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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K
  (Mark One)

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

    For the fiscal year ended March 3, 2001

                                      OR

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

    For the transition period from        to

                        Commission File Number 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)

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

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

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

         Title of each class:              Name of each exchange on which
                                                     registered:


     Common Stock, $0.01 par value
                                               New York Stock Exchange

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

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

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

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

  As of May 16, 2001, 188,815,621 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 16, 2001 was approximately $3.4
billion.

                      DOCUMENTS INCORPORATED BY REFERENCE

  The following documents are incorporated by reference:

  Certain portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the 2001 Annual Meeting of Stockholders
is incorporated by reference into Part III of this Form 10-K.

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                               TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
Item                                                                    Page(s)
----                                                                    -------
<S>                                                                     <C>
 1. Business..........................................................      3
 2. Properties........................................................     13
 3. Legal Proceedings.................................................     14
 4. Submission of Matters to a Vote of Security Holders...............     15
  Executive Officers of the Registrant................................     15

                                    PART II

 5. Market for the Registrant's Common Equity and Related Stockholder
    Matters...........................................................     16
 6. Selected Financial Data...........................................     18
 7. Management's Discussion and Analysis of Financial Condition and
    Results of Operations.............................................     19
 7a. Quantitative and Qualitative Disclosures about Market Risk.......     44
 8. Consolidated Financial Statements and Supplementary Data..........     46
 9. Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure..............................................     91

                                    PART III

10. Directors and Executive Officers of the Registrant................     91
11. Executive Compensation............................................     91
12. Security Ownership of Certain Beneficial Owners and Management....     91
13. Certain Relationships and Related Transactions....................     91

                                    PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 10-K..     92
</TABLE>

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                                    PART I

ITEM 1. BUSINESS

Introduction

  Cabletron Systems, Inc. (the "Company" or "Cabletron") is a holding company
that conducts its operations through four subsidiaries in the
telecommunications and networking industry: Enterasys Networks, Inc.
("Enterasys"), Riverstone Networks, Inc. ("Riverstone"), Aprisma Management
Technologies, Inc. ("Aprisma") and GlobalNetwork Technology Services, Inc.
("GNTS") (collectively known as, the "Operating Subsidiaries"). In February
2000, Cabletron announced its plans to establish these four subsidiaries as
part of an effort to improve its strategic focus and better capitalize on
market opportunities.

  Enterasys. Enterasys designs, develops, markets and supports comprehensive
network communications solutions for enterprises. Enterasys' hardware,
software and service offerings to enterprises enable secure, available, mobile
and easily managed connections between employees, customers, suppliers and
business partners and the information, applications and services they need to
access. Enterasys solutions create a foundation that empowers enterprises to
use internal networks and the Internet to increase productivity, reduce
operating costs and facilitate the exchange of information.

  Riverstone. Riverstone is a leading provider of Internet infrastructure
equipment to telecommunications service providers in the metropolitan area
network. The metropolitan area network encompasses service providers, the
Internet infrastructure connecting these service providers with their
customers and the Internet backbone. Riverstone's switch routers and web
switches contain bandwidth management and provisioning, accounting and
billing, quality of service and content delivery capabilities that enable
service providers to deliver advanced applications and differentiated services
to their customers.

  Aprisma. Aprisma provides e-business infrastructure management software for
enterprises and service providers. Aprisma's Spectrum software suite bridges
the gap between legacy network management platforms and technology point
tools, providing enterprise information technology organizations and service
providers visibility and control of the networks, systems and applications
which are most important for the reliable delivery of business-critical
services. Through unified control interfaces, Spectrum allows global
organizations and service providers to align the performance of their networks
with business objectives.

  GNTS. GNTS is a network consulting company focused on the design,
performance, management and security of complex networks for large enterprises
and service providers. GNTS' comprehensive solutions seek to meet business
needs from assessment through operation, as well as to provide continuous
improvements that enable clients to adapt to market changes. The GNTS approach
utilizes configurable deliverables, project planning and pricing templates to
create and enhance unique information solutions for each client.

  A Delaware corporation founded in 1983 and listed on the New York Stock
Exchange for more than a decade under the symbol "CS," Cabletron is an S&P 500
Index company. Cabletron's world headquarters are located at 35 Industrial
Way, Rochester, New Hampshire 03867. Cabletron's telephone number is (603)
332-9400, and its website is located at www.cabletron.com.

Business Transformation

  On February 10, 2000, Cabletron announced its intention to transform its
business into a holding company with four operating subsidiaries. During
fiscal 2001, Cabletron implemented this transformation by transferring a
substantial portion of its operating assets and related liabilities to its
Operating Subsidiaries. This transformation was approved by Cabletron's
stockholders at the 2000 Annual Meeting of Stockholders. Cabletron has also
announced that, while it was also considering other strategic opportunities
for the Operating Subsidiaries, it planned to conduct an initial public
offering ("IPO") for each of the Operating Subsidiaries, followed by a

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distribution of the remaining shares of one or more of the Operating
Subsidiaries to Cabletron's stockholders. At the time of this announcement,
Cabletron estimated that implementation and completion of this plan would
likely take twelve to eighteen months.

  On February 22, 2001, Riverstone completed an IPO of 10 million shares of
common stock through a group of underwriters lead by Morgan Stanley Dean
Witter. Riverstone common stock is traded on the NASDAQ National Market System
under the symbol RSTN. On March 28, 2001, Cabletron announced that it had
received a private letter ruling from the Internal Revenue Service that the
distribution of Cabletron's shares of Riverstone would be tax-free to
Cabletron's stockholders. The private letter ruling is subject to amendment
and to compliance with representations made by Cabletron to the Internal
Revenue Service.

  On March 28, 2001, Cabletron announced that it was considering alternative
strategic transactions for GNTS, after the Company's Board of Directors
determined that in view of market conditions, an alternative strategic
transaction, rather than an IPO followed by a distribution of the remaining
shares to Cabletron's stockholders, would be in the interests of GNTS and
Cabletron's stockholders. On March 28, 2001, Cabletron also announced that, in
view of unfavorable market conditions for IPOs, it intended to establish
Enterasys and Aprisma as independent public companies without the intermediate
step of an IPO. The plan for these transactions is currently being formulated
and will be announced at a later date.

  As discussed in the Company's most recent Proxy Statement pursuant to which
the Company's transformation plan was approved by its shareholders, each of
the Operating Subsidiaries has established an equity incentive plan and
granted to existing employees, directors and consultants of the subsidiary or
the Company options to purchase common stock. As of March 3, 2001, these
options represented approximately 15% to 25% of the respective operating
subsidiary's capital stock on a fully-diluted basis. In addition, each of the
Operating Subsidiaries has granted rights to purchase approximately 4.25% of
its capital stock on a fully diluted basis of its common stock to a group of
strategic investors. In connection with Riverstone's initial public offering,
these strategic investors exercised their rights to purchase shares of
Riverstone common stock and received additional rights to purchase shares of
Riverstone common stock. As of March 3, 2001, these strategic investors owned
shares of Riverstone common stock representing approximately 3.77% of
Riverstone's fully diluted common stock. Aprisma has sold shares of Aprisma
convertible preferred stock representing approximately 1.6% of the Aprisma
fully-diluted common stock to CPQ Holdings, Inc., an affiliate of Compaq
Computer Corporation.

  All of the transactions presently contemplated by the Company are subject to
various conditions, including IRS rulings and shareholder votes if deemed
necessary or desirable, and to other uncertainties. If we fail to satisfy any
conditions, if we encounter unfavorable or different financial, industry or
economic conditions, or if other unforeseen events intervene, some or all of
the currently planned steps could occur on a different timetable or on
different terms than we currently anticipate, or might not occur at all. The
Company is not obligated to complete any of these transactions, and no
assurance can be given as to whether or when any of these transactions will be
approved or implemented.

 Fiscal 2001 Acquisitions

  On January 31, 2001, Cabletron acquired Indus River Networks, Inc. ("Indus
River"), a designer and marketer of virtual private networks for enterprise-
class customers. On September 7, 2000, Cabletron acquired Network Security
Wizards, Inc. ("NSW"), a privately held company that develops intrusion
detection system technology.


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 Fiscal 2001 Divestitures

  During the year ended March 3, 2001, the Company completed the sale of its
Digital Network Products Group ("DNPG") division and certain legacy product
lines.

 Fiscal 2000 Divestitures

  On February 29, 2000, the Company sold its manufacturing and repair services
operations located in Rochester, New Hampshire and Limerick, Ireland to
Flextronics International Ltd. ("Flextronics"). Simultaneously, the Company
entered into an agreement with Flextronics to manufacture most of its products
as an original equipment manufacturer ("OEM"). On December 18, 1999, the
Company sold FlowPoint, a digital subscriber line router networking products
subsidiary, to Efficient Networks, Inc. ("Efficient"). In connection with the
sale of FlowPoint, Cabletron and Efficient entered into an OEM agreement under
which Cabletron is a reseller of the Efficient and FlowPoint product lines.

 Fiscal 1999 Acquisitions

  On September 25, 1998, Cabletron acquired NetVantage, Inc. ("NetVantage"), a
publicly held manufacturer of Ethernet workgroup switches. On September 9,
1998, Cabletron acquired all of the outstanding stock of FlowPoint Corp.
("FlowPoint"), a privately held manufacturer of digital subscriber line router
networking products. On September 1, 1998, Cabletron acquired the assets and
assumed certain liabilities of the DSLAM division of Ariel Corporation
("Ariel"), a privately held designer and manufacturer of digital subscriber
line access multiplexor products. On March 17, 1998, Cabletron acquired Yago
Systems, Inc. ("Yago"), a privately held manufacturer of wire-speed routing
and Layer-4 switching products and solutions.

Products and Services

  Through the Operating Subsidiaries, Cabletron provides network communication
solutions to customers in the United States, Europe, Pacific Rim and other
industrialized areas of the world.

Enterasys

  Enterasys designs, develops, markets and supports comprehensive network
communications solutions for enterprises. Enterasys' hardware, software and
service offerings enable secure, available, mobile and easily managed
connections between users and the information, applications and services they
need to access. Enterasys' solutions enable enterprises to make information,
applications and services readily available and customized to the needs of
employees, customers, suppliers and business partners. Enterasys' solutions
create a foundation that empowers enterprises to use internal networks and the
Internet to increase productivity, reduce operating costs and facilitate the
exchange of information.

 Hardware Switch Routers

  Enterasys offers a broad range of local and wide area network routers that
use a hardware-based architecture to provide wire-speed transmission rates
coupled with advanced functionality. The Enterasys X-Pedition family of switch
routers are typically used in the core of the enterprise network and range
from stand-alone to high port-density modular designs. By incorporating packet
forwarding and routing functions into custom built application specific
integrated circuits Enterasys' routers are able to deliver wire-speed
performance with security, content-based control, quality of service, auditing
and management features fully enabled. Enterasys has also developed a
standard-based routing operating system that enables routers to be used in a
diverse range of network environments, including Internet Protocol networks
and multi-protocol legacy networks. Enterasys

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routers all interface with serial and high speed serial wide area networks,
asynchronous transfer mode, fiber distributed data interface and gigabit
Ethernet networks.

 Multi-Layer Switches

  The Enterasys multi-layer switching Matrix and Vertical Horizon product
families address the broad market for desktop and wiring closet connectivity.
The Enterasys family of Matrix products are designed to meet the needs of
customers requiring high performance, multi-functional, scalable switching at
the edge of the network. Enterasys also provides a lower-cost, chassis-based
Matrix switch for customers who do not require the full functionality of high-
end products. Enterasys' Matrix products switch traffic at critical user
desktop and server access points based on information contained in the frame,
including user and application identifiers. This enables switches to deliver
security, quality of service, auditing and management services. Enterasys'
Vertical Horizon family of products consists of standalone and stackable
switches designed to address the needs of price-sensitive customers that
require wire speed performance for less complex application environments.

  Most switching products use an architecture that requires a central
processing unit and a backplane fabric shared by all line cards. Unlike these
other switching products, Enterasys switches use a distributed architecture
that incorporates the central processing unit and switching functions onto
each line card. An integral part of Enterasys' distributed architecture, our
nTera backplane and Matrix application-specific integrated circuit set provide
the foundation to scale this architecture up to one terabit of capacity.
Enterasys' Matrix and Vertical Horizon line cards are designed to accept
inserts that allow for enhanced functionality and connection to many different
networking technologies, including fiber distributed data interface,
asynchronous transfer mode and gigabit Ethernet. This enhances the longevity
and cost effectiveness of Enterasys products by allowing for incremental
upgrades as the network environment evolves. In addition to providing a high
level of reliability and compatibility with prior generations of Enterasys
products, this design allows maximum port density and reduces the cost to our
customers of incorporating new technology and additional users.

 Wireless Networks

  Enterasys' RoamAbout product family allows our customers to easily, securely
and economically establish a high performance wireless network within
enterprise buildings or campuses, enabling mobile connectivity. Enterasys
RoamAbout networks function like standard wired Ethernet networks, but use
radio frequencies instead of cables for network connection. Additionally,
enterprises may use RoamAbout for connections between buildings up to
approximately 25 miles apart as an alternative to costly leased line
connections. The current RoamAbout technology is based on the Institute of
Electronics and Electrical Engineers 802.11b standard, which enables
connections at speeds of 11 megabits per second. Enterasys has developed and
is currently testing products based on the 802.11a standard, which enables
connections at 54 megabits per second. All of the RoamAbout products
incorporate security enhancements to the basic wireless standards including
the user authentication standard 802.1X, device authentication, encryption key
management software and advanced encryption technologies such as 40 and 128
bit Wired Equivalent Privacy.

  Enterasys' RoamAbout product line consists of access points and connection
cards that allow personal computers and handheld devices to establish a
wireless connection to the enterprise network. Enterasys' current access
point, the AP 2000, provides a secure 11 megabit connection and transparent
switching into the wired network infrastructure. The R2 access point, which
Enterasys is currently testing, will provide support for multiple wireless
networks enabling secure connections at speeds of 11 megabit per second and 54
megabit per second. The R2 also will provide the quality of service, security
and Layer 3 switch routing functions provided by high performance Matrix
products. The Enterasys access points also receive their power over their
Ethernet connection, allowing enterprises to deploy RoamAbout without concern
for the location of existing power supplies.

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 Virtual Private Networking

  Enterasys' Aurorean family offers a comprehensive suite of secure and cost-
effective virtual private networking solutions for mobile access,
telecommuting, branch office and regional site connectivity. Virtual private
networks enable employees, customers, suppliers and business partners to
access enterprise networks using encrypted communications and secure Internet
connections including dial-up, dedicated line, digital subscriber line and
cable-modem.

  The Aurorean Virtual Private Network includes gateways, management servers
and remote client software which operate as a single system under one
management framework. This design allows for increases in the number of remote
users without increasing management demands. Enterasys' innovative client
dialer technology automatically determines the optimal access telephone number
for the remote user based on established enterprise usage guidelines.
Enterasys products are designed to enable connectivity to networks that
typically prevent standard virtual private network connections due to
firewalls and Network Address Translators.

 Security

  Enterasys' comprehensive security solution, Secure Harbor, is an integrated
suite of products and design features that provides a high level of protection
to enterprise networks from both external and internal security threats.
Security features are central to all Enterasys connectivity products,
including packet filtering and bandwidth and access control in switches and
routers, 802.1X in switching and wireless products, Wired Equivalent Privacy
in wireless products and triple Defense Encryption Standard 128 bit encryption
in virtual private network products. Enterasys also offers special purpose
security devices including firewalls and honey pots, which are simulated
servers designed to attract and capture suspicious network traffic. Further,
Enterasys supplies host intrusion detection systems and network-based
intrusion detection systems that support a wide variety of network
connectivity technologies including, Ethernet, fiber distributed data
interface, asynchronous transfer mode, token ring, and gigabit Ethernet.

  Enterasys' Dragon intrusion detection system offers a family of products
designed to monitor enterprise network traffic, system files and firewall logs
for evidence of malicious users, hackers and system abusers. The Dragon
intrusion detection system provides a flexible and scalable solution for
enterprise environments. This includes host-based intrusion detection sensors
for placement on servers, network-based intrusion detection sensors to monitor
network segments and a coordinated management framework for systems consisting
of large numbers of sensors. Additionally, the management framework can
coordinate security event logging from firewalls, routers and other network
devices. Enterasys' technology uses sophisticated algorithms and an extensive
library of over 2,000 patterns to detect a wide variety of security attacks.
Dragon also provides functionality that allows network operators to
incorporate additional patterns into the library based on new methods of
attack.

 Service and Support

  In addition to its broad line of network equipment, Enterasys' maintenance
group provides support for enterprise customers. This group includes
maintenance, design and configuration, product planning, training, testing,
certification and documentation. Enterasys provides service and support
through a combination of internal capabilities and relationships with third
parties. The programs are designed to support both standard and mission-
critical network environments. Enterasys offers comprehensive training
programs to ensure that customers understand the benefits of their networks.

Riverstone

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


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 Network Availability, Reliability and Security

  Riverstone's products provide high levels of network availability and
reliability, even under heavy network traffic conditions. Riverstone's routers
and switches are interoperable with a variety of products from other vendors.
In collaboration with Riverstone customers, Riverstone has developed a testing
environment that includes real world configurations, allowing Riverstone to
deliver reliable products. Riverstone products meet numerous regulatory
requirements and Riverstone's most advanced products are designed to be NEBS
compliant. Riverstone products also incorporate numerous security protocols
for supporting virtual private networks and secure network access.

 Service Creation

  Riverstone has designed these products as platforms on which service
providers can deliver sophisticated and differentiated services. The key
service enablers that are embedded in Riverstone products are:

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

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

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

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

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

 Flexible Service Delivery Platform

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

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

Aprisma

  Aprisma develops, markets and supports e-business infrastructure management
software solutions that deliver service assurance capabilities on a global
basis. Spectrum, Aprisma's flagship product, is designed to treat a network as
a system managed in terms of service level agreements. The Spectrum software
suite bridges the gap between legacy network management platforms and
technology point tools, providing enterprise network administrators, service
providers and broadband networks visibility and control of the networks,
systems and applications critical to the reliable delivery of e-business
information.

  Aprisma's Spectrum offers a comprehensive solution that shortens the time
required to resolve problems and reduces the number of tools required to
accomplish network management tasks, provides trend analysis for network
capacity planning purposes, and addresses the critical need for ensuring
application and e-business response time and service availability. The
Spectrum suite of management software offers solutions that include:

  Business Process Management, to assure service level agreements are meeting
the operation and business needs and requirements of the customers, partners
and employees they are designed to support;

  Systems Management, to determine server and/or desktop resource utilization
or capacity problems with automated agents proactively taking corrective
action;

  Network Management, which can automatically discover edge, distribution and
core components of the infrastructure including switches, routers, LAN and WAN
components. Networking technologies supported include: VLANs, ELANs, ATM,
Frame Relay and IP. Applications supported include: routing, switching and
management protocols and IP services such as DHCP, DNS, and QoS;

  Application Management, which supports leading ERP systems, databases and
operating systems; intelligent agent technology is proactive to ensure
availability and response time;

  Fault Management, to pinpoint a problem, prioritize according to business
impact, notify affected users or customers, and identify the root cause end to
end across systems, networks and applications (advanced applications include
Spectrum Alarm Notification Manager and Spectrum Resolution Expert, or
SpectroRx); and

  Configuration Management, which simplifies training requirements by
normalizing configurations of specific device types regardless of the vendor
(advanced application includes Spectrum Enterprise Configuration Manager).

GNTS

  GNTS is the Company's professional services group that provides network
infrastructure consulting services designed to optimize application
availability and network performance for enterprise customers, service
providers and service partners. GNTS offers a broad range of services using
the scalable GNTS Powered Services model where intellectual property and
standard methodology are used to aid partners and direct resources in the
delivery of services. GNTS' areas of focus include physical infrastructure
services, infrastructure management services, infrastructure security, and
network operations outsourcing.

  GNTS provides the following services:

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  Physical Infrastructure. Network analysis and recommendations for linking
network goals to business objectives; network strategy planning, design and
deployment to support strategic business initiatives; migration to new
technologies; comprehensive global project management from concept to
production; and network performance tuning and optimization.

  Infrastructure Management. Design, development and deployment of integrated
IT service management systems; operations process assessment, design,
documentation, implementation, training and continuous improvement; proactive
network, systems, database and application performance management; problem
management; network operations/management center automation; and
voice/data/CTI and call center design and implementation.

  Infrastructure Security. Assessment of current infrastructure to identify
security vulnerabilities; continuous security monitoring via intrusion
detection systems; security system design, policy development, and training;
firewall design, implementation and management; disaster recovery/business
continuity planning; forensics laboratory; and security audit and policy
review.

  Network Operations OutSourcing. Addresses all aspects of remotely
administering clients' enterprise and networking infrastructures--
provisioning, configuration and deployment, change control, fault resolution,
performance and lifecycle management; comprehensive multi-vendor network
monitoring and management; 24 hours 7 days per week outsourcing of network
operations; and operations support and management processes.

  GNTS provides its customers maintenance, design and configuration, product
planning, training, testing certification and documentation through an
agreement with Enterasys. GNTS customers also have full access to the benefits
from Enterasys' maintenance group.

