  to cost of sales of $6.0  million  and a tax  benefit  of $2.0
million.  The impact  for the year ended  February  28,  1997 was a decrease  of
special charges of $6.0 million and an increase to tax expense of $2.0 million.

The  Company  has  reclassified   certain  expenses  relating  to  its  business
combinations  from  special  charges to cost of sales and  selling,  general and
administrative  expense.  For the year ended  February 28, 1998,  $24.5  million
relating to the write down of Company  inventory made redundant and discontinued
as a  result  of the  acquisition  of DNPG has been  reclassified  from  special
charges to cost of sales.  For the year ended  February 28, 1997,  the amount of
special  charges  reclassified  to cost of sales  represented  the write down of
$20.3 million of inventory that was duplicative  and/or  rendered  obsolete as a
result of the acquisitions of ZeitNet,  Network Express and Netlink. The amounts
reclassified to selling,  general and administrative  expenses  represented $3.4
million for customer warranty costs, $2.8 million for contract termination, $1.5
million for stay bonuses and $7.3 million for other costs that were attributable
to the  businesses  acquired  during the year ended  February  28,  1997.  These
reclassifications  had no  impact  on net  income  (loss)  for the  years  ended
February 28, 1998 and 1997.

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

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

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

    Reduction of in-process research and
       development charge, related to the
       acquisition of DNPG                           (125,700)              ---
    Reduction of special charges, related
       to the acquisition of DNPG and
       ZeitNet, respectively                          (33,200)           (6,000)
    Reclassification to cost of sales related
       to the acquisition of DNPG                     (24,500)              ---
    Reclassification to cost of sales related
       to the acquisitions of ZeitNet, Network
       Express and Netlink                                ---           (20,300)
    Reclassification to selling, general and
       administrative expenses related to the
       acquisitions of ZeitNet, Network Express
       and Netlink                                        ---           (15,000)
                                                     --------           -------
Special charges, as restated                         $234,285           $21,724
                                                     ========           =======

Net income (loss), as originally reported           ($127,062)         $222,125
    Reduction of in-process research and
       development charge, related to the
       acquisition of DNPG, net of tax
       expense of $49.9 million                        75,838               ---
    Increase in amortization charges, related
       to the acquisition of DNPG, of
       intangible assets, net of tax benefit
       of $0.4 million                                   (659)              ---
    Reduction of special charges, related to
       the acquisition of DNPG, net of tax
       expense of $11.3 million                        21,899               ---
    Recognition of costs as incurred, related
       to the acquisition of DNPG, net of tax
       benefit of $0.5 million                         (1,023)              ---
    Recognition of ZeitNet inventory writedown,
       net of tax benefit of $2.0 million              (3,954)              ---
    Reduction of special charges, related to
       the acquisition of ZeitNet, net of tax
       expense $2.0 million                               ---             3,954
                                                     --------          --------
Net income (loss), as restated                       ($34,961)         $226,079
                                                     ========          ========
Net income (loss) per share - basic,                   ($0.81)            $1.43
     as originally reported                            =======            =====
Net income (loss) per share - diluted,                 ($0.81)            $1.40
     as originally reported                            =======            =====
Net income (loss) per share - basic,                   ($0.22)            $1.46
     as restated                                       =======            =====
Net income (loss) per share - diluted,                 ($0.22)            $1.42
     as restated                                       =======            =====
<PAGE>

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

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

The effect of the restatement on the  consolidated  balance sheet as of February
28, 1997 is as follows:

                                                  As Originally          As
(in thousands)                                       Reported         Restated
                                                  -------------     -----------
Inventories                                        $  197,438        $  203,438
Deferred income taxes                                  57,107            55,061
Total current assets                                  889,356           893,310
Total assets                                        1,306,855         1,310,809
Retained earnings                                     812,885           816,839
Total stockholders' equity                          1,081,498         1,085,452
Total liabilities and stockholders' equity         $1,306,855        $1,310,809

Note (3)  Business Combinations

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

On February 7, 1998, the Company acquired certain assets of the Network Products
Group  of  Digital  Equipment  Corporation  ("DNPG").  Under  the  terms  of the
agreement,  the purchase price was approximately  $439.5 million,  consisting of
cash, product credits and liabilities  resulting from the acquisition.  Based on
an independent appraisal, approximately $199.3 million of the purchase price was
allocated  to  in-process  research  and  development.   Accordingly,  Cabletron
recorded  special  charges of $199.3  million for this  in-process  research and
development  at the date of  acquisition.  The excess of cost over the estimated
fair value of $161.8  million was  allocated  to goodwill  and other  intangible
assets and is being amortized on a straight-line  basis over a period of 5 to 10
years. The Company's  consolidated  results of operations  include the operating
results of the acquired  business from the  acquisition  date.