Distribution and Marketing

  The Company has strengthened and expanded its relationship with distributors
and resellers. These distributors and resellers commit to focusing on the
customers' needs and providing quality professional service support to the
end-user in addition to carrying the Company's line of products. The Company
extends limited product return and price protection rights to certain
distributors and resellers. These rights are generally limited to a certain
percentage of sales over primarily a three month period. In addition to the
Company's use of distributors and resellers, the Company maintains its own
direct sales force with representatives located around the world. The direct
sales force is supplemented by employees located at the Company's headquarters
and regional in-house technical services and sales support staff. The
Company's international locations use various sales strategies tailored to the
preferred channels of distribution for each country. These strategies include
a direct sales presence, a direct sales force working with local distributors
or a combination of the two.

  The Company's Worldwide Partner Programme sets forth the principles of the
relationship between the Company and the reseller, including level of
information and training, business support and services, pricing structure,
and levels of organization. The Worldwide Partner Programme offers a unified,
tiered program that helps partners with marketing, sales support, education,
accreditation, technical support and incentives.

  The Company employs several methods to market its products, including
regular participation in trade shows, frequent advertisements in trade
journals, regular attendance by corporate officers at press briefings and
trade seminars, submission of demonstration products to selected customers for
evaluation, and direct mailings and telemarketing efforts.

Customers

  The Company's end-user customers include brokerage firms, investment banking
firms and other financial institutions; federal, state and local government
agencies; commercial, industrial and manufacturing companies;

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multinational and international companies; telecommunications companies;
internet service providers; health care facilities; insurance companies;
universities; and leading accounting and law firms.

  During the year ended March 3, 2001, no customer accounted for more than 10%
of the Company's revenue. During the year ended February 29, 2000, Compaq
Computer Corporation, accounted for 16% of total net revenues and the United
States federal government accounted for approximately 14% of total net
revenues. During the year ended February 28, 1999, Compaq, accounted for 11%
of total net revenues, and the United States federal government accounted for
approximately 15% of net revenues. Cabletron's top ten customers, excluding
the United States federal government, represented, in the aggregate,
approximately 30%, 28% and 22% of its total net revenues for the fiscal years
ended March 3, 2001, February 29, 2000 and February 28, 1999, respectively.
During the year ended February 29, 2000, the Company and Compaq restructured
their relationship resulting in lower revenues from Compaq in fiscal year
2001. Most of the Company's contracts with the federal government are on a
fixed-price basis. The books and records of the Company are subject to audit
by the General Services Administration, the Department of Labor and other
government agencies.

Research and Development

  During the years ended March 3, 2001, February 29, 2000 and February 28,
1999, research and development expenses ("R&D") were $146.1 million, $184.6
million and $210.4 million, respectively. The Company believes that the
continued investment in new product development and enhancements to existing
products are critical to achieving the Company's strategic objectives.
Decreases in R&D expense are due to the Company's focus of its research and
development efforts toward a more disciplined approach to project initiation,
emphasizing features most likely to be valuable to the Company's customers.

  The Company plans to continue to invest in emerging technologies for use in
existing and future products through investments, internal efforts and
acquisitions. However, there can be no assurance that the Company will be able
to successfully develop new products that meet customer needs or that such
products will achieve market acceptance.

Manufacturing and Components

  The Company does not have internal manufacturing capabilities. The Company
outsources substantially all of its manufacturing to one contract
manufacturer, Flextronics International, Ltd., which procures raw materials on
the Company's behalf and provides comprehensive manufacturing services,
including assembly, test and control. Flextronics manufactures the Company's
products in Rochester, New Hampshire; San Jose, California; and Limerick,
Ireland. The loss of the Company's existing contract manufacturer or the
Company's failure to timely qualify a new contract manufacturer to meet
anticipated demand increases could result in a significant interruption in the
supply of the Company's products.

  The Company sources several key components used in the manufacture of its
products, including application-specific integrated circuits, or "ASICs," from
single or limited sources and is dependent upon the supply from these sources
to meet its needs. With the increasing technological sophistication of new
products and the associated design and manufacturing complexities, the Company
anticipates that it may need to rely on additional single-source or limited-
source suppliers for components or manufacture of products and subassemblies.
The Company has encountered shortages and delays in obtaining ASICs and other
components in the past and may experience similar shortages and delays in
obtaining components in the future. Any reduction in supply, interruption or
extended delay in timely supply, variances in actual needs from forecasts for
long order lead time components, or change in costs of components could affect
Cabletron's ability to deliver its products in a timely and cost-effective
manner and may adversely impact the Company's operating results and supplier
relationships. In addition, even if the Company is able to obtain these
critical components in sufficient volume and on schedules that permit the
Company to satisfy delivery requirements, the Company has little control over
the cost, which could adversely impact the Company's gross margins.


                                      11
<PAGE>

Competition

  The market for network communications products is intensely competitive,
subject to rapid technological change and significantly affected by new
product introductions and other market activities of industry participants.
This market historically has been dominated by Cisco Systems, which has
substantially greater market share than any other competitor, including
Cabletron, and which as a result of its early leadership position in the
market has been able to develop and promote a broad product line. The
remainder of the network communications products market is highly fragmented.
The Company's other principal competitors include 3Com, Alcatel, Avaya,
formerly part of Lucent, Extreme Networks, Foundry Networks, Juniper Networks,
Hewlett-Packard, Nortel Networks, Marconi, and Siemens, although the Company
also experiences competition from a number of other smaller public and private
companies. The Company may experience a reluctance by the Company's
prospective customers to replace or expand their current infrastructure
solutions, which may be supplied by one or more of these established
competitors, with the Company's products. There has also been a trend toward
consolidation in the Company's industry for several years, and the Company
expects this trend to continue as companies attempt to strengthen or maintain
their market share positions. The Company believes that consolidation among
the Company's competitors and potential competitors could result in stronger
competitors with expanded product offerings and a greater ability to
accelerate their development of new technologies.

  The Company believes that the Company competes primarily on the basis of
breadth of product and service offerings, features and functionality of
products, total cost of ownership, price, performance, customer service and
the ability to provided comprehensive networking solutions and value-added
features such as security and virtual private networks.

  As the Company continues to expand operations in markets outside the United
States, the Company will also encounter new competitors and competitive
environments. The Company's foreign competitors may have a better
understanding of their market and longer working relationships with potential
customers.

Intellectual Property

  The Company generally relies on a combination of patent, copyright,
trademark and trade secret laws and contractual restrictions to establish and
protect the Company's technology. As of March 3, 2001, the Company had a total
of 683 issued patents. The Company's products are also protected by trade
secret and copyright laws of the United States and other jurisdictions. These
legal protections provide only limited protection. Further, the market for
network communications solutions is subject to rapid technological change.
Accordingly, while the Company intends to continue to protect the Company's
proprietary rights where appropriate, the Company believes that the Company's
success in maintaining a technology leadership position is more dependent on
the technical expertise and innovative abilities of the Company's personnel
than on these legal protections.

  Despite the Company's efforts to protect the Company's proprietary
technology, the Company cannot provide assurance that steps it takes will be
adequate to prevent misappropriation of the Company's technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. The laws of
many countries do not protect proprietary technology to as great an extent as
do the laws of the United States. The Company may need to resort to litigation
in the future to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of
the Company's proprietary rights or those of others. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
the intellectual property rights of others. Any resulting litigation could
result in substantial costs and diversion of management and adverse effect on
the Company's business and financial condition.

Backlog

  The Company's backlog at March 3, 2001 was approximately $139.4 million,
compared with backlog at February 29, 2000 of approximately $118.0 million,
compared with backlog at February 28, 1999 of

                                      12
<PAGE>

approximately $170.0 million. During the year ended February 29, 2000, the
Company and Compaq agreed to restructure their relationship. The new
relationship has resulted in the Company maintaining a lower amount of backlog
related to Compaq. Although the Company expects that its backlog at March 3,
2001 will be filled in fiscal 2002, orders included in backlog may be canceled
or rescheduled by the customer without significant penalty. Therefore, backlog
as of any particular date may not be indicative of the Company's actual
revenues for any succeeding fiscal period.

Inventory and working capital

  During fiscal 2001, the Company maintained minimal raw materials inventory
and no work-in-process inventory due to the outsourcing of its manufacturing
operations that occurred during the year ended February 29, 2000. In
anticipation of potential shortages of critical components, the Company
increased its finished goods inventory levels from $61.1 million at February
29, 2000 to $94.7 million at March 3, 2001. The outsourcing of manufacturing,
including the sale of a portion of its inventory to Flextronics, allowed an
increased focus on supply chain management and the streamlining of product
offerings which resulted in inventory levels decreasing from $229.5 million,
at February 28, 1999, to $85.0 million, at February 29, 2000.

  The working capital increase in fiscal year 2001 is primarily as a result of
a balance sheet reclassification of $242.7 million of Efficient common stock,
from a long term investment to a short term investment; a $111.4 million
reduction in the deferred gain relating to the Efficient holdings; a $56.5
million increase in deferred tax assets, which are primarily as a result of an
increase in tax attributes generated in the current year; and a $52.8 million
increase in prepaid expenses and other assets due primarily to an increase in
non-trade receivables. The working capital increase in fiscal year 2000 is
primarily as a result of the Company's sale of its and fixed assets that
related to manufacturing operations, as the Company completed its outsourcing
of manufacturing.

Employees

  As of March 3, 2001, the Company had approximately 3,845 full-time
employees, compared to 4,456 full-time employees at February 29, 2000, and
5,951 full-time employees at February 28, 1999. The decreased number of
employees from February 29, 2000 to March 3, 2001 was mainly attributable to
the Company reducing approximately 570 individuals from the Company's
workforce as each operating subsidiary adjusted their workforce to reflect
their business model. The decrease in the number of full-time employees from
February 28, 1999 to February 29, 2000 resulted from the Company's outsourcing
arrangement with Flextronics, which resulted in 966 employees transferring to
Flextronics, and the termination of 418 full-time employees in accordance with
the Company's restructuring initiative announced in March 1999. The Company's
employees are not represented by a union or other collective bargaining agent
and the Company considers its relations with its employees to be good.

ITEM 2. PROPERTIES

  The Company owns and operates a number of buildings in Rochester, New
Hampshire, including a 63,000 square foot office building that serves as the
corporate headquarters of Cabletron and Enterasys. Other buildings, including
a 78,750 square foot building and a 60,000 square foot building, accommodate
the Enterasys engineering, finance and human resources departments. The
Company also owns two additional buildings that it does not utilize in its
regular operations. These buildings include a 72,000 square foot manufacturing
building that is currently leased to Flextronics International and a 63,900
square foot office building, which was vacated as part of the Company's fiscal
year 2001 restructuring initiative and remains available for lease.

  The Company also leases a 75,000 square foot building, which contains
Enterasys warehousing and distribution. There is also a leased 75,000 square
foot warehouse and distribution facility in Shannon, Ireland. The Company
leases several Enterasys engineering sites, including 42,000 square feet in
Salt Lake City, UT, 32,000 square feetin Toronto, Canada, 152,000 square feet
in Andover, MA, 17,500 square feet in Acton, MA, 6,800 square

                                      13
<PAGE>

feet in Columbia, MD, and 68,000 square feet in Nashua, NH. The Nashua
facility is utilized by Enterasys and Aprisma personnel.

  Riverstone leases a 129,000 square foot building in Santa Clara, CA that
serves as Riverstone's corporate headquarters. This facility also houses
Riverstone's core engineering function.

  The Company leases a 62,865 square foot building in Durham, NH that serves
as Aprisma's corporate headquarters. Aprisma has signed a 10 year lease, with
three five-year renewal options, to relocate, in December 2001, its corporate
headquarters to a 100,000 square foot Class A office building that is
currently under construction in Portsmouth, NH.

  GNTS leases a building in Houston, TX that serves as GNTS' corporate
headquarters, GNTS also maintains satellite offices throughout the US and the
rest of the world.

  The Company and its subsidiaries maintain a large number of sales offices
throughout the world, ranging from 1,000 to 25,000 square feet.

  Financial information regarding leases and lease commitments are contained
in Note 10 of "Notes to the Consolidated Financial Statements."

ITEM 3. LEGAL PROCEEDINGS

  Since October 24, 1997, nine shareholder 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. By order dated
March 3, 1998 these lawsuits, which are similar in material respects, were
consolidated into one class action lawsuit, captioned In re Cabletron Systems,
Inc. Securities Litigation (C.A. No. 97-542-SD). The case has been transferred
to the District of Rhode Island. The complaint alleges that Cabletron and
several of its officers and directors disseminated materially false and
misleading information about Cabletron's operations and acted in violation of
Section 10(b) and Rule 10b-5 of the Exchange Act during the period between
March 3, 1997 and December 2, 1997. The complaint further alleges that certain
officers and directors profited from the dissemination of such misleading
information by selling shares of the common stock of Cabletron during this
period. The complaint does not specify the amount of damages sought on behalf
of the class. Cabletron and other defendants moved to dismiss the complaint,
and by Order dated December 23, 1998, the District Court expressed its
intention to grant Cabletron's motion to dismiss unless plaintiffs amended
their complaint within 30 days (or January 22, 1999). The plaintiffs served a
second consolidated class action complaint, and Cabletron filed a motion to
dismiss this second complaint. In a ruling dated May 23, 2001, the disctrict
court dismissed this complaint with prejudice. The plaintiffs may choose to
appeal this ruling to the First Circuit Court of Appeals. If the plaintiffs
were to appeal, prevail upon appeal and subsequently prevail on the merits of
the case, Cabletron could be required to pay substantial damages.

                                      14
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  During the fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of the Company's security holders.

Executive Officers of the Registrant

  The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name                             Age                  Position
----                             ---                  --------
<S>                              <C> <C>
Enrique P. Fiallo...............  48 President of Enterasys

Eric Jaeger.....................  38 Executive Vice President

David J. Kirkpatrick............  49 Chief Financial Officer and Chief Operating
                                     Officer

Piyush Patel....................  45 Chairman, Chief Executive Officer and
                                     President

Michael A. Skubisz..............  34 President of Aprisma
</TABLE>

  Enrique P. (Henry) Fiallo has served as President of Enterasys since
February 2000. From November 1998 through February 2000, he was Executive Vice
President and Chief Information Officer of Cabletron. Prior to joining
Cabletron, he served as Senior Vice President and Chief Information Officer at
Entergy Services, Inc. Prior to joining Entergy, he was Vice President of
Logistics Information Systems at Ryder Systems, Inc., in Miami, Florida, where
he held a variety of senior management positions in IT, MIS and
telecommunications during a 10-year tenure.

  Eric Jaeger has served as an Executive Vice President since June 1999. From
October 1998 to June 1999, he served as Senior Vice President and General
Counsel. Prior to joining Cabletron, he was a corporate attorney with the law
firm of Ropes & Gray.

  David J. Kirkpatrick has served as Chief Operating Officer since October
2000 and Chief Financial Officer since August 1990. He served as Director of
Finance from August 1990 until March 1998. From 1986 to 1990, he was a Vice
President of Zenith Data Systems, a subsidiary of Zenith Electronics
Corporation.

  Piyush Patel has served as Chairman of the Board of Directors, Chief
Executive Officer and President since June 1999. From October 1998 to June
1999, he was Senior Vice President of Worldwide Engineering. From September
1996 to October 1998, he served as Chief Executive Officer of Yago Systems,
Inc. From 1980 to 1996, he held a variety of senior management positions at
Intel, Sun Microsystems, MIPS computers and QED.

  Michael A. Skubisz has served as President of Aprisma since July 1999. From
September 1998 to July 1999, he served as Chief Technology Officer of
Cabletron. From 1993 to 1998, he served as Cabletron's Vice President of
Product Marketing and Product Management. Prior to 1993, he held various
positions at Cabletron, including Regional Manager of Field Engineering in the
New York City office, where he began his career with Cabletron in 1988.

                                      15
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

STOCK PRICE HISTORY

  The following table sets forth the high and low sale prices for the
Company's Common Stock as reported on the New York Stock Exchange (symbol--CS)
during the last two fiscal years. As of May 16, 2001, the Company had
approximately 2,730 stockholders of record. The Company has paid no dividends
on its Common Stock and anticipates it will continue to reinvest earnings to
finance future growth.

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ ------
<S>                                                                <C>    <C>
Fiscal 2001
First quarter..................................................... $51.50 $17.50
Second quarter....................................................  37.50  20.38
Third quarter.....................................................  37.44  15.00
Fourth quarter.................................................... $23.25 $11.31
Fiscal 2000
First quarter..................................................... $15.31 $ 7.25
Second quarter....................................................  16.81  11.94
Third quarter.....................................................  24.38  14.81
Fourth quarter.................................................... $49.00 $22.00
</TABLE>

 Strategic Investors

  In connection with an investment on August 29, 2000 totaling $87.8 million,
by an investor group led by Silver Lake Partners, L.P. ("Silver Lake")
(collectively, the "Strategic Investors") in Cabletron and its four separate
Operating Subsidiaries, Cabletron and the Operating Subsidiaries issued a
number of securities to the strategic investors, as described below.

 Securities in Cabletron

  On August 29, 2000, Cabletron issued to the strategic investors (i) 65,000
shares of its Series A Preferred Stock at an initial conversion rate of $40.00
per share and 25,000 shares of its Series B Preferred Stock at an initial
conversion rate of $30.00 per share, both of which are participating
redeemable convertible preferred stock and (ii) Class A Warrants to purchase
up to 250,000 shares of Cabletron common stock for an initial exercise price
of $45.00 per share and Class B Warrants to purchase up to 200,000 shares of
Cabletron common stock for an initial exercise price of $35.00 per share.

 Securities in the Operating Subsidiaries

  The strategic investors have agreed to purchase from the Operating
Subsidiary:

  .  up to 0.75% of the fully diluted outstanding common stock of Enterasys
     for approximately $6.2 million;

  .  up to 0.75% of the fully diluted outstanding common stock of Riverstone
     for approximately $7.8 million;

  .  up to 0.75% of the fully diluted outstanding common stock of Aprisma for
     approximately $3.4 million; and,

  .  up to 0.75% of the fully diluted outstanding common stock of GNTS for
     approximately $2.6 million.


                                      16
<PAGE>

  Each Operating Subsidiary has also granted to the strategic investors rights
to purchase shares of its common stock in the following amounts:

  .  up to 4.25% (inclusive of the 0.75% discussed above) of the fully
     diluted outstanding common stock of Enterasys for approximately $43.7
     million;

  .  up to 4.25% (inclusive of the 0.75% discussed above) of the fully
     diluted outstanding common tock of Riverstone for approximately $49.0
     million;

  .  up to 4.25% (inclusive of the 0.75% discussed above) of the fully
     diluted outstanding common stock of Aprisma for approximately $22.7
     million; and,

  .  up to 4.25% (inclusive of the 0.75% discussed above) of the fully
     diluted outstanding common stock of GNTS for approximately $16.7
     million.

  The percentages and exercise prices outlined above are subject to change
upon the occurrence of events described in detail in Exhibits 3.2, 4.2, 4.3,
4.6 and 4.9-4.12 (the "Silver Lake Exhibits"). In addition to the forgoing
securities, the Company has agreed to issue to the Strategic Investors
additional warrants upon the occurrence of certain events relating to the
Operating Subsidiaries, including the sale of an Operating Subsidiary or the
failure of an Operating Subsidiary to consummate an IPO. In addition, the
Company has agreed to cause each of the four Operating Subsidiaries to issue
additional rights to purchase shares of its common stock upon the occurrence
of certain events.

  The terms and rights of each security listed above are described in full in
the Silver Lake Exhibits. All issuances of securities to the strategic
investors described above were made without registration under the Securities
Act of 1933, as amended (the "Securities Act") in reliance upon an exemption
from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.

  Since the August 29, 2000 investment by the Strategic Investors, Riverstone
has completed an IPO of its common shares. Riverstone issued 10,000,000 of its
common shares to public shareholders for net proceeds of approximately $108.8
million. In connection with the Riverstone IPO the Strategic Investors
exercised their Riverstone common stock purchase rights and purchased
5,401,970 shares of Riverstone common stock for approximately $46.6 million.
The strategic investors also received warrants to purchase 104,167 shares of
Riverstone common stock for $12.00 per share, the IPO offering price. As of
March 3, 2001, the Strategic Investors had not exercised these warrants. The
Riverstone IPO has resulted in a 14.3% minority investment in the Company's
Riverstone subsidiary.

                                      17
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

                            CABLETRON SYSTEMS, INC.