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

On December 11, 1996, the Company acquired Netlink Inc. ("Netlink"), a privately
held  manufacturer  of frame relay  products.  Under the terms of the agreement,
Cabletron issued approximately 3.8 million shares of common stock for all of the
outstanding shares (and all shares issuable upon exercise of options) of Netlink
in a transaction accounted for as a pooling of interests. In connection with the
acquisition,   the  Company   recorded  special  charges  of  $1.8  million  for
professional  fees  and  $0.2  million  for  employee  severance.  The  employee
severance costs relate to small planned layoffs primarily in the areas of office
administration, engineering, marketing and senior management.

On August 1,  1996,  the  Company  acquired  Network  Express,  Inc.,  ("Network
Express") a publicly held  manufacturer of ISDN LAN switched  access  solutions.
Under the terms of the agreement,  Cabletron  issued  approximately  2.9 million
shares  of  common  stock  for all of the  outstanding  shares  (and all  shares
issuable upon exercise of options) of Network Express in a transaction accounted
for as a pooling of interests.  In connection with the acquisition,  the Company
recorded   special   charges  of  $5.5  million  for  in-process   research  and
development,  $3.1 million for  professional  fees and $1.7 million for employee
severance.  The  employee  severance  costs  relate  to  small  planned  layoffs
primarily  in the areas of office  administration,  engineering,  marketing  and
senior management.

On July 26, 1996,  the Company  acquired  ZeitNet Inc.,  ("ZeitNet") a privately
held manufacturer of ATM products.  Under the terms of the agreement,  Cabletron
issued  approximately  3.3  million  shares  of  common  stock  for  all  of the
outstanding shares (and all shares issuable upon exercise of options) of ZeitNet
in a transaction accounted for as a pooling of interests. In connection with the
acquisition,   the  Company   recorded  special  charges  of  $1.8  million  for
professional  fees  and  $0.6  million  for  employee  severance.  The  employee
severance costs relate to small planned layoffs primarily in the areas of office
administration, engineering, marketing and senior management.

On January 12, 1996, the Company acquired the Enterprise  Networks Business Unit
(ENBU) from Standard Microsystems Corporation. The acquisition was accounted for
as a  purchase  and,  accordingly,  the  acquired  assets and  liabilities  were
recorded at their  estimated fair market values at the date of the  acquisition.
The cash portion of the purchase  price was $74.6 million.  In connection,  with
the  acquisition,  the  Company  recorded  special  charges  of  $85.7  million,
consisting  of the  write-off  of  $67.8  million  of  in-process  research  and
development   and  $17.9  million  of  other  special   charges  which  included
adjustments  to  conform  the  ENBU  accounting   policies  with  the  Company's
accounting  policies.  The Company's  consolidated results of operations include
the operating results of the acquired business from its acquisition date.

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

<TABLE>
<CAPTION>

(in thousands)                                           (unaudited)
                                                         Fiscal 1997                  Fiscal 1996
                                               -------------------------------       -------------
                                                 Nine months       Six months        Twelve months
                                               ended 11/30/96    ended 8/31/96       ended 2/29/96
                                               --------------    -------------       -------------
<S>                                          <C>              <C>                 <C>

Net sales:
    Cabletron                                      $1,025,997         $664,439         $1,069,715
    ZeitNet                                               ---            2,140              4,395
    Network Express                                       ---            3,177             18,997
    Netlink                                             7,935              ---              7,242
                                                   ----------         --------         ----------
                   Pro forma total net sales       $1,033,932         $669,756         $1,110,349
                                                   ==========         ========         ==========

Operating income (loss):
    Cabletron                                        $234,842         $135,813         $  227,562
    ZeitNet                                               ---           (2,965)            (8,890)
    Network Express                                       ---           (2,293)            (9,415)
    Netlink                                            (2,856)             ---             (2,322)
                                                     --------         --------         ----------
            Pro forma total operating income         $231,986         $130,555         $  206,935
                                                     ========         ========         ==========