                   CONSOLIDATED STATEMENTS OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                             Fiscal Year Ended
                          -----------------------------------------------------------
                           March 3,    February   February 28,  February    February
                             2001      29, 2000       1999      28, 1998    28, 1997
                          ----------  ----------  ------------ ----------  ----------
                                   (in thousands, except per share data)
<S>                       <C>         <C>         <C>          <C>         <C>
Net revenues............  $1,071,453  $1,459,593   $1,411,279  $1,377,330  $1,406,552
Cost of revenues........     558,350     803,820      811,350     676,291     595,407
                          ----------  ----------   ----------  ----------  ----------
  Gross margin..........     513,103     655,773      599,929     701,039     811,145
Research and
 development............     146,134     184,614      210,393     181,777     161,674
Selling, general and
 administrative.........     471,743     414,568      435,824     372,224     301,263
Amortization of
 intangible assets......      37,280      41,270       27,978       1,565         206
Stock-based
 compensation...........       4,980         --           --          --          --
Special charges.........      51,150      21,096      217,350     234,285      21,724
                          ----------  ----------   ----------  ----------  ----------
  Income (loss) from
   operations               (198,184)     (5,775)    (291,616)    (88,812)    326,278
Interest income, net....      35,179      18,587       15,089      18,578      19,422
Other income, net.......    (541,127)    746,209          --          --          --
Minority interest.......         166         --           --          --          --
                          ----------  ----------   ----------  ----------  ----------
  Income (loss) before
   taxes................    (703,966)    759,021     (276,527)    (70,234)    345,700
Income tax expense
 (benefit)..............     (97,963)    294,750      (31,136)    (35,273)    119,621
                          ----------  ----------   ----------  ----------  ----------
  Net income (loss).....  $ (606,003) $  464,271   $ (245,391) $  (34,961) $  226,079
Dividend on beneficial
 conversion of
 preferred..............     (16,854)        --           --          --          --
Accretive dividend on
 preferred stock........      (6,044)        --           --          --          --
                          ----------  ----------   ----------  ----------  ----------
Net income (loss) to
 common shareholders....  $ (628,901) $  464,271   $ (245,391) $  (34,961) $  226,079
                          ==========  ==========   ==========  ==========  ==========
Net income (loss) per
 share--basic...........  $    (3.40) $     2.62   $    (1.47) $    (0.22) $     1.46
                          ==========  ==========   ==========  ==========  ==========
Net income (loss) per
 share--diluted.........  $    (3.40) $     2.46   $    (1.47) $    (0.22) $     1.42
                          ==========  ==========   ==========  ==========  ==========
Weighted average number
 of shares outstanding--
 basic..................     184,770     177,541      167,432     157,686     155,207
                          ==========  ==========   ==========  ==========  ==========
Weighted average number
 of shares outstanding--
 diluted................     184,770     188,618      167,432     157,686     158,933
                          ==========  ==========   ==========  ==========  ==========
<CAPTION>
                                             Fiscal Year Ended
                          -----------------------------------------------------------
                           March 3,    February   February 28,  February    February
                             2001      29, 2000       1999      28, 1998    28, 1997
                          ----------  ----------  ------------ ----------  ----------
                                               (in thousands)
<S>                       <C>         <C>         <C>          <C>         <C>
Balance Sheet Data:
Working capital.........  $  901,313  $  448,168   $  370,945  $  593,046  $  679,056
Total assets............   1,912,109   3,166,507    1,566,500   1,682,048   1,310,809
Redeemable convertible
 preferred stock........     109,589         --           --          --          --
Stockholders' equity....   1,290,035   2,147,439    1,089,833   1,085,075   1,085,452
</TABLE>

                                       18
<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 any forward-looking
statements. See "Business Environment and Risk Factors" below.

 Results of Operations

  This table sets forth the Company's net revenues, cost of revenues, expenses
by category, income (loss) from operations, interest income, income (loss)
before income taxes and net income (loss), each expressed as percentages of
net revenues, for the fiscal years ended March 3, 2001, February 29, 2000 and
February 28, 1999:

<TABLE>
<CAPTION>
                                                          2001    2000   1999
                                                          -----   -----  -----
<S>                                                       <C>     <C>    <C>
Net revenues............................................. 100.0%  100.0% 100.0%
Cost of revenues.........................................  52.1    55.1   57.5
                                                          -----   -----  -----
  Gross margin...........................................  47.9    44.9   42.5
Research and development.................................  13.6    12.6   14.9
Selling, general and administrative......................  44.0    28.5   29.6
Amortization of intangible assets........................   3.5     2.8    2.0
Stock-based compensation.................................   0.5     --     --
Special charges..........................................   4.8     1.4   16.6
                                                          -----   -----  -----
  Income (loss) from operations.......................... (18.5)   (0.4) (20.6)
Interest income, net.....................................   3.3     1.3    1.1
Other income, net........................................ (50.5)   51.1    --
Minority interest........................................   0.0     --     --
                                                          -----   -----  -----
  Income (loss) before income taxes...................... (65.7)   52.0  (19.5)
Income tax expense (benefit).............................  (9.1)   20.2   (2.2)
                                                          -----   -----  -----
Net income (loss)........................................ (56.6)   31.8  (17.3)
Dividend on beneficial conversion of preferred...........  (1.6)    --     --
Accretive dividend on preferred stock....................  (0.5)    --     --
                                                          -----   -----  -----
Net income (loss) to common shareholders................. (58.7%)  31.8% (17.3%)
                                                          =====   =====  =====
</TABLE>

Results of the fiscal year ended March 3, 2001 vs. fiscal year ended February
29, 2000

  Net revenues for the year ended March 3, 2001 decreased by 26.6% to $1,071.5
million from $1,459.6 million for the year ended February 29, 2000. Net
revenues decreased due to the discontinuations of several non-core businesses,
related product lines and the restructuring of the Compaq relationship. In
addition, revenues of the Company's non-core legacy products decreased as the
Company's transformation continued and the Company focused on selling products
and services related to the ongoing businesses of the four Operating
Subsidiaries. During the third quarter of fiscal 2001, the Company sold its
DNPG business and most of the Company's non-core legacy products. Net revenues
within the United States (domestic) decreased $330.7 million or 34.8% to
$620.6 million or 57.9% of total net revenues for fiscal 2001 from $951.3
million or 65.2% of total net revenues for fiscal 2000. Net revenues in Europe
decreased $110.2 million or 32.2% to $232.0 million or 21.7% of total net
revenues for fiscal 2001 from $342.2 million or 23.4% of total net revenues
for fiscal 2000. Net revenues within Pacific Rim increased $10.7 million or
9.2% to $127.1 million or 11.9% of total net revenues for fiscal 2001 from
$116.4 million or 8.0% of total net revenues for fiscal 2000. Net revenues
within other regions increased $42.1 million or 84.8% to $91.7 million or 8.6%
of total net revenues for fiscal 2001 from $49.6 million or 3.4% of total net
revenues for fiscal 2000.


                                      19
<PAGE>

  Total segment net revenues of Enterasys were $793.2 million and $642.5
million fiscal years 2001 and 2000, respectively, representing an increase of
$150.7 million or 23.5% from fiscal year 2000 to 2001. The increases in net
revenues were primarily due to increased revenues of multi-layer switching
products, wireless and security products.

  Total segment net revenues of Riverstone were $98.3 million and $23.1
million in fiscal years 2001 and 2000, respectively, representing an increase
of $75.2 million or 326% from fiscal year 2000 to 2001. The increases in net
revenues were primarily due to the addition of new telecommunications service
provider customers both in the United States and internationally.

  Total segment net revenues of Aprisma were $74.1 million, and $52.3 million
in fiscal years 2001 and 2000, respectively, representing an increase of $21.8
million or 41.7% from fiscal year 2000 to 2001. The increase in revenues of
Aprisma products was attributable to increased revenues to new service
provider and enterprise customers, continued penetration of current service
provider and enterprise customers in Aprisma's target markets as well as the
expansion of Aprisma product line capabilities to manage the latest generation
optical and broadband networking equipment in the optical and metro
aggregation markets. In addition, Aprisma's product line capabilities
expansion included the integration and management of multi-vendor security
devices and applications.

  Total segment net revenues of GNTS were $48.3 million and $26.8 million in
fiscal years 2001 and 2000 respectively, representing an increase of $21.5
million or 80.6% from fiscal year 2000 to 2001. The increase in net revenues
was primarily due to the addition of new professional service customers both
in the United States and internationally.

  Total other net revenues of Cabletron's non-core legacy and discontinued
products decreased $642.9 million, or 89.9%, to $72.1 million in fiscal year
2001 compared to net revenues of $714.9 million in fiscal 2000. The decrease
in revenues of non-core legacy and discontinued products was principally due
to the discontinuations of the DNPG and NetVantage product lines, as well as
lower revenues of other non-core legacy products.

 Gross Margin, Expenses and Interest Income

  Gross margin of Enterasys products increased $132.2 million or 50.2% to
$395.4 million, or 49.8% of net revenues, in fiscal year 2001 compared to
$263.2 million, or 41.0% of net revenues, in fiscal year 2000. The increase in
gross margin is primarily related to the increase in net revenues and is also
attributable to overall cost savings as a result of outsourcing manufacturing.

  Gross margin of Riverstone products increased $43.4 million or 390.6% to
$54.4 million, or 55.4% of net revenues, in fiscal year 2001 compared to $11.1
million, or 48.1% of net revenues, in fiscal year 2000. The improvements in
gross margins are primarily attributable to the increase in net revenues and
economies of scale achieved from increased net revenues.

  Gross margin of Aprisma products increased $16.0 million, or 45.8%, to $51.0
million, or 68.8% of net revenues, in fiscal year 2001 compared to $34.9
million, or 66.9% of net revenues, in fiscal year 2000. The increase in gross
margin was due to increased revenues of Spectrum licenses, an improved revenue
mix of higher margin core products compared to lower margin third party
products and the execution and implementation of OEM agreements resulting in
improved margins.

  Gross margin of GNTS services increased $9.0 million or 70.5% to $21.7
million, or 44.9% of net revenues, in fiscal year 2001 compared to $12.7
million, or 47.5% of net revenues, in fiscal year 2000. The improvements in
gross margins are primarily attributable to increased net revenues.

  Gross margin of Cabletron non-core legacy and discontinued products
decreased $343.2 million to a loss of $9.4 million, or 13.0% or net revenues,
in fiscal year 2001 compared to $333.8 million, or 46.7% of net revenues, in
fiscal year 2000. The decrease in gross margins is primarily attributable to
decreased net revenues associated with products that the Company discontinued,
sales returns, and pricing allowances.

                                      20
<PAGE>

  Research and development ("R&D") expenses in the year ended March 3, 2001
decreased to $146.1 million, or 13.6% of net revenues, compared to $184.6
million, or 12.6% of net revenues, in the year ended February 29, 2000. R&D
decreased in accordance with prior restructuring initiatives and refocused
efforts on core projects identified in the restructuring initiative. The
Company plans to continue to develop new products through a combination of
internal development efforts and acquisitions.

  Selling, general and administrative ("SG&A") expenses were $471.7 million,
or 44.0% of net revenues, in the year ended March 3, 2001 compared to $414.6
million, or 28.5% of net revenues, in the year ended February 29, 2000. The
increase in SG&A expenses, as a percentage of net revenues was primarily a
result of increased professional fees, consulting fees and asset impairments
that were incurred as a result of the transformation of the Company.

  Amortization of intangible assets expense was $37.3 million, or 3.5% of net
revenues, in the year ended March 3, 2001 compared to $41.3 million, or 2.8%
of net revenues, in the year ended February 29, 2000. The change in
amortization expense was primarily a result of the acquisition of Indus River
and the divestiture of DNPG both of which were completed during the year ended
March 3, 2001.

  Stock-based compensation expense in the year ended March 3, 2001 was $5.0
million; $1.4 million was amortized related to stock options granted with
exercise prices below fair market value on the date of grant and $1.5 million
was amortized related to stock issued that was contingent on future services
in connection with the Company's acquisition of NSW. The Company expects to
recognize future quarterly charges of $1.3 million per quarter during each of
the next eight quarters followed by $0.6 million per quarter during each of
the subsequent eight quarters, in connection with these grants. An additional
$2.1 million was related to stock options granted to consultants. As the
majority of these options have been fully vested and the related services have
been performed, the Company does not expect any significant future
compensation expenses associated with these options granted to consultants.

  In the first quarter of fiscal 2001, the Company recorded a special charge
of $27.1 million related to the restructuring initiative undertaken during May
2000 in connection wth the Company's transformation. The special charges
consisted of $13.5 million related to asset impairments, $11.9 million related
to severance benefits and $1.7 million related to exit costs. These charges
reflect the expected sale of an office building in Rochester, NH, exit costs
associated with the planned closure of 20 sales offices worldwide (11 of which
were closed as of March 3, 2001), the write-off of certain assets that were
not required subsequent to the transformation of the Company and the planned
reduction of approximately 570 individuals from the Company's global
workforce. The reduction in the global workforce involved principally sales,
engineering and administrative personnel and has also included targeted
reductions impacting most functions within the Company. The exit costs which
the Company expects to incur relate primarily to long-term lease commitments.
This initiative is intended to establish the proper sizing of the transformed
Company and to align the revenue opportunities with cost models. As of March
3, 2001, 567 employees have been terminated in accordance with the plan.

  In the year ended March 3, 2001, the Company recorded $51.2 million of
special charges. These special charges consisted of $25.6 million of in-
process research and development costs related to the acquisition of Indus
River and a $27.1 million charge taken in connection with a restructuring
initiative that resulted from the Company's transformation offset by a $1.5
million adjustment to the prior year restructuring. In the year ended February
29, 2000, the Company recorded $21.1 million of special charges for the
restructuring initiative undertaken during March 1999. These charges reflect
the closure of the Company's manufacturing facility in Ohio, the planned
closure of 40 sales offices worldwide (38 sales offices were closed), the
consolidation and outsourcing of various manufacturing operations, the write-
off of certain assets that were not required subsequent to the restructuring
and the planned reduction of approximately 1,000 individuals from the
Company's global workforce (678 individuals were terminated in accordance with
the initiative). The reduction in the global workforce was principally
manufacturing and distribution personnel but also included targeted reductions
impacting most functions within the Company. The exit costs which the Company
expects to incur relate

                                      21
<PAGE>

primarily to long-term lease commitments which will be paid out over a few
years. This initiative was intended to reduce the expense structure of the
Company; reduce cost of goods sold; increase cash reserves; provide higher
return on assets and revenue per employee; enable aggressive asset reduction
and consolidation initiatives and increase net income. These actions were
completed prior to June 3, 2000. There is no assurance that the Company will
achieve the intended benefits of the restructuring initiative. The benefits
are subject to numerous risks that could impair the Company's ability to
realize the expected benefits when expected, or ever.

  Enterasys' income from operations increased $97.3 million to income of $59.5
million in fiscal year 2001 compared to a loss of $37.8 million in fiscal year
2000. This increase was due principally to increased gross margins and reduced
R&D expenses.

  Riverstone's loss from operations decreased $0.6 million, or 1.6%, to $36.8
million in fiscal year 2001 compared to $37.4 million in fiscal year 2000.
This increase was due principally to increased gross margins being offset by
higher operating expenses as Riverstone developed its own infrastructure apart
from Cabletron and to increased spending in R&D and selling expenses.

  Aprisma's loss from operations decreased $0.3 million, or 2.9%, to $9.7
million in fiscal year 2001 compared to a loss of $10.0 million in fiscal year
2000. The additional loss was principally due to increased sales and marketing
expenses including an increase in the number of direct sales people.

  GNTS' loss from operations increased $6.0 million or 41.6% to $20.3 million
in fiscal 2001 compared to $14.3 million in fiscal 2000. This increase was due
to higher gross margins being offset by increased operating expenses.

  The other segment's loss from operations increased $253.6 million to $97.5
million in fiscal year 2001 compared to income from operations of $156.1
million in fiscal year 2000. The change was principally due to
discontinuations of non-core product lines and the sale of DNPG.

  Net interest income in the year ended March 3, 2001 was $35.2 million
compared to $18.6 million in the year ended February 29, 2000. The increase in
net interest income in the year ended March 3, 2001 as compared to the year
ended February 29, 2000 was due to higher interest rates and higher average
invested balances.

  Net other expense in the year ended March 3, 2001 was $541.1 million. Of
this total $403.5 million relates to write-down of marketable and non-
marketable securities to their expected realizable value, recognition of
$30.4 million of deferred gain relating to the Efficient transaction,
$21.4 million loss on the sale of marketable and non-marketable securities,
$143.1 million loss on the disposal of the DNPG business and $3.5 million of
other non-operating expenses. Net other income in the year ended February 29,
2000 was $746.2 million. Of this total $705.1 million relates to the realized
gain from the sale of a subsidiary, FlowPoint, $37.2 million relates to the
restructuring of the Company's relationship with Compaq and $4.6 million
relates to the sales of corporate equities.

 Income (Loss) Before Income Taxes

  Loss before income taxes was $704.0 million in the year ended March 3, 2001,
compared to income before income taxes of $759.0 million in the year ended
February 29, 2000. In the year ended March 3, 2001, the Company recorded
$541.1 million of net other expenses, $34.1 million of expenses related to the
transformation of the Company's business, $30.1 million of segment costs,
special charges of $25.6 million for in-process research and development,
arising out of the acquisition of Indus River and $25.6 million charge for
restructuring. In the year ended February 29, 2000, the Company recorded
$734.1 million of net other income and a $21.1 million restructuring charge.

 Income Tax Expense (Benefit)

  The Company's effective tax rate was 13.9% for the year ended March 3, 2001
compared to 38.8% for the year ended February 29, 2000. The income tax benefit
was $98.0 million for the year ended March 3, 2001

                                      22
<PAGE>

compared to an income tax expense of $294.8 million in the year ended February
29, 2000. The tax benefit for the year ended March 3, 2001 included a non-
deductible in-process research and development charge and $126.6 million
charge for the write-down of certain deferred tax assets, which in
management's opinion are not likely to be realized. The tax expense for the
year ended February 29, 2000 included other income items, which in total, were
taxed at higher tax rates than normal operating income and expenses. The year
ended February 29, 2000 income tax expense included a $277.0 million tax
charge related to the sale of FlowPoint, a $13.3 million tax charge related to
the Compaq alliance agreement, a $9.1 million tax benefit related to the
amortization of purchased acquisition costs, a $8.2 million tax benefit
related to the write-off of product lines and a $6.5 million tax benefit
related to the manufacturing divestiture.

Results of the fiscal year ended February 29, 2000 vs. fiscal year ended
February 28, 1999

  Net revenues for the year ended February 29, 2000 increased by 3.4% to
$1,459.6 million from $1,411.3 million for the year ended February 28, 1999.
Net revenues increased primarily as a result of increased revenues of the
Company's Layer-3 and Layer-4 switched technology products. Worldwide revenues
of switched products increased approximately $138.2 million, or 17.1%, to
$948.4 million in the year ended February 29, 2000 compared to $810.2 million
in the year ended February 28, 1999. The increase in revenues of switched
products was principally due to an increase in revenues of the Company's
Switch Router products, which offset declining revenues of older switched
products. The increase has been as a result of the Company's success in
penetrating the WAN segment of the Layer-3 switching market, creation of
Layer-4 switching technology products and continuation of customers migrating
from the older shared media technology products. Secondarily, revenues
increased as a result of increased revenues to Compaq in connection with the
transition from an OEM agreement between Compaq and the Company, with minimum
purchase commitments, to an alliance agreement. As part of this transition,
Compaq purchased $85.0 million ($48.7 million in the fourth quarter of fiscal
2000) of existing inventory that was in the Company's manufacturing pipeline
and paid the Company $11.7 million as a pricing rebate for Compaq's failure to
meet its minimum purchase commitments in the year ended February 29, 2000.
Revenues of shared media products decreased by approximately $99.4 million, or
60.0%, to $66.3 million in the year ended February 29, 2000 from $165.8
million in the year ended February 28, 1999. Revenues of shared media products
steadily decreased throughout the years ended February 29, 2000 and February
28, 1999 as a result of both declining unit shipments and lower prices per
product. Revenues of Spectrum and other miscellaneous products increased by
approximately $11.7 million, or 7.1%, to $177.0 million in the year ended
February 29, 2000 compared to $165.3 million in the year ended February 28,
1999. This increase was largely a result of customers purchasing older
miscellaneous products that enable them to maintain their existing systems.
Revenues from professional services and maintenance remained relatively flat
at approximately $267.9 million in the year ended February 29, 2000 and $270.1
million in the year ended February 28, 1999.

  Net revenues within the United States in the year ended February 29, 2000
were $951.3 million or 65.2% of net revenues, compared to $829.4 million or
58.8% of net revenues in the year ended February 28, 1999. Domestic net
revenues increased in the year ended February 29, 2000 compared to the year
ended February 28, 1999, largely due to revenues of switched media products
increasing by more than 29% domestically and revenues of products in the
Company's manufacturing pipeline to Compaq.

  Net revenues in Europe were $342.2 million or 23.4% of total net revenues in
the year ended February 29, 2000 compared to $430.3 million or 30.5% of total
net revenues in the year ended February 28, 1999. The decrease in revenues was
a result of decreases across a majority of the product lines, including a
$39.5 million, or 66.1%, from the year ended February 28, 1999 to the year
ended February 29, 2000, decrease in shared media products and a $10.3
million, or 4.0%, from the year ended February 28, 1999 to the year ended
February 29, 2000, decrease in revenues of switched products. Revenues
decreased in the year ended February 29, 2000 compared to February 28, 1999 as
revenues of DNPG/Compaq products began to decline.

  Net revenues in the Pacific Rim ("Pac Rim") were $116.4 million or 8.0% of
total net revenues in the year ended February 29, 2000 compared to $114.2
million or 8.1% of total net revenues in the year ended February

                                      23
<PAGE>

28, 1999. Revenues of switched products increased $21.6 million, or 31.9%,
from the year ended February 28, 1999 to the year ended February 29, 2000, but
were offset by decreases in revenues across a majority of the product lines,
including a $8.6 million, or 61.7%, decrease in service revenues.

  Net revenues in other regions were $49.6 million, or 3.4%, of total net
revenues in the year ended February 29, 2000 compared to $37.4 million, or
2.7%, of total net revenues in the year ended February 28, 1999. Revenues of
switched products increased $14.5 million, or 76.1%, from the year ended
February 28, 1999 to the year ended February 29, 2000.

  The effect of foreign exchange rate fluctuations did not have a significant
impact on the Company's operating results in the periods presented.

  Gross margin was $655.8 million, or 44.9%, in the year ended February 29,
2000 compared to $599.9 million, or 42.5%, in the year ended February 28,
1999. The improvement in gross margin during the year ended February 29, 2000,
as compared to the year ended February 28, 1999, reflects lower materials
costs associated with streamlined product offerings.

  Research and development ("R&D") expenses in the year ended February 29,
2000 decreased to $184.6 million, or 12.6% of net revenues, compared to $210.4
million, or 14.9% of net revenues, in the year ended February 28, 1999. R&D
decreased, in the year ended February 29, 2000 compared to the year ended
February 28, 1999 as a result of the elimination of staff and facilities from
various R&D departments and refocused efforts on core projects identified in
the restructuring initiative.

  Selling, general and administrative ("SG&A") expenses were $414.6 million,
or 28.5% of net revenues, in the year ended February 29, 2000 compared to
$435.8 million, or 30.9% of net revenues, in the year ended February 28, 1999.
The decrease in SG&A expenses, as a percentage of net revenues in the year
ended February 29, 2000 compared to the year ended February 28, 1999, was
primarily a result of reductions in sales offices, staff and the writeoff of
fixed assets.

  Amortization of intangible assets expenses were $41.3 million, or 2.8% of
net revenues, in the year ended February 29, 2000 compared to $28.0 million,
or 2.0% of net revenues, in the year ended February 28, 1999. The change in
amortization expense was a result of acquisitions, that were completed during
the year ended February 28, 1999, having a full year's worth of amortization
expense.

  Special charges were $21.1 million in the year ended February 29, 2000
compared to $217.4 million in the year ended February 28, 1999. In the year
ended February 29, 2000, the $21.1 million of special charges were taken for a
restructuring initiative undertaken in connection with the Company's decision
to outsource its manufacturing operations. In the year ended February 28,
1999, special charges were taken for in-process research and development
related to the acquisition of Yago Systems, Inc. ($150.0 million), Ariel
($26.0 million), FlowPoint ($12.0 million) and NetVantage ($29.4 million).

  Net interest income for the year ended February 29, 2000 was $18.6 million
compared to $15.1 million in the year ended February 28, 1999. The increase in
net interest income in the year ended February 29, 2000 as compared to the
year ended February 28, 1999 was due to a significant increase in cash,
resulting from the sale of an equity investment near the end of fiscal 2000.

 Income (Loss) Before Income Taxes

  The improvement from a loss before income taxes, in the year ended February
28, 1999, to income before income taxes, in the year ended February 29, 2000,
was primarily due to the Company's sale of its FlowPoint subsidiary and income
related to its restructured relationship with Compaq as well as higher gross
profit margins and lower operating expenses. The increase in loss before taxes
in the year ended February 28, 1999 was due to lower gross profit margins as
the Company continued its migration from shared media products to switched
products and higher personnel costs in R&D departments, which more than offset
the decrease in special charges.

                                      24
<PAGE>

 Income Tax Expense (Benefit)

  The Company's effective tax rate was 38.8% for the year ended February 29,
2000 compared to 11.3% for the year ended February 28, 1999. The income tax
expense of $294.8 milllion in the year ended February 29, 2000 compared to an
income tax benefit of $31.1 million in the year ended February 28, 1999. The
tax benefit for the year ended February 28, 1999 included large non-deductible
in process research and development charges and acquisition costs and tax
benefits related to the Ariel acquisition, fixed asset loss and losses from
operations, which produced a higher tax rate than normal operating income and
expenses. The year ended February 28, 1999 income tax benefit included a $10.2
million tax benefit related to the acquisition of Ariel and a $6.8 million tax
benefit related to the fixed asset loss.

 Business Combinations

Fiscal Year 2001 Acquisitions

  On January 31, 2001, Cabletron acquired Indus River, a designer and marketer
of virtual private networks for enterprise-class customers. In connection with
the acquisition, Cabletron issued 3,641,139 shares of Cabletron common stock
and 45,471 shares of Cabletron Series C preferred stock to the shareholders of
Indus River in exchange for all of the outstanding shares of stock of Indus
River. In addition, Cabletron assumed outstanding options to purchase Indus
River stock, which options were converted into options to purchase 406,898
shares of its common stock and 5,000 shares of its Series C preferred stock.
Cabletron also assumed outstanding warrants to purchase Indus River stock,
which warrants were converted into warrants to purchase 23,472 shares of its
common stock and 293 shares of its Series C preferred stock.

  The Company has recorded the cost of the acquisition at approximately $184.6
million, including direct costs of $2.6 million. This acquisition has been
accounted for under the purchase method of accounting. Approximately $25.6
million of the purchase price was allocated to in-process research
development. Accordingly, the Company recorded an expense of $25.6 million for
this in-process research and development. The excess of cost over the
estimated fair value of net assets acquired of $154.3 million was allocated to
goodwill and other intangible assets and is being amortized on a straight-line
basis over periods of 3-10 years. The Company's consolidated results of
operations include the operating results of Indus River from the acquisition
date. Cabletron also issued stock options in connection with the acquisition
of Indus River. The Company calculated the intrinsic value of the unvested
stock options as of the consummation date of the merger, and as a result
recorded approximately $2.9 million of unearned stock-based compensation for
the value of the options. The Company incurred approximately $0.1 million of
compensation expense as earned during fiscal year 2001.

  In connection with our acquisition of Indus River Networks, we allocated
$25.6 million of the purchase price to in-process research and development
projects. This allocation represents the estimated fair value of these
projects based on risk-adjusted cash flows related to the incomplete products.
At the date of the acquisition, these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, we expensed these costs as of the
acquisition date.

  We used an independent third-party appraiser to assess and allocate values
to the in-process research and development. The values 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 Indus River Networks'
enterprise-class virtual private network technologies. The percentage of
completion method was utilized for the valuation procedures. The percentage
complete was determined based on a ratio of completed project engineer hours
to total estimated engineer hours required to complete the project.

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

                                      25
<PAGE>

  The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process
research and development 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 projections used to value the in-process
research and development were 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 us and our competitors.

  In the model used to value this in-process research and development, total
revenues attributable to Indus River Networks were projected to exceed $550
million within five years, assuming the successful completion and market
acceptance of the major research and development efforts. As of the valuation
date, it was determined that RiverWorks, the existing product of Indus River
Networks, would generate revenues through end of fiscal 2006, with $23.4
million in that year and $23.6 million in fiscal 2005. The estimated revenues
for the products resulting from in-process research and development were
projected to peak at approximately $300 million in fiscal 2005 and then
decline as other new products and technologies were projected to enter the
market.

  Our cost of sales was estimated based on internal projections generated by
Indus River Networks, review of market and industry data and discussions with
Indus River Networks management regarding anticipated gross margin
improvements. Due to the opportunities in the virtual private networking
market and the unique technology architecture of RiverWorks, substantial gross
margins were expected through the forecast period. Our cost of sales was
projected to average approximately 32% through fiscal 2005 and increase
gradually to 38% in fiscal 2010. Our selling, general and administrative
expenses, including depreciation, were projected to remain constant as a
percentage of sales at approximately 27%. Our research and development
expenditures were expected to peak in fiscal 2003 at 23% of sales and then
remain constant at 15% of sales in fiscal 2004 and thereafter.

  The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return for companies in between the
start-up and the early development stages. Due to the nature of the forecast
and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 30-40% were used for the business
enterprise and for the in-process research and development. We believe these
rates were appropriate because they were commensurate with the early stage of
development for Indus River Networks; the uncertainties in the economic
estimates described above; the inherent uncertainty surrounding the successful
development of the purchased in-process research and development; the useful
life of the technology; the profitability levels of the technology; and the
uncertainty of technological advances that are unknown at this time. The
forecasts used in valuing in-process research and development were based upon
assumptions that we believed to be reasonable. However, at the time these
forecasts were made, it was uncertain whether the underlying assumptions used
to estimate expected project sales, development costs or profitability, or the
events associated with such projects, would prove accurate. Our assumptions
may have been incomplete or inaccurate and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may vary
from the projected results.

  The projected and actual results from the acquisition date of January 31,
2001 have been materially consistent. The majority of the projects in-process
at the time of the acquisition have progressed reasonably consistent with the
planned schedule. Research and development expenditures since the acquisition
have not differed materially from expectations.

  We expect to successfully complete these research and development programs.
However, there is risk associated with the completion of the projects and
these projects may not prove technologically or commercially successful.

  Such factors as efforts to achieve technical viability, uncertainty
regarding standards required for new products, the rapid pace of changing
technology inherent in the industries in which the Company operates, as well
as competitive threats, contribute to the significant risks of completing the
development of these technologies. The nature of the efforts to develop the
acquired technologies into commercially viable products

                                      26
<PAGE>

consist principally of planning, designing, and testing activities necessary
to determine that the products can meet market expectations, including
functionality and technical requirements. Failure to bring these products to
market in a timely manner could result in a loss of market share or a lost
opportunity to capitalize on emerging markets and could have a material
adverse impact on the Company's business and operating results and a portion
of the value of the in-process research and development might never be
realized.

  We believe, as we did at the time of the acquisition, that if we do not
successfully complete these outstanding in-process research and development
efforts, our future operating results would be materially adversely impacted
and may never realize the value of these in-process research and development
programs.

  On September 7, 2000, the Company acquired Network Security Wizards, Inc., a
privately held company that develops intrusion detection system technology.
Under the terms of the agreement, the Company (i) issued 210,286 shares of its
common stock to the two stockholders of NSW, (ii) issued 157,714 shares of its
common stock to be held in escrow on behalf of the two stockholders of NSW
(subject to forfeiture upon the occurrence of certain events) and (iii)
granted 32,000 options to purchase the Company's common stock in exchange for
all of the issued and outstanding capital stock of NSW.

  The Company recorded the cost of the acquisition at approximately $8.2
million, including direct costs of $0.2 million. This acquisition has been
accounted for under the purchase method of accounting. The cost represents
210,286 shares of common stock at $35.00 per share and 32,000 options, valued
at approximately $0.6 million. The excess of cost over the estimated fair
value of the net assets acquired of $8.0 million was allocated to goodwill and
is being amortized on a straight-line basis over a period of four years. The
157,714 shares of common stock that are held in escrow were recorded as
unearned stock-based compensation of $5.5 million and were not included in the
cost of the acquisition. The stock-based compensation will be amortized over a
two-year period. The Company's consolidated results of operations include the
operating results of NSW from the acquisition date.

Fiscal 2000 Divestitures

  On January 18, 2000, the Company and Flextronics entered into a definitive
agreement for Cabletron to divest its manufacturing and repair services
operations located in Rochester, New Hampshire and Limerick, Ireland to
Flextronics which closed on February 29, 2000. Flextronics acquired the
Company's manufacturing assets, inventories and manufacturing personnel.
Simultaneously with this transaction, the Company contracted with Flextronics
as an OEM to produce most of its products. In anticipation of this
divestiture, the Company recorded a charge of $5.2 million related to lowering
its carrying value of inventory as cost of goods sold expense and recorded a
$4.7 million charge related to personnel costs as SG&A expense. The Company
received $60.5 million for inventory that it sold to Flextronics and $18.1
million for manufacturing related fixed assets, including buildings.

  On December 18, 1999, the Company sold its FlowPoint subsidiary to Efficient
Networks, Inc. in exchange for 7.2 million shares of Efficient common stock
and 6,300 shares of Efficient preferred stock. The common stock was subject to
various restrictions on resale. The preferred stock was converted into 6.3
million shares of common stock following the approval of Efficient
shareholders at a special meeting on April 12, 2000. In connection with the
sale of FlowPoint, Cabletron and Efficient entered into an OEM agreement under
which Cabletron will resell the Efficient and FlowPoint product lines.


                                      27
<PAGE>

Fiscal 1999 Acquisitions

 Yago Systems, Inc.

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

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

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

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

  The nature of the efforts to develop the acquired in-process technology into
commercially viable products principally 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 two years following the acquisition
and the Company expected to begin generating the economic benefits from the
technologies in the second half of fiscal 1999. Expenditures to complete the
MSR technology were expected to total approximately $10.0 million two years
following the acquisition.

                                      28
<PAGE>

  At the time of the acquisition, Cabletron anticipated generating significant
increases in revenues and undiscounted cash flows from the acquisition of
Yago, with a projected peak in 2003 and then a decline as other new products
displaced those used in the original forecast assumptions. Yago, which has
been renamed Riverstone Networks, makes up Cabletron's Internet infrastructure
solutions business for Internet service providers and other telecommunications
service providers. Cabletron also maintains a significant enterprise market
business. The Yago-based products began generating significant revenue for the
enterprise markets during Cabletron's fiscal year ended February 28, 1999.
This began with the release of a fully featured MSR8000 in July 1998 and
continued with the release of the MSSR16000 product. Cabletron continued to
increase sales of products based on the Yago in-process projects in the
enterprise market during the fiscal year ended February 29, 2000 based on
additional successful product introductions including the MSR8600, MSR2000 and
Wide Area Network interfaces. Based on Riverstone's markets the Company began
to experience significant revenue growth from the Yago products beginning the
third and fourth quarters of the fiscal year ended February 29, 2000. This
reflected the growth of the service provider marketplace and acceptance of the
underlying Yago technology as it pertained to the service provider market.

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

  The estimated revenues for the in-process projects were projected to peak in
2003 and then decline as other new products and technologies were projected to
enter the market. Cost of sales was estimated based on Yago's internally
generated projections and discussions with management regarding anticipated
gross margin improvements. Selling, general and administrative expenses were
projected to remain constant. Research and development expenses were projected
to decrease as a percentage of sales as the in-process projects were
completed.

  The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 45% to 50% were used for the
business enterprise and for the in-process R&D. The Company believes these
rates were appropriate because they were commensurate with Yago's stage of
development; the uncertainties in the economic estimates described above; the
inherent uncertainty surrounding the successful development of the purchased
in-process technology; the useful life of such technology; the profitability
levels of such technology; and, the uncertainty of technological advances that
are unknown at this time.

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

  Such factors as efforts to achieve technical viability, uncertainty
regarding standards required for new products, the rapid pace of changing
technology inherent in the industries in which the Company operates, as well
as competitive threats contribute to the significant risks of completing the
development of these technologies. The nature of the efforts to develop the
acquired technologies into commercially viable products

                                      29
<PAGE>

consist principally of planning, designing, and testing activities necessary
to determine that the products can meet market expectations, including
functionality and technical requirements. Failure to bring these products to
market in a timely manner could result in a loss of market share or a lost
opportunity to capitalize on emerging markets and could have a material
adverse impact on the Company's business and operating results and a portion
of the value of the in-process research and development might never be
realized.

 DSLAM division of Ariel Corporation

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

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

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

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

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

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

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


                                      30
<PAGE>

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

  The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. During the fourth quarter of
fiscal 2000, the Company determined to abandon its efforts regarding DSL-
related technology. The Company's DSL efforts were largely a result of
technology acquired in the acquisitions of Ariel and FlowPoint. The Company
finalized its decision to abandon R&D on DSL technology when it sold its
FlowPoint subsidiary, thus the Company expensed the remainding $12.2 million
of the Ariel goodwill.

 FlowPoint Corp.

  On September 9, 1998, Cabletron acquired FlowPoint, Corp., a privately held
manufacturer of digital subscriber line router networking products for $20.6
million, payable in four installments. Prior to the Agreement, Cabletron owned
42.8% of the outstanding shares of FlowPoint stock. The first installment was
paid in the form of cash while the remaining 3 installments were paid in the
form of Cabletron common stock. During the year ended February 29, 2000, the
Company issued approximately 1.0 million shares of common stock pursuant to
the installment payments. In addition, Cabletron assumed 494,000 options,
valued at approximately $2.7 million.

  Cabletron recorded the cost of the acquisition at approximately $25.0
million, including direct costs of the acquisition. Cabletron's consolidated
results of operations include the operating results of FlowPoint from the
acquisition date until December 18, 1999, the date on which the Company sold
FlowPoint to Efficient.

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

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

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

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

                                      31
<PAGE>

expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.

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

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

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

  The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. During the fourth quarter of
its year ended February 29, 2000, the Company sold its FlowPoint division to
Efficient Networks. Consequently, the Company expensed the remainder of the
goodwill associated with this acquisition which resulted in decreasing the
realized gain from the sale of FlowPoint.

 NetVantage, Inc.

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

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

  In connection with the acquisition of NetVantage, the Company recorded
special charges of $29.4 million for in-process research and development
projects. The valuation of the IPR&D incorporated the guidance on IPR&D
valuation methodologies promulgated by the SEC. These methodologies
incorporate the notion that cash flows attributable to development efforts,
including the effort to be completed on the development effort underway, and
development of future versions of the product that have not yet been
undertaken, should be excluded in the valuation of IPR&D. This allocation
represents risk-adjusted cash flows related to the incomplete products. At the
date of acquisition, the development of these projects had not yet reached
technological

                                      32
<PAGE>

feasibility and the R&D in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.

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

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

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

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

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

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

  The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believed to be reasonable
but which, at the time, was inherently uncertain and unpredictable. At the
time such forecasts were made, it was uncertain whether the underlying
assumptions used to estimate expected project sales, development costs or
profitability. The Company's assumptions may have been incomplete or
inaccurate, and unanticipated events and circumstances were likely to occur.
For these reasons, actual results may vary from the projected results.


                                      33
<PAGE>

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

  The Company began recognizing the economic benefits from the technologies in
the fourth quarter of the year ended February 28, 1999. The estimated
expenditures to complete these projects were reasonable compared to actual
expenditures incurred. The Company ceased further research into these projects
during the year ended March 3, 2001.

  The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of acquisition. During the last quarter of fiscal
year 2001, the Company wrote off $14.5 million of the remaining intangible
assets relating to NetVantage when it finalized its decision to abandon
research and development on NetVantage related technology and discontinued
sales of NetVantage products.

 Liquidity and Capital Resources

  Cash, cash equivalents and short and long-term investments decreased to
$1,085.1 million at March 3, 2001 compared $2,476.8 million at February 29,
2000. The balance at February 29, 2000 included $1,666.5 million, recorded as
long-term investments, related to the Company's investment in Efficient stock.
At March 3, 2001, the Company's investment in Efficient was valued at $242.7
million. Net cash used by operating activities was $189.7 million in the year
ended March 3, 2001 compared to net cash provided by operating activities of
$207.1 million in the year ended February 29, 2000. The decrease in net cash
provided by operating activities during the year ended March 3, 2001 was
primarily a result of net changes in inventories, prepaid expenses and
accounts payable and other non-cash items. Net cash used in investing
activities was $46.4 million during the year ended March 3, 2001 compared to
net cash used in investing activities of $67.3 million in the year ended
February 29, 2000. The decrease in cash used in investing activities was
primarily as a result of a decrease in capital expenditures and the receipt of
proceeds on written call options. Net cash provided by financing activities
was $239.0 million in the year ended March 3, 2001 compared to $52.1 million
in the year ended February 29, 2000. The increase was primarily due to cash
received for the issuance of preferred stock, warrants and stock purchase
rights. The Company also received proceeds from the issuance of subsidiary
shares and exercise of subsidiary stock purchase rights primarily related to
the Riverstone IPO. These amounts were partially offset by the Company's
repurchase of its common stock.

  Accounts receivable, net of allowance for doubtful accounts, were $210.9
million, or 66 days of sales outstanding, at March 3, 2001 compared to $228.4
million at February 29, 2000, or 54 days sales outstanding. The increase in
days of sales outstanding was a result of the timing of sales and related
collections.

  Worldwide inventories were $98.1 million at March 3, 2001 or 63 days of
inventory, compared to $85.0 million, or 37 days of inventory, at February 29,
2000. The increase of days in inventory was due to the increase in finished
goods inventory purchased to protect against an anticipated shortage of supply
components.


                                      34
<PAGE>

  During the years ended March 2, 2001, February 29, 2000, and February 28,
1999 capital expenditures totaled $47.8 million, $44.4 million and $44.8
million, respectively, and were principally related to upgrades of computer
related equipment and investments in technology to improve productivity.

  In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and marketable securities will provide
adequate funds to support the Company's working capital and capital
expenditure requirements for at least the next twelve months.

 Business Environment and Risk Factors

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

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

Risks Related to Cabletron

The completion of our transformation involves risks.

  Following shareholder approval at our 2000 annual meeting, we contributed a
substantial portion of our operating assets and liabilities to four operating
subsidiaries, Enterasys, Riverstone, Aprisma and GNTS. In February 2001, we
completed an initial public offering of Riverstone. On March 28, 2001, we
announced our intention to distribute all of our shares of Riverstone to our
shareholders in a "spin-off" transaction and to establish Aprisma and
Enterasys as independent public companies. In addition, we are considering
other strategic alternatives with respect to our operating subsidiaries,
including the sale of one or more of the operating subsidiaries.