Net income (loss):
    Cabletron                                        $161,789          $94,047         $  164,418
    ZeitNet                                               ---           (2,972)            (8,938)
    Network Express                                       ---           (2,154)            (8,475)
    Netlink                                            (2,887)             ---             (2,520)
                                                     --------          -------         ----------
                  Pro forma total net income         $158,902          $88,921         $  144,485
                                                     ========          =======         ==========
</TABLE>

<PAGE>

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

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

Net Sales                               $1,878,476         $2,004,586
Operating income                           136,937            350,696


The  purchase  price  for each  acquisition,  completed  during  the year  ended
February 28, 1998, has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of  acquisition.  The  purchase  price is
summarized as follows:

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


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

Fair value of assets acquired                   $251,888
In-process research and development              199,300
Assumed liabilities                              (19,581)
Product credits                                 (302,500)
                                            -------------
     Cash portion of acquisition                $129,107
                                            =============


Note (4)  Investments

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

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

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


The Company's  investments  consist principally of high grade obligations of the
United States  government and various state,  county,  and municipal  government
notes and bonds.  The contractual  maturities for the above  securities are less
than three years.


Note (5)  Inventories

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

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

Raw materials                          $ 70,415         $ 64,685
Work-in-process                          24,521           57,070
Finished goods                          214,731           81,683
                                       --------         --------
Total                                  $309,667         $203,438
                                       ========         ========

<PAGE>

Note (6)  Property, Plant and Equipment

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

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

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


Note (7) Intangible Assets

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

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

Goodwill                              $20,160     $1,439   7 - 10 years
Customer relations                     97,000        ---        8 years
Assembled work force acquired
  in business acquisition               6,500        ---   7 - 10 years
Patents and technologies acquired
  in business acquisition              39,600        ---    3 - 5 years
                                      -------     ------
                                      163,260      1,439
Less accumulated amortization          (1,770)       205
                                      -------     ------
                                     $161,490     $1,234
                                     ========     ======


Note (8)  Accrued Expenses

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

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

Salaries and benefits                    $ 25,152          $ 15,527
Deferred revenue                           74,414            50,041
Warranty                                   18,669            19,315
Other                                      96,493            50,325
                                         --------          --------
      Total                              $214,728          $135,208
                                         ========          ========

Note (9) Long-Term Obligation

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

(in thousands)

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

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


Note (10)  Leases

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

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

(in thousands)            Year

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



Note (11) Income Taxes

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

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

Total US domestic income (loss)             ($36,343)   $319,017   $173,515
Total foreign subsidiaries income (loss)     (33,891)     26,683     51,311
                                            --------    --------   --------
Total income (loss) before income taxes     ($70,234)   $345,700   $224,826
                                            ========    ========   ========

Tax expense (benefit) is summarized as follows:

Currently payable:
     Federal                                $ 55,782    $117,546    $92,109
     State                                    10,689      21,962     20,807
     Foreign                                     956       1,000     11,519
Deferred tax benefit                        (102,700)    (20,887)   (44,094)
                                            --------    --------    -------
     Tax expense (benefit)                 ($ 35,273)   $119,621    $80,341
                                            ========    ========    =======

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

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

Statutory federal income tax rate              (35.0%)      35.0%      35.0%
State income tax, net of federal tax benefit    (3.3)        3.6        3.8
Exempt income of foreign sales corporation,
     net of tax                                (10.9)       (0.7)      (1.1)
Research and experimentation credit             (5.9)       (0.7)       ---
Municipal income                                (8.9)       (2.0)       ---
Rate differential on foreign operations         14.0        (2.5)      (1.6)
Nondeductible goodwill & intangibles             1.7         ---        ---
Other                                           (1.9)        1.9       (0.4)
                                                -----       -----      -----
                                               (50.2%)      34.6%      35.7%
                                                =====       =====      =====


<PAGE>

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

(in thousands)                                  1998        1997
                                                ----        ----
Deferred tax assets:
  Accounts receivable                        $  6,166    $  4,996
  Inventories                                  37,415      31,813
  Property, plant and equipment                   200        ---
  Other reserves and accruals                  34,382      24,149
  Acquired research and development           105,078      29,262
  Domestic net operating loss carryforwards    27,213      27,213
  Foreign net operating loss carryforwards     23,715       5,636
                                             --------    --------
     Total gross deferred tax assets          234,169     123,069
  Less valuation allowance                    (45,914)    (38,381)
                                             --------    --------
     Net deferred tax assets                  188,255      84,688
                                             --------    --------
Deferred tax liabilities:
  Property, plant and equipment               (12,057)    (11,103)
                                             --------    --------
     Total gross deferred liabilities         (12,057)    (11,103)
                                             --------    --------
         Net deferred tax assets             $176,198     $73,585
                                             ========    ========


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

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

Note (12) Financial Instruments and Concentration of Credit Risk

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

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

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

<PAGE>

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

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

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

Note (13)  Legal Proceedings

Since October 24, 1997, nine  stockholder  class action lawsuits have been filed
against  Cabletron and certain officers and directors of Cabletron in the United
States District Court for the District of New Hampshire.  The complaints  allege
that Cabletron and several of its officers and directors disseminated materially
false and  misleading  information  about  Cabletron's  operations  and acted in
violation of Section  10(b) and Rule 10b-5 of the Exchange Act during the period
between  March 3, 1997 and  December 2, 1997.  The  complaint  also alleges that
certain of the Company's alleged accounting practices resulted in the disclosure
of  materially  misleading  financial  results  during  the  same  period.  More
specifically,   the  complaint  challenged  the  Company's  revenue  recognition
policies, accounting for product returns, and the validity of certain sales. The
complaint  does not specify the amount of damages sought on behalf of the class.
On March 3, 1998,  the United  States  District  Court for the  District  of New
Hampshire  granted the motion to  consolidate  the nine class action  complaints
against  Cabletron  and its officers and directors  into one class  action.  The
legal costs  incurred by  Cabletron  in  defending  itself and its  officers and
directors  against  this  litigation,  whether  or not  it  prevails,  could  be
substantial,  and in the event that the plaintiffs  prevail,  Cabletron could be
required to pay substantial  damages.  This litigation may be protracted and may
result in a diversion  of  management  and other  resources  of  Cabletron.  The
payment of  substantial  legal costs or damages,  or the diversion of management
and other  resources,  could  have a  material  adverse  effect  on  Cabletron's
business, financial condition or results of operations.

Note (14)  Stock Plans

(a) Equity Incentive and Directors Plans

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

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

<PAGE>


A summary of option transactions under the two plans follows:

                                                         Weighted-Average
                                               Shares    Exercise Price
                                          ----------     ----------------
Options outstanding at February 28, 1995   7,857,226         $15.71
                                          -----------
Granted and assumed                        3,898,312          25.61
Exercised                                 (1,453,402)         11.13
Cancelled                                   (464,210)         21.97
                                          -----------
Options outstanding at February 29, 1996   9,837,926          20.02
                                          -----------
Granted and assumed                        6,619,763          29.67
Exercised                                 (1,345,415)         12.50
Cancelled                                 (1,516,856)         24.59
                                          -----------
Options outstanding at February 28, 1997  13,595,418          20.02
                                          -----------
Granted and assumed                        5,015,000          23.11
Exercised                                 (1,762,565)         10.40
Cancelled                                 (1,968,762)         29.45
                                          -----------
Options outstanding at February 28, 1998  14,879,091         $25.45
                                          ===========
Options exercisable at February 28, 1998   4,134,623         $22.99
                                          ===========


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

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

The weighted average  estimated fair values of stock options granted and assumed
during  fiscal  1998,  1997 and 1996 were  $9.19,  $12.01  and $12.08 per share,
respectively.

<PAGE>


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

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

Net income (loss)   As reported  ($ 34,961)      226,079      $144,485
                      Pro forma  ($ 60,583)      211,063      $121,302

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

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

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

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

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

(b)  Employee Stock Purchase Plans

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

Note (15) Realignment

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


<PAGE>


Note (16) Geographic Area Information
(in thousands)
<TABLE>
<CAPTION>
<S>                               <C>             <C>     <C>           <C>      <C>           <C>
                                                    % of                  % of                    % of
                                       1998        Total       1997       Total       1996        Total
                                       ----        -----       ----       -----       ----        -----
                                   (Restated)              (Restated)
Net Sales:
US ..............................  $  923,285       67.0%  $  998,406      71.0%   $  771,179      70.1%
Direct Foreign Export ...........      59,759        4.3       38,435       2.7        35,378       3.2
                                   ----------      -----   ----------     -----    ----------     -----
Total US Source .................     983,044       71.4    1,036,841      73.7       806,557      73.3
Europe ..........................     281,224       20.4      273,972      19.5       215,796      19.6
Other (1) .......................     113,062        8.2       95,739       6.8        77,996       7.1
                                   ----------      -----   ----------      -----   ----------     -----
     Total Sales ................  $1,377,330      100.0%  $1,406,552     100.0%   $1,100,349     100.0%
                                   ==========      =====   ===========    =====    ==========     =====