  We are not obligated to complete any of these transactions and cannot assure
you whether any distribution or other strategic transaction will be approved
or implemented. The distribution of Riverstone and the establishment of
Aprisma and Enterasys as independent public companies will depend upon the
individual performance of each subsidiary, market conditions and similar
considerations. Also, all of these transactions are subject to conditions,
including IRS rulings and shareholder votes, if deemed necessary or desirable,
as well as other regulatory approvals and uncertainties. Any distribution or
other strategic transaction will be implemented only if our Board of Directors
continues to believe that it is in the best interests of the subsidiary and
our stockholders. If we fail to satisfy any conditions, if we encounter
unfavorable or different financial, industry or economic conditions, or if
other unforeseen events intervene, some or all of the currently planned steps
could occur on a different timetable or on different terms than we currently
anticipate, or might not occur at all.

  We believe that the shares of Enterasys and Riverstone that we own comprise
a substantial portion of our value. Following any distribution of these
shares, our stock price will likely trade at substantially lower prices, and
may remain low unless our stockholders approve and we implement a reverse
stock split. In addition, investors who hold our shares because of our
ownership of Enterasys, Riverstone or both may sell our shares, creating
further downward pressure on our stock price. A portion of our common stock is
held by mutual funds obligated to purchase stocks in the Standard & Poor's 500
Index. If we do not remain in this index following the distribution of
Enterasys or Riverstone, these mutual funds will be required to sell our
stock. Substantial sales of our common stock following the distribution of
Enterasys, Riverstone or both could cause the market price of our common stock
to fall.


                                      35
<PAGE>

  Many of our management personnel are employees of Enterasys and will leave
Cabletron when we distribute shares of Enterasys to our shareholders.
Enterasys provides many administrative services to us and our other operating
subsidiaries under a sub-services agreement, which Enterasys may terminate
upon one full fiscal quarter's notice. Following our distribution of Enterasys
shares, Enterasys may terminate this sub-services agreement, and we may be
unable to develop sufficient administrative capacity to operate efficiently by
the effective date of termination.

  We have received a ruling from the Internal Revenue Service that the
distribution of Riverstone common stock to shareholders of Cabletron will
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code of 1986, as amended. We may seek a similar ruling, or an opinion of legal
counsel, with respect to our intention to establish Aprisma and Enterasys as
independent public companies. Rulings and opinions of this nature are subject
to various representations and limitations, and in any event, are not binding
upon the Internal Revenue Service or any court. If a distribution of a
subsidiary's shares fails to qualify as a tax-free distribution under Section
355 of the Internal Revenue Code, we will recognize a taxable gain equal to
the difference between the fair market value of the applicable subsidiary on
the date of the distribution and our adjusted tax basis in the applicable
subsidiary's common stock on the date of the distribution. In addition, each
of our stockholders will be treated as having received a taxable corporate
distribution in an amount equal to the fair market value of the applicable
subsidiary's common stock received by the stockholder on the date of
distribution. Any taxable gain recognized by us or our stockholders as a
result of a distribution which failed to qualify as a tax-free distribution
under Section 355 is likely to be substantial.

  Limitations under Section 355 of the Internal Revenue Code may restrict our
ability to use our capital stock following any distribution of a subsidiary.
These limitations will generally prevent us from issuing capital stock to the
extent that the issuance is part of a plan or series of related transactions
that includes one or more of the distributions, and pursuant to which one or
more persons acquire shares of our capital stock that represents 50% or more
of the voting power or 50% or more of the value of our capital stock. These
limitations may restrict our ability to undertake transactions involving the
issuance of our capital stock that we believe would be beneficial.

We have a history of operating losses in recent years and may not operate
profitably in the future.

  We have experienced operating losses in recent years and may not achieve or
sustain profitability in the future. For the fiscal years ended February 28,
1999, February 29, 2000 and March 3, 2001, we incurred operating losses of
$291.6 million, $5.8 million and $198.2 million respectively. We will need to
generate higher revenues and lower our expenses to achieve and maintain
profitability. We may not be able to generate sufficient revenues or reduce
expenses to achieve profitability, and if we do achieve profitability, we may
not be able to sustain or increase profitability over subsequent periods. If
the current global economic slow down were to continue or the United States
were to enter a recession, our ability to increase revenues may be seriously
adversely affected.

The unpredictability of our quarterly results of operations may adversely
affect the trading price of our common stock.

  Our quarterly operating results are likely to vary significantly in the
future based on a number of factors related to our industry, the markets for
our products and how we manage our business. We have little or no control over
many of these factors and any of these factors could cause the price of our
common stock to fluctuate significantly. In addition to the other risks that
we discuss in this section, the following may adversely affect our quarterly
operating results:

  .  fluctuations in the demand for our products and services;

  .  the timing and size of sales of our products or the cancellation or
     rescheduling of significant orders;

  .  the timing of product introductions and product acceptance by customers;

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

  .  increases in the prices or decreases in the availability of the
     components we purchase;

  .  product returns from our distribution partners in excess of reserves;

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

  .  the timing and level of research and development and prototype expenses;

  .  the mix of products and services sold; and

  .  changes in the distribution channels through which we sell our products.

  We plan to continue to increase our operating expenses to fund greater
levels of research and development, broaden our customer support capabilities
and develop new distribution channels. We also expect our general and
administrative expenses to increase as our operating subsidiaries address the
increased reporting and other administrative demands that will result from
being a publicly traded company.

  Our operating expenses are largely based on anticipated organizational
growth and revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, if revenue for a
particular quarter is below our expectations for any of the reasons set forth
above, or for any other reason, we could not proportionately reduce operating
expenses for that quarter. This revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter,
which could result in significant variations in our operating results from
quarter to quarter.

  Historically we have recognized a substantial portion of our revenues in the
last month of a quarter, with revenues frequently concentrated in the last two
weeks of the quarter. Most distribution partners and customers tend to make a
majority of their purchases at the end of a quarter, in part because they
believe they are able to negotiate lower prices and more favorable terms at
that time. Because we rely on the generation of a large portion of revenues at
the end of the quarter, traditionally we have not been able, and in the future
do not expect to be able, to predict our financial results for any quarter
until very late in the quarter. Due to this end-of-period buying pattern, we
may not achieve our financial forecasts, either because expected sales do not
occur in the anticipated quarter or because they occur at lower prices or on
terms that are less favorable to us than anticipated.

  Due to the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. You
should not rely on our results or growth for one quarter as any indication of
our future performance. It is likely that in some future quarters, our
operating results may be below the expectations of public market analysts and
investors. In this event, the price of our common stock may fall.

Risks Related To Our Industry

There is intense competition in the market for network communications
equipment, which could prevent us from increasing revenue and sustaining
profitability.

  The network infrastructure equipment market is dominated by Cisco Systems,
which currently has substantially greater market share than any other
participant in that market, including us. In addition, this market is
intensely competitive, subject to rapid technological change and significantly
affected by new product introductions and other market activities of industry
participants. Our other principal competitors include Alcatel; Avaya, formerly
part of Lucent; Extreme Networks; Foundry Networks; Hewlett-Packard; Nortel
Networks; Marconi; and 3Com. We also experience competition from a number of
other smaller public and private companies. We may experience reluctance by
our prospective customers to replace or expand their current infrastructure
solutions, which may be supplied by one or more of these competitors, with our
products. There has also been a trend toward consolidation in our industry for
several years, and we expect this trend to continue as companies attempt to
strengthen or maintain their market share positions. We believe that
consolidation among our competitors and potential competitors could result in
stronger competitors with expanded product offerings and a greater ability to
accelerate their development of new technologies.


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<PAGE>

  Some of our competitors, particularly Cisco, have significantly more
established customer support and professional services organizations and
substantially greater selling and marketing, technical, manufacturing,
financial and other resources than we do. Many of our competitors also have
more customers, greater market recognition and more established relationships
and alliances in the industry. As a result, these competitors may be able to
develop, enhance and expand their product offerings more quickly, adapt more
swiftly to new or emerging technologies and changes in customer demands,
devote greater resources to the marketing and sale of their products, pursue
acquisitions and other opportunities more readily and adopt more aggressive
pricing policies. Due to the rapidly evolving markets in which we compete,
additional competitors with significant market presence and financial
resources may enter our market, thereby further intensifying competition. We
expect that competitive pressures may result in price reductions, reduced
margins and loss of market share, which would materially harm our ability to
increase revenues and profitability.

  We and our competitors have pursued and continue to pursue a strategy of
acquiring network communications companies that have developed advanced
networking technologies. The acquisition of these companies allows us and our
competitors to offer new products without the lengthy time delays associated
with internal product development. We compete with our competitors to acquire
companies of this nature. As a result, in addition to other factors, the
prices paid to acquire companies of this nature is often very high, when
compared to the assets and sales of these companies. The greater resources of
our competitors may enable them to compete more effectively for the
acquisition of companies of this nature and may cause us to pay higher prices
for the companies we do acquire. In addition, we and our competitors invest in
early-stage network communications companies to secure access to advanced
technology under development by these companies and to improve our chances of
acquiring these companies in the future. If we are unable to successfully
invest in companies with promising network communications technology, we may
be unable to gain access to their technology and may have more difficulty
acquiring these companies in the future.

If we do not respond effectively and on a timely basis to rapid technological
changes, our products could become obsolete and we may be unable to attract
new customers or retain our existing customers.

  The market for network communications equipment is characterized by rapid
technological change, evolving industry standards and frequent new product
introductions. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies or the
emergence of new industry standards could render our existing or future
products obsolete. Accordingly, we may be required to make significant and
ongoing investments in future periods in order to remain competitive. The
development of new products or technologies is a complex and uncertain process
that requires the accurate anticipation of technological and market trends. We
may be unable to respond quickly or cost-effectively to these developments or
to obtain the necessary funds to develop or acquire new technologies or
products needed to compete.

If we do not anticipate and meet evolving customer requirements, we will not
retain our current customers or attract new customers.

  Our future success depends upon our ability to develop and manage customer
relationships to introduce a variety of new products and product enhancements
that address the increasingly sophisticated needs of our customers. Our
current and prospective customers may require product features and
capabilities that our products do not have. We must effectively and timely
anticipate and adapt to customer requirements and offer products that meet
those demands. Our failure to develop products that satisfy evolving customer
requirements would seriously harm our ability to achieve or sustain market
acceptance for our products and prevent us from recovering our investment in
developing products. We have responded in the past, and expect to respond in
the future, to customer requirements by occasionally licensing products from
others. If we are unable to license these products, or to license them on
favorable terms, we may be unable to provide our customers with the products
and services they demand.

  In addition, we may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. Material delays in

                                      38
<PAGE>

introducing new products may cause customers to forego purchases of our
products and purchase those of our competitors, which could seriously harm our
business.

We may expend significant resources on educating potential customers about our
products without achieving actual sales.

  The purchase of our products often represents a significant capital
investment by our customers related to their network infrastructure and
typically involves significant internal procedures involving the evaluation,
testing, implementation and acceptance of new technologies. We often must
provide a significant level of education to our customers on the benefits of
our products and services. This frequently results in a lengthy sales process,
and purchases of our products are subject to a number of significant risks,
including customer budgetary constraints and internal acceptance reviews.
During this time we may incur substantial sales and marketing expenses and
expend significant management effort. If we fail to recognize revenue from a
particular customer after making such a substantial investment, our operating
results may be negatively impacted.

We may be unable to expand our indirect distribution channels, which may
hinder our ability to increase our revenues.

  Our sales and distribution strategy relies heavily on our indirect sales
efforts, including value-added resellers, systems integrators and original
equipment manufacturers. We believe that our future success will also depend
on our ability to maintain and expand existing relationships, as well as
establish successful new relationships, with a variety of systems integrators.
We have entered into agreements with only a small number of large systems
integrators to date. We also intend to increase our reliance on our value-
added resellers, which requires that we add more sales personnel to monitor
this distribution channel. Our value-added resellers and systems integrators
are not, and will not be, prohibited from selling products and services that
compete with ours. We cannot be certain that we will be able to maintain our
existing agreements or reach new agreements with additional systems
integrators or other distribution partners on a timely basis or at all, or
that our systems integrators and distribution partners will devote adequate
resources to selling our products and services. If we are unable to expand our
indirect sales operations, we may be unable to increase market awareness or
sales of our products and services, which may prevent us from increasing or
sustaining our revenues.

We work with other companies to develop products in our primary market or in
complementary markets, which increases our reliance on others for generating
revenues and may lead to disputes about ownership of intellectual property.

  We intend to establish strategic partnerships with industry-leading
organizations in complementary markets to incorporate our networking
technology into products or solutions sold by these organizations. We have not
yet entered into any agreements of this type and may be unable to do so in the
future on favorable terms, if at all. If we are able to enter into these
agreements, we will likely be unable to control the amount and timing of
resources our partners devote to developing products that incorporate our
technology and the efforts they devote toward selling these products. If we
are unable to enter into these agreements on favorable terms, or if these
partners do not devote sufficient resources to developing and selling the
products that incorporate our technology, our revenue growth will be lower
than expected.

  Although we intend to retain all rights to our technology in these
arrangements, we may be unable to negotiate the retention of these rights.
Furthermore, disputes may arise over the ownership of technology developed as
a result of these partnerships. These and other potential disagreements
between us and these partners could lead to delays in the research,
development or sale of products we are developing with them or more serious
disputes, which may be costly to resolve. Disputes with partners who also
serve as indirect distribution channels for our products could reduce our
revenues from sales of our products in our traditional market, as well as in
these complementary markets.

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<PAGE>

We use several key components for our products that are purchased from single
or limited sources and we could lose sales if these sources fail to fulfill
our needs.

  We currently work with third parties to manufacture our key proprietary
application specific integrated circuits, which are custom designed circuits
built to perform a specific function more rapidly than a general purpose
microprocessor. These proprietary circuits are very complex and these third
parties are our sole source suppliers for the specific types of application
specific integrated circuits that they supply to us. We also have limited
sources for the semiconductor chip that we use in our wireless Roam About
solution. We do not carry significant inventories of these components and we
do not have a long-term fixed price or minimum volume agreement with these
suppliers. If we encounter future problems with these vendors, we likely would
not be able to develop an alternate source in a timely manner. There are also
several key components used in the manufacture of our products that are
purchased from single or limited sources, and we are dependent upon supply
from these sources to meet our needs. Our contract manufacturers may
experience shortages and delays in obtaining these or other components in the
future. If we are unable to purchase our critical components, particularly our
application specific integrated circuits, at such times and in such volumes as
our business requires, we will not be able to deliver our products and
services to our customers in accordance with their schedule requirements. In
addition, any delay in obtaining key components for new products under
development could cause a significant delay in the initial launch of these
products. Any delay in the launch of new products could harm our reputation
and operating results.

  In addition, even if we are able to obtain these critical components in
sufficient volume and on schedules that permit us to satisfy our delivery
requirements, we have little control over their cost. Accordingly, the lack of
alternative sources for these components may force us to pay higher prices for
them. If we are unable to obtain these components from our current suppliers
or others at economical prices, our margins could be adversely impacted unless
we raise the prices of our products in a commensurate manner. Existing
competitive conditions may not permit us to do so, in which case we may suffer
increased losses or reduced profits.

We depend on a single contract manufacturer for providing substantially all of
our manufacturing requirements, and a failure by this contract manufacturer
would impair our ability to meet the demands of our customers.

  We do not have internal manufacturing capabilities. We outsource
substantially all of our manufacturing to one company, Flextronics
International, Ltd., which procures material on our behalf and provides
comprehensive manufacturing services, including assembly, test, control and
shipment to our customers. If we experience increased demand for our products,
we will need to increase our manufacturing capacity with Flextronics or add
additional contract manufacturers. Flextronics also builds products for other
companies, and we cannot be certain that they will always have sufficient
quantities of inventory and capacity available to fill orders placed by our
customers or that they will allocate their internal resources to fill these
orders on a timely basis. Further, qualifying a new contract manufacturer and
commencing volume production is expensive and time consuming. The loss of our
existing contract manufacturer or our failure to timely qualify a new contract
manufacturer to meet anticipated demand increases could result in a
significant interruption in the supply of our product. In this event, we could
lose revenue and damage our customer relationships.

If we fail to accurately predict our manufacturing requirements, we could
incur additional costs or experience manufacturing delays.

  We use a forward-looking forecast of anticipated product orders to determine
our material requirements. If we overestimate our requirements, our contract
manufacturer may have excess inventory, which would increase our costs. If we
underestimate our requirements, our contract manufacturer may have an
inadequate inventory, which could result in delays in delivery to our
customers and recognition of revenue. In addition, the lead times for
materials and components we order vary significantly and depend on factors
such as the specific supplier, contract terms and demand for each component at
a given time. For example, some of our application specific integrated
circuits have a lead time of up to eight months.

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<PAGE>

Our customers and business partners may not recognize our new brands, which
could adversely affect our sales and marketing efforts and cause our revenue
to decline.

  Before the transformation of our business, we sold our products and services
under the Cabletron name. We now sell our products and services under the
names of our operating subsidiaries and are changing the trademarks and trade
names under which we conduct our business to these names. We are also changing
the names of some of our products. We believe that the sale of our products
and services has significantly benefited from the use of the Cabletron brand
name. Because we have previously marketed our products under the Cabletron
name, our existing customers and business partners and investors generally may
not recognize our new brands or the names of our products. We plan to incur
significant sales and marketing expense to build new strong brand identities.
The expenses we incur toward building our brands, however, will not result in
immediate returns and it may be a long time before our customers and business
partners recognize and make positive connections with our new brands. If we
fail to promote our new brands and new product names successfully in local and
international markets, our business may suffer.

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

  We regard our products and technology as proprietary. We attempt to protect
them through a combination of patents, copyrights, trademarks, trade secret
laws, contractual restrictions on disclosure and other methods. These methods
may not be sufficient to protect our proprietary rights. We also generally
enter into confidentiality agreements with our employees, consultants and
customers; and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise misappropriate and use
our products or technology without authorization, particularly in foreign
countries where the laws may not protect our proprietary rights to the same
extent as do the laws of the United States, or to develop similar technology
independently. We have in the past and may need to resort to litigation in the
future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. This litigation could result in substantial costs and diversion of
resources and could harm our business.

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

  We license technology from third parties and are continuing to develop and
acquire additional intellectual property. Although we have not been involved
in any material litigation relating to our intellectual property, we expect
that participants in our markets will be increasingly subject to infringement
claims. Third parties may try to claim our products infringe upon their
intellectual property, in which case we would be forced to defend ourselves or
our customers, manufacturers and suppliers against those claims. Any claim,
whether meritorious or not, could be time consuming, result in costly
litigation and/or require us to enter into royalty or licensing agreements.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. In addition, any royalty or licensing
agreements might not be available on terms acceptable to us or at all, in
which case we would have to cease selling, incorporating or using the products
that incorporate the challenged intellectual property and expend substantial
amounts of resources to redesign our products. If we are forced to enter into
unacceptable royalty or licensing agreements or to redesign our products, our
business and prospects could suffer.

Our significant sales outside the United States subject us to increasing
foreign political and economic risks, including foreign currency fluctuations.

  Our sales outside of the United States accounted for 42% in the fiscal year
ended March 3, 2001, 35% in the fiscal year ended February 29, 2000 and 41% of
our revenues in the fiscal year ended February 28, 1999. One of our principal
growth strategies is to expand our presence in international markets both
through increased international sales and strategic relationships.
Consequently, we anticipate that sales outside of the United States will
continue to account for a significant portion of our revenues in future
periods. We often experience increased

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<PAGE>

costs in international markets, which reduces our margins and profitability.
Our international presence subjects us to international risks, including:

  .  foreign currency exchange fluctuations;

  .  political and economic instability;

  .  delays in meeting customer commitments associated with managing an
     international distribution system;

  .  increased time to collect receivables caused by slower payment practices
     in many international markets;

  .  managing export licenses, tariffs and other regulatory issues pertaining
     to international trade;

  .  increased effort and costs associated with the protection of our
     intellectual property in foreign countries;

  .  natural disasters, political uncertainties and changing regulatory
     environments in foreign countries; and

  .  difficulties in hiring and managing employees in foreign countries.

  The sales of our products are denominated primarily in United States
dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies could cause our products to become less
competitive in international markets and could result in a reduction in sales
and profitability. To the extent our prices or expenses are denominated in
foreign currencies, we will be exposed to increased risks of currency
fluctuations.

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

  Our networking products are extremely complex and must operate successfully
with equally complex products of other vendors. Our products may contain
undetected software or hardware errors when first introduced or as new
upgrades are released. These errors may relate to the product itself or to its
interoperability with other products in the network. The pressures we face to
be the first to market new products increases the possibility that we will
offer products in which we or our customers later discover errors. We have
experienced new product and product upgrade errors in the past and expect
similar problems in the future. These problems could result in our incurring
significant warranty and repair costs and divert the attention of our
engineering personnel from our product development efforts. If we are unable
to fix these problems in a timely manner, we would likely experience loss of
or delay in revenues and significant damage to our reputation and business
prospects.

We have made and expect to make future acquisitions which involve numerous
risks.

  We have supplemented and expect to supplement further our internal growth by
acquiring complementary businesses, technologies or product lines. We recently
acquired Indus River Networks, Inc. and Network Security Wizards, Inc. as part
of our strategy to increase our presence in the market for virtual private
networks and for network security. In the future, we may be unable to identify
and acquire suitable candidates on reasonable terms, if at all. We compete for
acquisition candidates with other companies that have substantially greater
financial, management and other resources than we do. Acquisitions often
involve significant transaction costs, and there may be substantial costs
incurred in connection with potential acquisitions that are not successfully
completed. If we do complete an acquisition, integrating newly acquired
organizations and products and services is likely to be expensive, time
consuming and a strain on our managerial resources. These acquisitions,
particularly multiple acquisitions over a short period of time, involve a
number of risks that may result in our failure to achieve the desired benefits
of the transaction. These risks include, among others, the following:

  .  difficulties in assimilating the operations of the acquired businesses;


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  .  potential disruption of our existing operations;

  .  an inability to integrate, train and retain key personnel;

  .  diversion of management attention and employees from day-to-day
     operations;

  .  an inability to incorporate, develop or market acquired technologies or
     products;

  .  unexpected liabilities of the acquired business without sufficient
     indemnification;

  .  operating inefficiencies associated with managing companies in different
     locations; and

  .  impairment of relationships with employees, customers, suppliers and
     strategic partners.

  These acquisitions also may not generate sufficient revenues to offset
increased expenses associated with the acquisition in the short term or at
all.

  We may finance acquisitions by issuing shares of our common stock, which
could dilute our existing stockholders. We may also use cash or incur debt to
pay for these acquisitions. In addition, we may be required to expend
substantial funds to develop acquired technologies to amortize significant
amounts of goodwill and other intangible assets in connection with future
acquisitions, which could adversely affect our operating results. In addition,
from time to time, we have made, and expect to make in the future,
acquisitions that resulted in in-process research and development expenses
being charged in a particular quarter, which could adversely affect our
operating results for that quarter.

Our ability to develop, market and support products depends upon retaining and
attracting highly qualified individuals in our industry.

  Our future success depends to a significant extent on our continuing ability
to identify, hire, train, assimilate and retain large numbers of highly
qualified engineering, sales, marketing, managerial and support personnel. The
demand for qualified personnel is high and competition for their services is
intense. The competition for qualified employees in our industry is
particularly intense in the New England area, where our principal operations
are located. We have from time to time experienced, and we expect to continue
to experience difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. The loss of the services of any of our key
employees, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers and
sales personnel, could delay the development and introduction of our products,
negatively impact our ability to sell them, and increase our costs of doing
business.

We expect the average selling prices of our products to decrease over time,
which may reduce our revenue and gross margins.

  Our industry has experienced erosion of average selling prices in recent
years. We anticipate that the average selling prices of our products will
decrease in the future in response to increased sales discounts and new
product or technology introductions by us or our competitors. Our prices will
also likely be affected adversely by downturns in regional or industry
economies, such as the recent down turn in the United States economy. We also
expect our gross margins may be affected adversely by increases in material or
labor costs and an increasing reliance on third party distribution channels.
If we are unable to achieve sufficient cost reductions and increases in sales
volumes, any decline in average selling prices will reduce our revenues and
gross margins.

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


  The market for network communications equipment is characterized by the need
to support industry standards as different standards emerge, evolve and
achieve acceptance. To be competitive, we must continually

                                      43
<PAGE>

introduce new products and product enhancements that meet these emerging
standards. In the past, we have had to delay the introduction of new products
to comply with third party standards testing. We may be unable to address
compatibility and interoperability issues that arise from technological
changes and evolving industry standards. We also may devote significant
resources developing products designed to meet standards that are not widely
adopted. In the United States, our products must comply with various
governmental regulations and industry regulations and standards, including
those defined by the Federal Communications Commission, Underwriters
Laboratories and Networking Equipment Building Standards. Internationally, our
products are required to comply with standards or obtain certifications
established by telecommunications authorities in various countries and with
recommendations of the International Telecommunications Union. If we do not
comply with existing or evolving industry standards, fail to anticipate
correctly which standards will be widely adopted or fail to obtain timely
domestic or foreign regulatory approvals or certificates, we will be unable to
sell our products where these standards or regulations apply, which may
prevent us from sustaining our revenues or achieving profitability.

  The United States government requires that network equipment providers
satisfy certain performance requirements before they are permitted to sell to
the government. We have not yet satisfied these requirements, although at
least one of our competitors has satisfied the requirements. Other governments
or industries may establish similar performance requirements or tests that we
may be unable to satisfy. If we are unable to satisfy the performance or other
requirements of the United States government or other industries that
establish them, our revenue growth may be lower than expected.

  Because Cisco maintains a leadership position in selling network
communications equipment products, they may have the ability to establish de
facto standards within the industry. Any actions by Cisco or any other
industry leaders that diminish compliance by our products with industry or de
facto standards, or the ability of our products to interoperate with other
networking products, would be damaging to our reputation and our ability to
generate revenue.

 New Accounting Pronouncements

  In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-9, "Modification of Software Revenue
Recognition" which requires recognition of revenue using specific methods and
amends SOP 98-4 (Deferral of the Effective Date of a Provision of SOP 97-2)
and amends certain paragraphs of SOP 97-2. The Company adopted SOP 98-9 for
its year ended February 29, 2000. The adoption of SOP 98-9 did not have a
material impact on the Company's results of operations in the year ended
February 29, 2000.

  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. The Company adopted SFAS 133 in the first quarter of fiscal 2002,
which did not have a material effect on the Company's results of operations or
financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk primarily related to changes in interest rates and foreign
currency exchange rates. The Company's hedging activity is intended to offset
the impact of currency fluctuations on certain nonfunctional currency assets
and liabilities.

  The Company holds minority equity investments in various public and private
companies. The publicly traded equities are subject to market volatility, are
classified as available for sale and are recorded on the balance

                                      44
<PAGE>

sheet at fair value. Many of the private investments are early stage companies
which are highly illiquid and inherently risky, thus the Company could lose
its entire investment.

  At March 3, 2001, the Company held approximately 10.5 million shares of
common stock of Efficient Networks, which it received as consideration for the
sale of its FlowPoint subsidiary on December 18, 1999. As of March 3, 2001,
the Company determined that in accordance with SFAS 115, the Efficient shares
had experienced an other than temporary decline in value. The Company
recognized a reduction in value of the Efficient investment of $487.9 million
based on the expected realizable value of $23.50 per share, which represents
the Siemens tender offer price. There was an associated reduction in the
deferred gain of $111.4 million, which resulted in pre-tax net other expense
of $376.5 million. The Company also recorded other than temporary declines on
five other publicly traded equity securities which resulted in pre-tax net
other expense of approximately $18.0 million. On March 29, 2001, the Company
liquidated its holdings of Efficient common stock in a tender offer by Siemens
AG ("Siemens"). The Company's financial statements as of March 3, 2001 valued
the Company's interest in Efficient at approximately the same price as the
tender offer. At March 3, 2001, the Company's fair value holdings of Efficient
stock totaled $242.7 million and represented 13.1% of total assets.

  Interest Rate Sensitivity. The Company maintains an investment portfolio
consisting partly of debt securities of various issuers, types and maturities.
The securities that the Company classifies as held-to-maturity are recorded on
the balance sheet at amortized cost, which approximates market value.
Unrealized gains or losses associated with these securities are not material.
The securities that the Company classifies as available-for-sale are recorded
on the balance sheet at fair market value with unrealized gains or losses
reported as part of accumulated other comprehensive income, net of tax as a
component of stockholders' equity. A hypothetical 50 or 100 basis point
increase in interest rates would result in an approximate $1.0 million or $3.5
million decrease, respectively (approximately 0.25 percent or 0.9 percent,
respectively) in the fair market value of the securities. The Company has the
ability to hold its fixed income investments until maturity, and therefore the
Company does not expect its operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market interest
rates on its securities portfolio.

  Foreign Currency Exchange Risk. The Company, as a result of its global
operating and financial activities, is exposed to changes in foreign currency
exchange rates which may adversely affect its results of operations and
financial position. In order to minimize the potential adverse impact, the
Company uses foreign currency forward and option contracts to hedge the
currency risk inherent in global operations. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments. Gains and losses on the contracts are
largely offset by gains and losses on the underlying assets and liabilities.
At March 3, 2001, the Company had purchased forwards with a notional value of
approximately $9.2 million and options with a notional value of approximately
$5.0 million. A hypothetical 10 percent appreciation or depreciation of the
U.S. Dollar from March 3, 2001 market rates would not result in a material
decrease in fair market value, earnings or cash flows. Also, any gains or
losses on the contracts are largely offset by the gains or losses on the
underlying transactions and consequently a sudden or significant change in
foreign exchange rates would not have a material impact on future net income
or cash flows.


                                      45
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                         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 March 3, 2001 and February 29, 2000, and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity, and cash flows for each of the years
in the three-year period ended March 3, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit 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 March 3, 2001 and February 29, 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 3, 2001, in conformity with accounting
principles generally accepted in the United States of America.

Boston, Massachusetts
April 12, 2001 except for the first paragraph of Note 16, which is as of May
23, 2001

                                      46
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                            CABLETRON SYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS

                      March 3, 2001 and February 29, 2000

<TABLE>
<CAPTION>
                                                             2001        2000
                                                          ----------  ----------
                                                          (In thousands, except
                                                           per share amounts)
<S>                                                       <C>         <C>
                         Assets
Current assets:
 Cash and cash equivalents..............................  $  354,543  $  350,980
 Investments............................................     428,173     221,981
 Accounts receivable, net of allowance for doubtful
  accounts ($30,559 and $21,684 in 2001 and 2000,
  respectively).........................................     210,862     228,372
 Inventories............................................      98,183      85,016
 Deferred income taxes..................................     139,340      82,813
 Prepaid expenses and other assets......................      91,065      38,211
                                                          ----------  ----------
 Total current assets...................................   1,322,166   1,007,373
                                                          ----------  ----------
Investments.............................................     302,370   1,903,858
Property, plant and equipment, net......................      91,271     124,992
Intangible assets, net..................................     196,302     130,284
                                                          ----------  ----------
 Total assets...........................................  $1,912,109  $3,166,507
                                                          ==========  ==========
          Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable.......................................  $   91,351  $   89,453
 Accrued expenses.......................................     105,243     132,701
 Deferred revenue.......................................     112,096     119,011
 Deferred gain..........................................      60,769     189,862
 Income taxes payable...................................      51,394      28,178
                                                          ----------  ----------
 Total current liabilities..............................     420,853     559,205
Deferred income taxes...................................      57,065     459,863
                                                          ----------  ----------
 Total liabilities......................................     477,918   1,019,068
                                                          ----------  ----------
Minority interest.......................................      34,567         --
Redeemable convertible preferred stock, $1.00 par value,
 65 shares of Series A, 25 shares of Series B and 45
 shares of Series C were designated, issued and
 outstanding at March 3, 2001 (aggregate liquidation
 preference of Series A and B, 65 and 25,
 respectively)..........................................     109,589         --
Commitments and contingencies
Stockholders' equity:
 Undesignated preferred stock, $1.00 par value.
  Authorized 1,859 shares...............................         --          --
 Common stock, $0.01 par value. Authorized 450,000
  shares; issued 190,611 and 183,585 shares,
  respectively..........................................       1,906       1,836
 Additional paid-in capital.............................     990,157     630,155
 Retained earnings......................................     371,857   1,000,758
 Unearned stock-based compensation......................     (16,673)        --
 Treasury stock, at cost (2,100 shares at March 3,
  2001).................................................     (56,479)        --
                                                          ----------  ----------
                                                           1,290,768   1,632,749
 Accumulated other comprehensive income.................        (733)    514,690
                                                          ----------  ----------
 Total stockholders' equity.............................   1,290,035   2,147,439
                                                          ----------  ----------
 Total liabilities and stockholders' equity.............  $1,912,109  $3,166,507
                                                          ==========  ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       47
<PAGE>

                            CABLETRON SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

       Years ended March 3, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>
                                                2001        2000        1999
                                             ----------  ----------  ----------
                                             (In thousands, except per share
                                                         amounts)
<S>                                          <C>         <C>         <C>
Net revenues...............................  $1,071,453  $1,459,593  $1,411,279
Cost of revenues (excludes stock-based
 compensation of $102 for the year ended
 March 3, 2001)............................     558,350     803,820     811,350
                                             ----------  ----------  ----------
    Gross margin...........................     513,103     655,773     599,929
Operating expenses:
  Research and development (excludes stock-
   based compensation of $1,758 for the
   year ended March 3, 2001)...............     146,134     184,614     210,393
  Selling, general and administrative
   (excludes stock-based compensation of
   $3,120 for the year ended March 3,
   2001)...................................     471,743     414,568     435,824
  Amortization of intangible assets........      37,280      41,270      27,978
  Stock-based compensation.................       4,980         --          --
  Special charges..........................      51,150      21,096     217,350
                                             ----------  ----------  ----------
    Loss from operations...................    (198,184)     (5,775)   (291,616)
Interest income, net.......................      35,179      18,587      15,089
Other income (expense), net................    (541,127)    746,209         --
Minority interest..........................         166         --          --
                                             ----------  ----------  ----------
    Income (loss) before income taxes......    (703,966)    759,021    (276,527)
Income tax expense (benefit)...............     (97,963)    294,750     (31,136)
                                             ----------  ----------  ----------
    Net income (loss)......................    (606,003)    464,271    (245,391)
Dividend effect of beneficial conversion
 feature to Series A and Series B Preferred
 Stockholders..............................     (16,854)        --          --
Accretive Dividend of Series A and Series B
 Preferred Shares..........................      (6,044)        --          --
                                             ----------  ----------  ----------
    Net income (loss) attributable to
     common shareholders...................  $ (628,901) $  464,271  $ (245,391)
                                             ==========  ==========  ==========
Net income (loss) per common share:
  Basic....................................  $    (3.40) $     2.62  $    (1.47)
                                             ==========  ==========  ==========
  Diluted..................................  $    (3.40) $     2.46  $    (1.47)
                                             ==========  ==========  ==========
Weighted-average number of common shares
 outstanding:
  Basic....................................     184,770     177,541     167,432
                                             ==========  ==========  ==========
  Diluted..................................     184,770     188,618     167,432
                                             ==========  ==========  ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       48
<PAGE>

                            CABLETRON SYSTEMS, INC.

     CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                             STOCKHOLDERS' EQUITY

      Years ended March 3, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>
                                                                      Stockholders' equity
                                   -------------------------------------------------------------------------------------------
                      Redeemable
                      convertible
                       preferred                                                                    Accumulated
                         stock        Common stock    Additional               Unearned                other         Total
                     ------------- ------------------  paid-in    Retained   stock-based  Treasury comprehensive stockholders'
                     Shares Amount   Shares    Stock   capital    earnings   compensation  stock      income        equity
                     ------ ------ ----------- ------ ---------- ----------  ------------ -------- ------------- -------------
                                                     (In thousands, except number of shares)
<S>                  <C>    <C>    <C>         <C>    <C>        <C>         <C>          <C>      <C>           <C>
Balance at February
28, 1998...........   --     $--   158,266,994 $1,583  $300,834  $  781,878      --         --       $    780     $1,085,075
                      ---    ----  ----------- ------  --------  ----------      ---        ---      --------     ----------
Comprehensive
income (loss):
 Net loss..........   --      --           --     --        --     (245,391)     --         --            --        (245,391)
 Other
 comprehensive
 income:
 Unrealized
 gain/(loss) on
 available-for-
 sale securities...   --      --           --     --        --          --       --         --          1,186          1,186
 Effect of foreign
 currency
 translation.......   --      --           --     --        --          --       --         --         (1,574)        (1,574)
                                                                                                     --------     ----------
   Total
   comprehensive
   income..........                                                                                      (388)      (245,779)
Exercise of options
for shares of
common stock.......   --      --       497,696      5     2,761         --       --         --            --           2,766
Issuance of common
stock for purchased
acquisitions.......   --      --    12,757,395    127   239,621         --       --         --            --         239,748
Issuance of common
stock for minority
interests..........   --      --        89,921      1     1,117         --       --         --            --           1,118
Tax benefit for
options exercised..   --      --           --     --      1,521         --       --         --            --           1,521
Issuance of shares
under employee
stock purchase
plan...............   --      --       572,087      6     5,378         --       --         --            --           5,384
                      ---    ----  ----------- ------  --------  ----------      ---        ---      --------     ----------
Balance at February
28, 1999...........   --     $--   172,184,093  1,722   551,232     536,487      --         --            392      1,089,833
                      ---    ----  ----------- ------  --------  ----------      ---        ---      --------     ----------
Comprehensive
income (loss):
 Net income........   --      --           --     --        --      464,271      --         --            --         464,271
 Other
 comprehensive
 income:
 Unrealized
 gain/(loss) on
 available-for-sale
 securities........   --      --           --     --        --          --       --         --        539,571        539,571
 Effect of foreign
 currency
 translation.......                        --     --        --          --       --         --         (1,041)        (1,041)
 Reclassification
 adjustment for
 gains on available
 for sale
 securities
 included in net
 income (net of
 tax)..............   --      --           --     --        --          --       --         --        (24,232)       (24,232)
                                                                                                     --------     ----------
   Total
   comprehensive
   income..........                                                                                   514,298        978,569
Exercise of options
for shares of
common stock.......   --      --     4,158,603     42    44,265         --       --         --            --          44,307
Issuance of common
stock for purchased
acquisitions.......   --      --     6,198,779     62    10,233         --       --         --            --          10,295
Tax benefit for
options exercised..   --      --           --     --     16,612         --       --         --            --          16,612
Issuance of shares
under employee
stock purchase
plan...............   --      --     1,043,962     10     7,813         --       --         --            --           7,823
                      ---    ----  ----------- ------  --------  ----------      ---        ---      --------     ----------
Balance at February
29, 2000...........   --     $--   183,585,437  1,836   630,155   1,000,758      --         --        514,690      2,147,439
                      ---    ----  ----------- ------  --------  ----------      ---        ---      --------     ----------
</TABLE>
         See accompanying notes to consolidated financial statements.

                                       49
<PAGE>

                            CABLETRON SYSTEMS, INC.

       CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                     AND STOCKHOLDERS' EQUITY--(Continued)

      Years ended March 3, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>
                                                                       Stockholders' equity
                                     --------------------------------------------------------------------------------------------
                       Redeemable
                      convertible                                                                      Accumulated
                    preferred stock     Common Stock     Additional              Unearned                 other         Total
                    ---------------- -------------------  paid-in   Retained   stock-based  Treasury  comprehensive stockholders'
                    Shares   Amount    Shares     Stock   capital   earnings   compensation  stock       income        equity
                    ------- -------- -----------  ------ ---------- ---------  ------------ --------  ------------- -------------
                                                     (In thousands, except number of shares)
<S>                 <C>     <C>      <C>          <C>    <C>        <C>        <C>          <C>       <C>           <C>
Comprehensive
income (loss):
 Net loss.........      --  $    --          --   $  --   $    --   $(606,003)   $    --    $    --     $     --     $  (606,003)
 Other
 comprehensive
 income:
 Unrealized loss
 on available-for-
 sale securities,
 net of tax.......      --       --          --      --        --         --          --         --      (752,232)      (752,232)
 Effect of foreign
 currency
 translation......      --       --          --      --        --         --          --         --           653            653
 Reclassification
 adjustment for
 gains on
 available-for-
 sale securities
 included in net
 income (net of
 tax).............      --       --          --      --        --         --          --         --       236,156        236,156
                                                                                                        ---------    -----------
  Total
  comprehensive
  income..........                                                                                       (515,423)    (1,121,425)
Exercise of
options and
warrants for
shares of common
stock.............      --       --    2,111,000      21    19,982        --          --         --           --          20,003
Issuance of
subsidiary
preferred stock...      --       --          --      --     13,720        --          --         --           --          13,720
Issuance of common
stock in
connection with
purchased
acquisitions......      --       --    4,009,139      40   139,173        --       (5,519)       --           --         133,694
Tax benefit for
options
exercised.........      --       --          --      --    (13,954)       --          --         --           --         (13,954)
Issuance of shares
under employee
stock purchase
plan..............      --       --      906,000       9    13,439        --          --         --           --          13,448
Issuance of stock
purchase rights...      --       --          --      --      7,173        --          --         --           --           7,173
Issuance of class
A and class B
warrants..........      --       --          --      --      3,400        --          --         --           --           3,400
Options issued in
connection with
purchased
acquisitions......      --       --          --      --     13,824        --       (2,935)       --           --          10,889
Issuance of Series
A and Series B
preferred stock
and beneficial
conversion........   90,000   68,000         --      --     16,854    (16,854)        --         --           --             --
Accretive dividend
of Series A and
Series B preferred
shares............      --     6,044         --      --        --      (6,044)        --         --           --          (6,044)
Issuance of Series
C preferred
stock.............   45,471   31,875         --      --        --         --          --         --           --             --
Issuance of
options and
warrants on Series
C preferred
stock.............      --     3,670         --      --        --         --          --         --           --             --
Purchase of
treasury stock....      --            (2,100,000)    --        --         --          --     (56,479)         --         (56,479)
Premium from sale
of put options....      --       --          --      --      4,934        --          --         --           --           4,934
Unearned stock-
based compensation
related to stock
option grants.....      --       --          --      --     11,099        --      (11,099)       --           --             --
Amortization of
unearned stock-
based
compensation......      --       --          --      --        --         --        2,880        --           --           2,880
Grants of options
to consultants....      --       --          --      --      2,100        --          --         --           --           2,100
Effect of
subsidiaries'
equity
transactions......      --       --          --      --    128,258        --          --         --           --         128,258
                    ------- -------- -----------  ------  --------  ---------    --------   --------    ---------    -----------
Balance at March
3, 2001...........  135,471 $109,589 188,511,576  $1,906  $990,157  $ 371,857    $(16,673)  $(56,479)   $    (733)   $ 1,290,035
                    ======= ======== ===========  ======  ========  =========    ========   ========    =========    ===========
</TABLE>
                See accompanying notes to financial statements.