Income (loss) from Operations:
US ..............................   ($ 57,164)      64.4%    $288,480      88.4%     $169,103      81.7%
Europe ..........................      (5,026)       5.7       29,877       9.2        33,834      16.4
Other (1) .......................     (26,622)      29.9        7,921       2.4         3,998       1.9
                                    ---------       -----    --------     ------     --------      -----
     Total Income (loss) from
        Operations ..............   ($ 88,812)     100.0%    $326,278     100.0%     $206,935     100.0%
                                     ========      =====     ========     =====      ========     =====

Identifiable Assets:
US ..............................  $1,073,891       83.0%  $1,126,716      85.9%     $841,979      84.4%
Europe ..........................     510,515       11.0      119,527       9.2       115,949      11.7
Other(1) ........................      97,642        6.0       64,566       4.9        38,980       3.9
                                   ----------      -----   ----------     -----      --------     -----
     Total Assets ...............  $1,682,048      100.0%  $1,310,809     100.0%     $996,908     100.0%
                                   ==========      =====   ==========     =====      ========     =====

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

</TABLE>


Note (17) Quarterly Financial Data (unaudited)

(in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S>                        <C>            <C>         <C>            <C>         <C>
                                                           Income
                                                           (Loss)          Net
                                   Net        Gross         from         Income    Income (Loss)
                                  Sales       Profit     Operations       (Loss)     Per Share (a)
1998
First Quarter (Restated)..... $  362,688     $203,127     $ 78,596      $ 54,870        $0.34
Second Quarter ..............    371,293      212,261       82,434        57,587         0.36
Third Quarter ...............    331,827      167,573       25,500        19,898         0.12
Fourth Quarter (Restated) ...    311,522      118,078     (275,342)     (167,316) (b)   (1.06)
                              ----------     --------     --------     ---------        -----
Total Year .................. $1,377,330     $701,039    ($ 88,812)    ($ 34,961)      ($0.22)
                              ==========     ========     ========     =========        =====

1997
First Quarter ............... $  323,499     $190,645     $ 85,672      $ 57,139        $0.37
Second Quarter (Restated)....    340,940      186,285       56,141        40,862 (c)     0.26
Third Quarter ...............    361,558      213,959       99,029        67,742         0.44
Fourth Quarter (Restated)....    380,555      220,256       85,436        60,336 (d)     0.36
                              ----------     --------     --------      --------        -----
Total Year .................. $1,406,552     $811,145     $326,278      $226,079        $1.42
                              ==========     ========     ========      ========        =====
</TABLE>

(a) Due to rounding some totals will not add.
(b) Includes $234.3 million of in-process research and development charges
    related to the acquisition of Digital's Network Products Group and the
    strategic alignment plan, $199.3 million and $35.0 million, respectively.
(c) Includes $12.7 million special charge related to the acquisitions of ZeitNet
    and Network  Express.
(d) Includes $9.0 million special charge related to the acquisitions of Netlink
    and OASys.
<PAGE>

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

The first quarter of the year ended February 28, 1997 has been  restated.  First
quarter   gross   profit   decreased   by  $20.3   million  as  a  result  of  a
reclassification  of  special  charges  to cost of  sales.  Based  on  inventory
disposals through February 28, 1997,  special charges decreased $6.0 million and
tax expense of $2.0 million was recorded, in the year ended February 28, 1997.

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

Note (18) Subsequent Event

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



<PAGE>


INDEPENDENT AUDITORS' REPORT


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

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

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

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

The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).


                                    KPMG LLP




Boston, Massachusetts
March 23, 1998, except for Notes 2 (n) and 17,
as to which the date is May 25, 1999




















<PAGE>
PART IV

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

(a)      Documents filed as part of this report:

 1.      Consolidated financial statements (see item 8)

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

                                                                      page(s)

         Independent Auditors' Report                                    38

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

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

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


 2.      Consolidated financial statement schedule

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

          Independent Auditors' Report                                   38

          Schedule II - Valuation and Qualifying Accounts                44

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



<PAGE>
3.      Exhibits

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

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

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








<PAGE>




                          INDEPENDENT AUDITORS' REPORT



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

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

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

The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).