                                       50
<PAGE>

                            CABLETRON SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

       Years ended March 3, 2001, February 29, 2000 and February 28, 1999

<TABLE>
<CAPTION>
                                                 2001       2000       1999
                                              ----------  ---------  ---------
                                                      (In thousands)
<S>                                           <C>         <C>        <C>
Cash flows from operating activities:
 Net income (loss)........................... $ (606,003) $ 464,271  $(245,391)
 Adjustments to reconcile net income (loss)
  to net cash provided by operating
  activities:
   Depreciation and amortization.............     72,982    123,466    114,679
   Provision for losses on accounts
    receivable...............................      8,875     (1,576)     2,240
   Deferred income taxes.....................   (113,483)   220,509     (6,475)
   Loss on disposals and impairment of
    property plant and equipment.............     29,941      9,458     18,351
   Stock-based compensation..................      4,980        --         --
   Purchased research and development from
    acquisitions.............................     25,600        --     217,350
   Tax benefit of options exercised..........    (13,954)    16,612      1,510
   Other non cash............................        --     (11,709)       --
   Net realized (gain) loss on sale of
    securities...............................     (9,004)   (51,984)       --
   Gain (loss) on sale of division...........    143,108   (657,727)       --
   Net non cash investment writedowns........    403,487        --         --
 Changes in assets and liabilities (net of
  effects of business acquisitions):
   Accounts receivable.......................      4,880    (12,543)    (9,059)
   Inventories...............................    (70,056)    96,979     88,682
   Prepaid expenses and other assets.........    (48,608)    29,044     (7,527)
   Accounts payable and accrued expenses.....    (38,690)     4,627    (88,992)
   Deferred revenue..........................     (7,034)    24,988        --
   Income taxes payable......................     23,216    (47,363)       --
                                              ----------  ---------  ---------
     Net cash (used in) provided by operating
      activities.............................   (189,763)   207,052     85,368
                                              ----------  ---------  ---------
Cash flows from investing activities:
 Capital expenditures........................    (35,277)   (44,373)   (44,773)
 Cash paid for business acquisitions, net....    (12,812)       --     (32,193)
 Proceeds from sale of fixed assets..........         65      6,680     24,531
 Outsourcing of manufacturing................     (7,682)    78,613        --
 Purchase of available-for-sale securities... (1,106,545)  (392,130)  (101,331)
 Purchase of held-to-maturity securities.....   (113,785)  (302,168)  (121,740)
 Proceeds received from written call
  options....................................     14,001        --         --
 Sales/maturities of marketable securities...  1,215,603    586,048    135,648
                                              ----------  ---------  ---------
     Net cash provided by (used in) investing
      activities.............................    (46,432)   (67,330)  (139,858)
                                              ----------  ---------  ---------
Cash flows from financing activities:
 Common stock issued to employee stock
  purchase plans.............................     13,439      7,823      5,384
 Proceeds from sale of common stock put
  options....................................      4,934        --         --
 Proceeds from issuance of preferred stock,
  warrants and stock purchase rights.........     87,750        --         --
 Proceeds from issuance of subsidiary shares
  and exercise of stock purchase rights......    169,410
 Repurchase of common stock..................    (56,479)       --         --
 Proceeds from exercise of stock options.....     19,982     44,307      2,766
                                              ----------  ---------  ---------
     Net cash provided by financing
      activities.............................    239,036     52,130      8,150
                                              ----------  ---------  ---------
Effect of exchange rate changes on cash......        722       (294)    (1,316)
Net increase (decrease) in cash and cash
 equivalents.................................      3,563    191,558    (47,656)
Cash and cash equivalents at beginning of
 year........................................    350,980    159,422    207,078
                                              ----------  ---------  ---------
Cash and cash equivalents at end of year..... $  354,543  $ 350,980  $ 159,422
                                              ==========  =========  =========
Supplemental disclosures of cash flow
 information:
 Cash paid (refunds received) during year
  for income taxes........................... $    3,502  $  (5,349) $ (28,706)
Non-cash investing and financing activities:
 Accretive dividend of Series A and Series B
  Preferred Shares...........................     (6,044)       --         --
 Dividend effect of beneficial conversion
  feature to Series A and Series B preferred
  shareholders...............................    (16,854)
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       51
<PAGE>

                            CABLETRON SYSTEMS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            March 3, 2001, February 29, 2000 and February 28, 1999

(1) Business Operations

  Cabletron Systems, Inc. (the "Company" or "Cabletron") is a holding company
that conducts its operations through four subsidiaries in the
telecommunications and networking industry: Enterasys Networks, Inc.
("Enterasys"), Riverstone Networks, Inc. ("Riverstone"), Aprisma Management
Technologies, Inc. ("Aprisma") and GlobalNetwork Technology Services, Inc.
("GNTS") and (collectively referred to as, the "Operating Subsidiaries"). In
February 2000, Cabletron announced its plans to establish these four
subsidiaries as part of an effort to improve its strategic focus and better
capitalize on market opportunities.

  Through the Operating Subsidiaries, Cabletron provides network communication
solutions to customers in the United States, Europe, Pacific Rim and other
industrialized areas of the world. Aprisma develops, markets and supports a
family of scalable, configurable software solutions that enable the effective
monitoring and management of multiple elements underlying network
communications infrastructure. Enterasys designs, develops, markets and
supports comprehensive network communications solutions for enterprises. GNTS
provides network infrastructure, infrastructure management services, security
and outsourced managed service solutions to assist clients in assessing,
designing, implementing, managing and optimizing their networks. Riverstone
provides metropolitan area Internet infrastructure solutions that enable
service providers to deliver advanced applications and value-added services to
their customers.

(2) Summary of Significant Accounting Policies

 (a) Principles of Consolidation

  The consolidated financial statements include the accounts the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.

 (b) Fiscal Year-End

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

 (c) Cash and Cash Equivalents

  Cash and cash equivalents consist of all highly liquid investments with a
maturity of 90 days or less.

 (d) Investments

  Held-to-maturity securities are those investments which the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for amortization and accretion of
premiums and discounts. Due to the nature of the Company's investments and the
resulting low volatility, the difference between fair value and amortized cost
is not material. Available-for-sale securities are recorded at fair value.
Unrealized gains and losses net of the related tax effect on available-for-
sale securities are reported in accumulated other comprehensive income, a
component of stockholders' equity, until realized. The estimated market values
of investments are based on quoted market prices as of the end of the
reporting period.

  The Company also has certain other minority investments in nonpublicly
traded companies. These investments are included in long-term investments on
the Company's balance sheet and are carried at cost. The

                                      52
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

Company monitors these investments for impairment and makes appropriate
reductions in carrying values when necessary.

 (e) 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.

 (f) Property, Plant and Equipment

  Property, plant and equipment are stated at cost. Depreciation is provided
on a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the lives of the
related assets or the term of the lease. Repairs and maintenance costs are
expensed as incurred.

 (g) Intangible Assets

  Intangible assets consist of goodwill and other intangible assets acquired
in business combinations recorded at cost less accumulated amortization.
Amortization of these intangible assets is provided on a straight-line basis
over the respective useful lives which range from three to ten years.

 (h) Accounting for Impairment of Long-Lived Assets

  The Company assesses the need to record impairment losses on long-lived
assets used in operations quarterly or when changes in facts and circumstances
indicate that the carrying amount of an asset may not be recoverable. Also, on
an on-going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill and other intangible
assets. Management then determines whether there has been a permanent
impairment of the value of long-lived assets based upon an evaluation of
undiscounted projected cash flows. It is reasonably possible that the
impairment factors evaluated by management will change in subsequent periods,
given that the Company operates in a volatile business environment. This could
result in material impairment charges in future periods.

 (i) Advertising Costs

  The Company expenses advertising costs as incurred.

 (j) Research and Development Costs and Software Costs

  Expenditures that are related to the development of new products, including
significant improvements and refinements to existing products and the
development of software are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized
beginning when a product's technological feasibility has been established, and
ending when a product is available for general release to customers. The
Company's current process for developing software is essentially completed
concurrently with the establishment of technological feasibility; accordingly,
no costs have been capitalized to date.


                                      53
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

  At the date of acquisition or investment, the Company evaluates the
components of the purchase price of each acquisition or investment to identify
amounts allocable to in-process research and development. Upon completion of
acquisition accounting and valuation such amounts are charged to expense if
technological feasibility had not been reached at the acquisition date.

 (k) Stock-Based Compensation Plans

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

 (l) 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 during the period
that includes the enactment date. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized.

  The Company has reinvested earnings of its foreign subsidiaries and,
therefore has not provided for income taxes that could result from the
remittance of such earnings. The unremitted earnings at March 3, 2001 and
February 29, 2000 amounted to approximately $202.7 million and $184.6 million,
respectively. Furthermore, any taxes paid to foreign governments on those
earnings may be used, in whole or in part, as credits against U.S. tax on any
dividends distributed from such earnings. It is not practicable to estimate
the amount of unrecognized deferred U.S. taxes on these undistributed
earnings.

 (m) Net Income (Loss) Per Share

  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 is computed by dividing net income (loss) to common shareholders by the
weighted average number of common shares and all dilutive securities
outstanding.

 (n) 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

                                      54
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

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 reported in accumulated other comprehensive
income, a 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.

 (o) Revenue Recognition

  The Company generally recognizes revenue upon shipment of products, provided
that there is no uncertainty of customer acceptance, persuasive evidence of an
arrangement exists, the sales price is fixed and determinable and
collectibility is deemed probable. If uncertainties exist, revenue is
recognized when these uncertainties are resolved. The Company defers revenue
from service and maintenance contracts and recognizes those revenues ratably
over the period the services are performed, typically twelve months or less.
The Company accrues estimated sales returns and allowances at the time of
shipment based on contractual rights and historical experience. The Company
recognizes software license revenue upon the delivery of the software provided
that there are no uncertainties relating to customer acceptance, the fee is
fixed and determinable and collection of the resulting receivable is probable.
In some instances, customers receive financing for the purchase of the
Company's or its subsidiaries' equipment from third party leasing
organizations and the Company guarantees the payments of those customers. The
Company defers a portion of the related revenue based on the consideration of
risk of loss. The Company accrues warranty costs based on its experience.

 (p) Reclassifications

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

 (q) Derivatives

  The Company utilizes derivative financial instruments to reduce foreign
currency exchange risks. The Company enters into foreign exchange forward and
option contracts to minimize the impact of foreign currency fluctuations on
assets and liabilities denominated in currencies other than the functional
currency of the reporting entity. All foreign exchange forward and option
contracts are designated as a hedge and are highly inversely correlated to the
hedged item as required by accounting principles generally accepted in the
United States of America. 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.

 (r) 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.


                                      55
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

 (s) New Accounting Pronouncements

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

  In June 1999, the FASB issued Financial Accounting Standards Board Statement
No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133 ("SFAS 137") which
delayed the effective date of SFAS 133 by one year to fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Financial Accounting
Standards Board Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of FASB Statement No.
133 ("SFAS 138"), which will be adopted concurrently with SFAS 133. SFAS 138
amends the accounting and reporting standards of SFAS 133 for certain
derivative instruments and hedging activities and incorporates decisions made
by the FASB related to the Derivatives Implementation Group process. The
Company adopted SFAS 133 in the first quarter of fiscal 2002 without a
material effect on the Company's operations or financial position.

 (t) Issuance of Subsidiary Stock

  At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. The increase is reflected in "effect of subsidiaries' equity
transactions" in the Company's Consolidated Statements of Stockholders'
Equity. The Company does not recognize gains on issuance of stock by a
subsidiary if a planned spin-off of the subsidiary to the Company's
shareholders will not be expected to result in realization of the gain by the
Company.

 (u) Minority Interests

  Minority interests primarily represents the common ownership of Riverstone
not held by the Company as a result of Riverstone's initial public offering
("IPO"). Also reflected is the proportionate share of certain investments in
the Company's subsidiaries held by third parties.

(3) Segment and Geographical Information

  Statement of Financial Accounting Standards Board Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131") establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports. SFAS 131 also
establishes standards or related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker ("CODM") in making
decisions concerning how to allocate resources and assess performance. The
Company's CODM, is the Chief Executive Officer.

  The Company and its Operating Subsidiaries provide a broad line of products
and services for the computer networking industry. Substantially all revenues
result from the sale of hardware and software products, and professional
services such as training, consulting, installation, and maintenance. The
Company's CODM reviews the Company's financial results based on the respective
businesses of the Operating Subsidiaries. Reflected in the "Other" category
are the Company's operating results from the non-core legacy products as well
as other

                                      56
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

corporate costs including amortization of intangible assets, restructuring
costs and in process research and development expenses. Operating income
(loss), at the subsidiary level, excludes stock-based compensation charges
resulting from subsidiary stock options issued to non-subsidiary employees
which are eliminated in the consolidated results of the Company. Expense
related to subsidiary stock options granted to consultants and stock options
granted with exercise prices below fair market value on the date of grant,
which are included in the results of Cabletron, are recorded in the
reconciliation of income (loss) before income taxes. The Other geographic
region includes Canada and Latin American countries. All revenue amounts are
based on product shipment destination.

  The financial information disclosed herein materially represents all of the
financial information related to the Company's principal operating segments.
No one foreign country accounts for greater than 10% of total revenues. Long-
lived assets consist primarily of the net book value of property and equipment
and long-term investments. Transactions between separate segments are
recorded, based on established agreements. These transactions are eliminated
in consolidation.

                                      57
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  Certain costs of service are charged to the operating subsidiaries by
Cabletron based on level of usage and other reasonable basis.

<TABLE>
<CAPTION>
                                                2001       2000       1999
                                             ----------  ---------  ---------
                                                     (In thousands)
   <S>                                       <C>         <C>        <C>
   Revenues to unaffiliated customers
    (trade):
     Enterasys.............................. $  790,128    642,540    625,067
     Riverstone.............................     94,897     23,077      3,284
     Aprisma................................     66,549     52,266     44,391
     GNTS...................................     47,817     26,768     21,656
     Other..................................     72,062    714,942    716,881
                                             ----------  ---------  ---------
       Total trade revenues................. $1,071,453  1,459,593  1,411,279
                                             ==========  =========  =========
   Revenues to related entities:
     Enterasys.............................. $    3,115        --         --
     Riverstone.............................      3,361        --         --
     Aprisma................................      7,522        --         --
     GNTS...................................        514        --         --
     Other..................................        --         --         --
                                             ----------  ---------  ---------
       Total intercompany revenues.......... $   14,512        --         --
                                             ==========  =========  =========
   Total segment revenues:
     Enterasys.............................. $  793,243    642,540    625,067
     Riverstone.............................     98,258     23,077      3,284
     Aprisma................................     74,071     52,266     44,391
     GNTS...................................     48,331     26,768     21,656
     Other..................................     72,062    714,942    716,881
                                             ----------  ---------  ---------
       Total revenues before eliminations...  1,085,965  1,459,593  1,411,279
   Eliminations.............................    (14,512)       --         --
                                             ----------  ---------  ---------
       Total revenues....................... $1,071,453  1,459,593  1,411,279
                                             ==========  =========  =========
   Segment income (loss) from operations:
     Enterasys.............................. $   59,548    (37,772)   (65,402)
     Riverstone.............................    (36,789)   (37,404)   (34,585)
     Aprisma................................     (9,707)    (9,994)    (8,188)
     GNTS...................................    (20,318)   (14,346)    (4,579)
     Other..................................    (97,508)   156,107     66,466
                                             ----------  ---------  ---------
       Total segment income (loss) from
        operations.......................... $ (104,774)    56,591    (46,288)
   Reconciliation:
     Amortization of intangible assets...... $  (37,280)   (41,270)   (27,978)
     Stock-based compensation...............     (4,980)       --         --
     Special charges........................    (51,150)   (21,096)  (217,350)
     Interest income, net...................     35,179     18,587     15,089
     Other income (expense), net............   (541,127)   746,209        --
     Minority interest......................        166        --         --
                                             ----------  ---------  ---------
       Income (loss) before income taxes.... $ (703,966)   759,021   (276,527)
                                             ==========  =========  =========
</TABLE>

                                      58
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  Compensation charges resulting from stock options issued to non-subsidiary
employees which were eliminated in consolidation were:

<TABLE>
<CAPTION>
                                                2001
                                           --------------
                                           (In thousands)
            <S>                            <C>
            Enterasys.....................    $ 8,369
            Riverstone....................     27,798
            Aprisma.......................      4,226
            GNTS..........................      4,603
                                              -------
              Total.......................    $44,996
</TABLE>

  Total net revenues by geography were:

<TABLE>
<CAPTION>
                                                  2001        2000       1999
                                               ---------- ------------ ---------
                                                        (In thousands)
   <S>                                         <C>        <C>          <C>
   Revenues by geographic area:
     United States............................ $  620,589    951,319     829,381
     Europe...................................    231,994    342,226     430,283
     Pac Rim..................................    127,129    116,417     114,174
     Other....................................     91,741     49,631      37,441
                                               ----------  ---------   ---------
       Total net revenues..................... $1,071,453  1,459,593   1,411,279
                                               ==========  =========   =========
<CAPTION>
                                                March 3,  February 29,
                                                  2001        2000
                                               ---------- ------------
   <S>                                         <C>        <C>          <C>
   Assets by segment were:
     Enterasys................................ $  745,570    376,347
     Riverstone...............................    264,043     33,248
     Aprisma..................................     88,843     12,059
     GNTS.....................................     80,333      7,292
     Other....................................    733,320  2,737,561
                                               ----------  ---------
       Total assets........................... $1,912,109  3,166,507
                                               ==========  =========
   Long-lived assets by geography were:
     United States............................ $  379,855  2,007,273
     Europe...................................      7,826     15,560
     Pac Rim..................................      2,799      3,784
     Other....................................      3,161      2,233
                                               ----------  ---------
       Total long-lived assets................ $  393,641  2,028,850
                                               ==========  =========
</TABLE>

(4) Business Combinations

 Acquisitions

  All business acquisitions during the three-year period ending March 3, 2001
have been accounted for using the purchase method. The Company's consolidated
results of operations include the operating results of the acquired companies
from their acquisition dates. Acquired assets and liabilities were recorded at
their estimated fair market values at the acquisition date and the aggregate
purchase price plus costs directly attributable to the completion of
acquisitions has been allocated to the assets and liabilities acquired.

                                      59
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


 Fiscal Year 2001 Acquisitions

  On January 31, 2001, Cabletron acquired Indus River, a designer and marketer
of virtual private networking products for enterprise-class customers. In
connection with the acquisition, Cabletron issued 3,641,139 shares of
Cabletron common stock and 45,471 shares of Cabletron Series C preferred stock
to the shareholders of Indus River in exchange for all of the outstanding
shares of stock of Indus River. In addition, Cabletron assumed outstanding
options to purchase Indus River stock, which options were converted into
options to purchase 406,898 shares of its common stock and 5,000 shares of its
Series C preferred stock. Cabletron also assumed outstanding warrants to
purchase Indus River stock, which warrants were converted into warrants to
purchase 23,472 shares of its common stock and 293 shares of its Series C
preferred stock.

  The Company has recorded the cost of the acquisition at approximately $184.6
million, including direct costs of $2.6 million. Approximately $25.6 million
of the purchase price was allocated to in-process research development
expense. The excess of cost over the estimated fair value of net assets
acquired of $154.3 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over periods of 3-10
years. The Company also issued stock options in connection with the
acquisition of Indus River, and recorded approximately $2.9 million of
unearned stock-based compensation for the intrinsic value of the unvested
options. The Company recorded approximately $0.1 million of compensation
expense as earned during fiscal year 2001.

  On September 7, 2000, the Company acquired Network Security Wizards, Inc.
("NSW"), a privately held company that develops intrusion detection system
technology. In exchange for all of the issued and outstanding capital stock of
NSW, the Company (i) issued 210,286 shares of its common stock to the two
stockholders of NSW, (ii) issued 157,714 shares of its common stock to be held
in escrow on behalf of the two former stockholders of NSW (subject to
forfeiture upon the occurrence of certain events) and (iii) granted 32,000
options to purchase the Company's common stock.

  The Company recorded the cost of the acquisition at approximately $8.2
million, including direct costs of $0.2 million. The excess of cost over the
estimated fair value of the net assets acquired of $8.0 million was allocated
to goodwill and is being amortized on a straight-line basis over a period of
four years. The 157,714 shares of common stock that are held in escrow were
recorded as unearned stock-based compensation of $5.5 million and were not
included in the cost of the acquisition. The stock-based compensation is being
amortized over a two-year period, with $1.4 million of compensation expense
recorded during the year ended March 3, 2001.