                                     KPMG LLP




Boston, Massachusetts
March 23, 1998, except for Notes 2 (n) and 17,
as to which the date is May 25, 1999





<PAGE>



                                   SCHEDULE II

                             CABLETRON SYSTEMS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

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

                                 (in thousands)

<TABLE>
<CAPTION>
<S>                     <C>         <C>                 <C>         <C>          <C>
                                                      Amounts
                                                  attributable
                      Balance at                 to changes in                    Balance
                       beginning   Charged to          foreign        Amounts      at end
Description            of period      expense   currency rates    written off   of period

Allowance for
doubtful accounts

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

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

February 29, 1996         $6,190       $2,725              $1        ($2,261)      $6,655
</TABLE>






<PAGE>


Signatures

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

                                       CABLETRON SYSTEMS, Inc.




Date:      July 23, 1999                By: /s/ Piyush Patel
           ------------                     -------------------
                                            Piyush Patel
                                            Chairman, President, and
                                            Chief Executive Officer


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>
<S>                                      <C>                                                 <C>

Signature                                  Titles                                               Date
---------                                  ------                                               ----

/s/ Piyush Patel                                                                                July 23, 1999
----------------------------               Chairman, President, and                             -------------
Piyush Patel                               Chief Executive Officer

/s/ David J. Kirkpatrick                                                                        July 23, 1999
---------------------------                Corporate Executive Vice President of Finance        -------------
David J. Kirkpatrick                       and Chief Financial Officer

/s/ Michael D. Myerow                      Secretary and Director                               July 23, 1999
--------------------------                                                                      ------------
Michael D. Myerow

/s/ Paul R. Duncan                         Director                                             July 23, 1999
-----------------------------                                                                   ------------
Paul R. Duncan

/s/ Donald F. McGuinness                   Director                                             July 23, 1999
------------------------                                                                        ------------
Donald F. McGuinness
</TABLE>








<PAGE>


                                  EXHIBIT INDEX


Exhibit No.   Exhibit
                                                                    Page No.

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

23.1          Consent of Independent Auditors                           49

27            Financial Data Schedule                                   54






<PAGE>

<TABLE>
<CAPTION>


                                                  EXHIBIT 11.1

                                             CABLETRON SYSTEMS, INC.

                              STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)

                        For Years Ended February 28, 1998 and 1997 and February 29, 1996
<S>                                                 <C>              <C>              <C>

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

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

Net income (loss)                                    ($ 34,961)       $226,079         $144,485
                                                      ========        ========         ========

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

Net income (loss) per common share                   ($    0.22)      $   1.46         $   0.95
                                                      =========       ========         ========


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

Net income (loss)                                     ($ 34,961)      $226,079         $144,485
                                                       ========       ========         ========

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

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

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

Net income (loss) per common share                    ($   0.22)       $  1.42         $   0.93
                                                       ========        =======         ========
</TABLE>




<PAGE>


                                  EXHIBIT 23.1



                         CONSENT OF INDEPENDENT AUDITORS


The Board of Directors
Cabletron Systems, Inc.:

We consent to incorporation  by reference in the  registration  statements (Nos.
33-50454,  33-31572, 33-50753, 33-21391, 33-17557, 33-09403, 33-09029, 33-96060,
33-96058,  33-33454 and 33-42490) on Form S-8 of Cabletron Systems,  Inc. of our
reports  dated March 23,  1998,  except for Notes 2 (n) and 17,  relating to the
consolidated  balance sheets of Cabletron  Systems,  Inc. and subsidiaries as of
February  28,  1998  and  1997,  and  the  related  consolidated  statements  of
operations,  stockholders'  equity and cash flows and the related  schedule  for
each of the years in the  three-year  period  ended  February  28,  1998,  which
reports are included in the February 28, 1998 Annual Report to  Stockholders  on
Form 10-K of Cabletron Systems, Inc.

The consolidated balance sheets as of February 28, 1998 and 1997 and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years then ended have been restated as discussed in Note 2 (n).



                                     KPMG LLP




Boston, Massachusetts
July 23, 1999