 Fiscal Year 1999 Acquisitions

  On September 25, 1998, the Company acquired NetVantage, Inc. ("NetVantage"),
a publicly held manufacturer of ethernet workgroup switches. Under the terms
of the Merger Agreement, the Company issued 6.4 million shares of its common
stock to the shareholders of NetVantage in exchange for all of the outstanding
shares of stock of NetVantage. In addition, the Company issued 1,309,000
options, valued at approximately $4.8 million.

  The Company recorded the cost of the acquisition at approximately $77.8
million, including direct costs of $4.2 million. Approximately $29.4 million
of the purchase price was allocated to in-process research and development
expense. The excess of cost over the estimated fair value of net assets
acquired of $35.6 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a period of 5-10
years.


                                      60
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

  During the second quarter of fiscal year 2001, the Company wrote off $14.5
million of remaining intangible assets related to NetVantage when it finalized
its decision to abandon research and development on the NetVantage related
technology and discontinued sales of NetVantage products.

  On September 9, 1998, the Company acquired all of the outstanding stock of
FlowPoint Corp., ("FlowPoint") a privately held manufacturer of digital
subscriber line router networking products. Prior to the agreement, the
Company owned 42.8% of the outstanding shares of stock. Pursuant to the terms
of the agreement, $20.6 million was to be paid in four installments, within
nine months after the merger date. Each installment was to be paid in either
cash or Company common stock, as determined by the Company's management at the
time of distribution. The Company paid the first installment in the form of
cash and the remaining three installments in the form of the Company's common
stock. During the year ended February 29, 2000, the Company issued
approximately 1.0 million shares of common stock pursuant to the installment
payments. In addition, the Company issued 494,000 options, valued at
approximately $2.7 million.

  The Company recorded the cost of the acquisition at approximately $25.0
million, including direct costs of $0.4 million. Approximately $12.0 million
of the purchase price was allocated to in-process research and development
expense. The excess of cost over the estimated fair value of net assets
acquired of $11.9 million was allocated to goodwill and other intangible
assets, and is being amortized on a straight-line basis over a period of 5-10
years.

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

  The Company recorded the cost of the acquisition at approximately $45.1
million, including direct costs of $1.1 million related to the acquisition,
which consisted of cash payments of $33.5 million and other assumed
liabilities. Approximately $26.0 million of the purchase price was allocated
to in-process research and development expense. The excess of cost over the
estimated fair value of net assets acquired of $18.2 million was allocated to
goodwill, and was scheduled to be amortized on a straight-line basis over a
period of 10 years.

  The Company ceased operations of the Ariel division in the fourth quarter of
fiscal year 2000 in association with its decision to abandon research and
development on digital subscriber line technology. The cessation of the Ariel
operations resulted in the write-off of the remaining $12.2 million of
goodwill recorded from the Ariel acquisition.

  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 6.0 million shares of Company common stock to the shareholders of Yago
in exchange for all of the outstanding shares of Yago, not then owned by the
Company. Prior to the closing of the acquisition, the Company held
approximately 25% of Yago's capital stock, calculated on a fully diluted
basis. The Company also agreed, pursuant to the terms of the merger agreement,
to issue up to 5.5 million shares of the Company's common stock to the former
shareholders of Yago in the event the shares originally issued in the
transaction did not attain a market value of $35 per share eighteen months
after the closing of the transaction. On September 8, 1999, the Company issued
approximately 5.2 million shares of the Company common stock to the former
shareholders of Yago, pursuant to the terms of the merger agreement.


                                      61
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

  The Company recorded the cost of the acquisition at approximately $165.7
million, including direct costs of $2.6 million. Approximately $150.0 million
of the purchase price was allocated to in-process research and development
expense. The excess of cost over the estimated fair value of net assets
acquired of $16.3 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a period of 5-10
years.

  The following table represents the unaudited pro forma results of operations
of the Company for the years ended March 3, 2001 and February 29, 2000, as if
the acquisitions had occurred at the beginning of the fiscal year. These pro
forma results include adjustments for the amortization of goodwill and other
intangibles and deferred compensation and the elimination of amounts expensed
for in-process research and development. They have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisitions been made at the beginning of the periods
noted or of the results that may occur in the future.

<TABLE>
<CAPTION>
                                                            2001        2000
                                                         ----------  ----------
                                                              (Unaudited)
                                                         (In thousands, except
                                                            per share data)
   <S>                                                   <C>         <C>
   Net revenues......................................... $1,074,467  $1,471,948
   Loss from operations.................................   (218,913)    (14,347)
   Net income (loss)....................................   (648,811)    455,716
   Net income (loss) per share basic....................      (3.51)       2.42
   Net income (loss) per share diluted..................      (3.51)       2.57
</TABLE>

  The purchase price for the acquisitions completed during the year ended
March 3, 2001 was allocated to assets acquired and liabilities assumed based
on fair market value at the date of the acquisition. The following tables
summarize the cash paid, value of equity instruments issued, assets acquired
and liabilities assumed related to the acquisitions and provide supplemental
disclosures of noncash transactions in connection with the acquisitions.

<TABLE>
<CAPTION>
                                                                       2001
                                                                  --------------
                                                                  (In thousands)
      <S>                                                         <C>
      Cash paid for acquisitions.................................    $ 12,719
      Common stock issued........................................     133,654
      Preferred stock issued.....................................      31,875
      Preferred stock options and warrants issued................       3,670
      Common stock options issued................................      13,824
      Acquisition costs..........................................       5,090
                                                                     --------
        Purchase price...........................................    $200,832
                                                                     ========

  The allocation of purchase price including intangible assets is as follows:

      Goodwill...................................................    $149,966
      Assumed workforce..........................................       1,875
      Patents and developed technology...........................      17,200
      In-process research and development........................      25,600
      Other assets...............................................      11,281
      Liabilities................................................      (5,090)
                                                                     --------
        Purchase price...........................................    $200,832
                                                                     ========
</TABLE>

                                      62
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


 Dispositions

  During the year ended March 3, 2001, the Company completed the sale of its
Digital Network Products Group ("DNPG") division and certain legacy product
lines. The sale included certain inventory, accounts receivable, net fixed
assets and related intangible assets, resulting in a loss on sale included in
other expense of approximately $143 million.

  On December 17, 1999, the Company sold its FlowPoint subsidiary to Efficient
Networks, Inc. ("Efficient"). From March 1, 1999 through the date of the sale,
FlowPoint's net sales were approximately $34.5 million. Under the terms of the
sale, the Company received 13.5 million shares of Efficient common stock,
including 6,300 shares of Efficient convertible preferred stock which
subsequently converted into 6.3 million shares of Efficient common stock, in
exchange for all of the outstanding capital stock of FlowPoint. The common
stock was subject to various restrictions on resale.

  Based upon an independent valuation of the Efficient stock (which resulted
in a 10% discount from the closing price of the Efficient stock on the NASDAQ
as of the sale date), the transaction was valued at approximately $946.2
million, resulting in a pre-tax gain of approximately $893.7 million.

  On the transaction date, Cabletron held approximately 24% of the outstanding
common stock of Efficient on an as-converted basis. Accordingly, Cabletron
deferred 24% of the pre-tax gain ($235.9 million) since through its ownership
percentage of Efficient, it effectively still had a 24% interest in FlowPoint.
Because the Company had irrevocably relinquished its voting rights on all but
10% of Efficient's common stock, the Efficient stock has been classified as an
available-for-sale security. The Company's effective interest in FlowPoint at
the end of fiscal years 2001 and 2000 was 17.7% and 21.1%, respectively. As
the Company sold the Efficient shares, this deferred gain has been recognized
into income in proportion to Cabletron's reduction in its percentage ownership
of Efficient. The Company has recognized an other than temporary decline in
price on the Efficient shares as of March 3, 2001, which has resulted in an
additional reduction of the deferred gain (note 5).

  In fiscal year 2000, the Company sold approximately 2.0 million shares of
Efficient common stock for net proceeds of approximately $135.3 million and
recognized approximately $47.3 million of the deferred gain into income. In
fiscal year 2001, the Company sold approximately 1.0 million shares of
Efficient common stock for net proceeds of approximately $46.6 million and
recognized approximately $11.8 million of deferred gain into income.

  On April 3, 2001, the Company received $245.2 million for its remaining 8.5
million shares of Efficient common stock associated with the tender offer to
acquire the outstanding shares of Efficient stock. The remaining $46.8 million
in deferred gain associated with the Seimens tender will be recognized as
other income in the first quarter of fiscal year 2002.

 Other Transactions

  On February 29, 2000, the Company sold its manufacturing and repair services
operations located in Rochester, New Hampshire and Limerick, Ireland to
Flextronics International, Ltd. ("Flextronics") for approximately $78.6
million. Flextronics acquired the Company's manufacturing operations.
Flextronics purchased, at net book value, approximately $18.1 million of the
Company's manufacturing related fixed assets including buildings,
approximately $60.5 million of inventory, assumed leases on certain leased
buildings, and acquired 966 manufacturing related employees. Simultaneously,
the Company entered into an agreement with Flextronics to manufacture most of
its products as an original equipment manufacturer ("OEM").

                                      63
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(5) Investments

  Investments are summarized as follows at March 3, 2001 and February 29,
2000:

<TABLE>
<CAPTION>
                                                Gross      Gross
                                   Amortized  unrealized unrealized
                                      cost      gains      losses   Fair value
                                   ---------  ---------- ---------- ----------
                                                 (In thousands)
<S>                                <C>        <C>        <C>        <C>
March 3, 2001
U.S. Government and agency
 obligations...................... $  171,552  $  1,780   $   --    $  173,332
U.S. corporate obligations........     87,538     1,042       (43)      88,537
Asset-backed securities...........     15,481       313       --        15,794
State, municipal and county
 government notes and bonds.......     50,440       346        (7)      50,779
Minority positions, corporate
 equity securities................    248,581       --     (2,896)     245,685
Foreign deposits..................     12,108       --        --        12,108
                                   ----------  --------   -------   ----------
Subtotal marketable securities....    585,700     3,481    (2,946)     586,235
                                   ----------  --------   -------   ----------
Privately held corporate debt and
 equity securities................    144,308       --        --       144,308
                                   ----------  --------   -------   ----------
  Total........................... $  730,008  $  3,481   $(2,946)  $  730,543
                                   ==========  ========   =======   ==========
February 29, 2000
U.S. Government and agency
 obligations...................... $  199,655  $     70   $  (169)  $  199,556
U.S. corporate obligations........      5,596         2       (50)       5,548
Asset-backed securities...........      4,468       --        (13)       4,455
State, municipal and county
 government notes and bonds.......    200,101        81      (873)     199,309
Minority positions, corporate
 equity securities................    804,331   861,383       --     1,665,714
Foreign deposits..................     12,000       --        --        12,000
                                   ----------  --------   -------   ----------
Subtotal marketable securities....  1,226,151   861,536    (1,105)   2,086,582
                                   ----------  --------   -------   ----------
Privately held corporate debt and
 equity securities................     39,257       --        --        39,257
                                   ----------  --------   -------   ----------
  Total........................... $1,265,408  $861,536   $(1,105)  $2,125,839
                                   ==========  ========   =======   ==========
</TABLE>

  The contractual maturities of debt securities at March 3, 2001 are as
follows:

<TABLE>
<CAPTION>
                                                              Amortized   Fair
                                                                cost     value
                                                              --------- --------
                                                                (In thousands)
<S>                                                           <C>       <C>
Less than one year........................................... $149,098  $149,634
Due in 1-2 years.............................................   84,797    86,577
Due in 2-3 years.............................................   69,577    70,907
                                                              --------  --------
  Total...................................................... $303,472  $307,118
                                                              ========  ========
</TABLE>

  Actual maturities may differ from contractual maturities because some
borrowers have the right to call or prepay obligations.

                                      64
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


<TABLE>
<CAPTION>
                                                Current  Long-term    Total
                                                -------- ---------- ----------
                                                        (In thousands)
<S>                                             <C>      <C>        <C>
March 3, 2001
Held-to-maturity............................... $131,891 $      --  $  131,891
Available-for-sale.............................  296,282    158,062    454,344
                                                -------- ---------- ----------
Subtotal marketable securities.................  428,173    158,062    586,235
                                                -------- ---------- ----------
Privately held corporate debt and equity
 securities....................................      --     144,308    144,308
                                                -------- ---------- ----------
  Total........................................ $428,173 $  302,370 $  730,543
                                                ======== ========== ==========
February 29, 2000
Held-to-maturity............................... $199,341 $   39,312 $  238,653
Available-for-sale.............................   22,640  1,825,289  1,847,929
                                                -------- ---------- ----------
Subtotal marketable securities.................  221,981  1,864,601  2,086,582
                                                -------- ---------- ----------
Privately held corporate debt and equity
 securities....................................      --      39,257     39,257
                                                -------- ---------- ----------
  Total........................................ $221,981 $1,903,858 $2,125,839
                                                ======== ========== ==========
</TABLE>

  The fair value of the March 3, 2001 and February 29, 2000 corporate equity
securities, $245.7 million and $1,665.5 million, respectively, relates
primarily to the Company's investment in common and preferred stock of
Efficient Networks, Inc.

  During the year ended March 3, 2001, the Company wrote call options to sell
2.0 million shares of Efficient Networks, Inc. ("Efficient") common stock at a
weighted-average price of $62.50 and received premiums of approximately $14.3
million which have been recorded as a deferred gain. The outstanding call
options expire on various dates between March 30, 2001 and December 4, 2001.

  As of March 3, 2001, the Company determined that in accordance with SFAS
115, the Efficient shares, classified as available-for-sale securities, had
experienced an other than temporary decline in value. The Company recognized a
reduction in value of the Efficient investment of $487.9 million based on the
expected realizable value of approximately $23.50 per share. There was an
associated reduction in the deferred gain of $111.4 million, which resulted in
pre-tax net other expense of $376.5 million. The Company also recorded other
than temporary declines on five other available-for-sale securities in
accordance with SFAS 115, which resulted in pre-tax net other expense of
approximately $18.0 million.

(6) Inventories

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

<TABLE>
<CAPTION>
                                                                  2001    2000
                                                                 ------- -------
                                                                 (In thousands)
      <S>                                                        <C>     <C>
      Raw materials............................................. $ 3,517 $20,503
      Work-in-process...........................................     --    3,416
      Finished goods............................................  94,666  61,097
                                                                 ------- -------
        Total................................................... $98,183 $85,016
                                                                 ======= =======
</TABLE>

                                      65
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(7) Property, Plant and Equipment

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

<TABLE>
<CAPTION>
                                                                    Estimated
                                                                     useful
                                                2001       2000       lives
                                              ---------  --------  -----------
                                                (In thousands)
   <S>                                        <C>        <C>       <C>
   Land and land improvements................ $   1,704     1,699   15 years
   Buildings and building improvements.......    25,071    25,342  15-40 years
   Construction in progress..................       857     1,654      --
   Equipment.................................   244,763   258,872  1.5-7 years
   Furniture and fixtures....................    13,704    13,710    5 years
   Leasehold improvements....................    16,811    15,553    5 years
                                              ---------  --------
                                                302,910   316,830
   Less accumulated depreciation and
    amortization.............................  (211,639) (191,838)
                                              ---------  --------
                                              $  91,271   124,992
                                              =========  ========
</TABLE>

  For the years ended March 3, 2001, February 29, 2000 and February 28, 1999,
depreciation expense was $47.8 million, $78.1 million and $87.5 million,
respectively.

(8) Intangible Assets

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

<TABLE>
<CAPTION>
                                                                   Estimated
                                                 2001     2000    useful lives
                                               --------  -------  ------------
                                                (In thousands)
   <S>                                         <C>       <C>      <C>
   Goodwill................................... $166,840   38,912   4-10 years
   Customer relations.........................   28,600   97,000    8 years
   Assembled work force.......................    1,933    7,380   3-10 years
   Patents and technologies acquired in
    business acquisitions.....................   32,200   41,200   3-10 years
                                               --------  -------
                                                229,573  184,492
   Less accumulated amortization..............  (33,271) (54,208)
                                               --------  -------
     Total.................................... $196,302  130,284
                                               ========  =======
</TABLE>

  Intangible assets increased during the year ended March 3, 2001 primarily
due to the acquisition of Indus River. The increase was partially offset by a
reduction in intangible assets that resulted from the Company's sale of its
DNPG division and the write-off of NetVantage intangible assets.

                                      66
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(9) Accrued Expenses

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

<TABLE>
<CAPTION>
                                                                  2001    2000
                                                                -------- -------
                                                                 (In thousands)
   <S>                                                          <C>      <C>
   Salaries and benefits....................................... $ 32,489  31,724
   Other.......................................................   72,754 100,977
                                                                -------- -------
     Total..................................................... $105,243 132,701
                                                                ======== =======
</TABLE>

(10) Leases

  The Company and its subsidiaries lease office facilities under noncancelable
operating leases expiring through the year 2018. 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 $16.5
million, $22.7 million and $18.1 million for the years ended March 3, 2001,
February 29, 2000 and February 28, 1999, respectively.

  Total future minimum lease payments under all noncancelable operating leases
as of March 3, 2001 are as follows:

<TABLE>
<CAPTION>
      Year
      ----                                                        (In thousands)
      <S>                                                         <C>
      2002.......................................................    $15,001
      2003.......................................................     13,292
      2004.......................................................     11,682
      2005.......................................................     11,148
      2006.......................................................      9,266
      Thereafter.................................................     22,505
                                                                     -------
                                                                     $82,894
                                                                     =======
</TABLE>

(11) Income Taxes

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

<TABLE>
<CAPTION>
                                                      2001      2000     1999
                                                    ---------  ------- --------
                                                          (In thousands)
   <S>                                              <C>        <C>     <C>
   Total U.S. domestic income (loss)............... $(685,789) 730,784 (315,428)
   Total foreign subsidiaries income (loss)........   (18,177)  28,237   38,901
                                                    ---------  ------- --------
     Total income (loss) before income taxes....... $(703,966) 759,021 (276,527)
                                                    =========  ======= ========

  Tax expense (benefit) is summarized as follows:

   Currently payable:
     Federal....................................... $  10,957   32,483  (29,939)
     State.........................................      (321)   6,400      --
     Foreign.......................................     5,244    5,951   13,254
   Deferred tax expense (benefit)..................  (113,843) 249,916  (14,451)
                                                    ---------  ------- --------
       Tax expense (benefit)....................... $ (97,963) 294,750  (31,136)
                                                    =========  ======= ========
</TABLE>

                                      67
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


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

<TABLE>
<CAPTION>
                                                         2001    2000  1999
                                                         -----   ----  -----
   <S>                                                   <C>     <C>   <C>
   Statutory federal income tax (benefit) rate.......... (35.0)% 35.0% (35.0)%
   State income tax, net of federal tax benefit.........  (0.6)   4.9   (1.9)
   Exempt income of foreign sales corporation, net of
    tax.................................................   --     --    (1.7)
   Research and experimentation credit..................  (0.7)  (0.4)  (0.7)
   Municipal income.....................................  (0.4)  (0.4)  (1.6)
   Rate differential on foreign operations..............   1.5   (0.5)  (1.2)
   Nondeductible goodwill and intangibles...............   1.6    0.5   27.5
   Valuation allowance..................................  18.0    --     --
   Other................................................   1.7   (0.3)   3.3
                                                         -----   ----  -----
                                                         (13.9)% 38.8% (11.3)%
                                                         =====   ====  =====
</TABLE>

  The Company has recorded a partial valuation allowance against its foreign,
federal and state deferred tax assets for the year ended March 3, 2001 since
management believes that, after considering all the available objective
evidence, both positive and negative, historical and prospective, with greater
weight given to historical evidence, it is more likely than not that a portion
of these assets will be realized.

  For the year ended March 3, 2001, the Company has recorded a charge of $25.6
million for in-process research and development relating to the acquisition of
Indus River. This charge was not deductible for tax purposes. For the year
ended February 28, 1999, the Company recorded charges of $217.4 million for
in-process research and development relating to the acquisitions of
NetVantage, FlowPoint, Ariel and Yago. $191.4 million of these charges were
not deductible for tax purposes.

  The Internal Revenue Service ("IRS") has proposed federal income tax
deficiencies for the years 1994 through 1996, and the Company has made certain
prepayments thereon. Although a substantial number of issues for these years
have been resolved, certain issues still remain in dispute and are being
contested by the Company. Management believes that adequate provision has been
made for any adjustments that may result from tax examinations.

                                      68
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at March 3, 2001
and February 29, 2000 are presented below:

<TABLE>
<CAPTION>
                                                              2001       2000
                                                            ---------  --------
                                                              (In thousands)
   <S>                                                      <C>        <C>
   Deferred tax assets:
     Accounts receivable................................... $   4,765     2,107
     Inventories...........................................    11,227    34,282
     Property, plant and equipment.........................     5,628     3,806
     Other reserves and accruals...........................    47,179    38,806
     Acquired research and development intangibles.........   127,143   104,521
     Domestic net operating loss carryforwards.............   106,559    12,854
     Foreign net operating loss carryforwards..............    23,079    23,079
                                                            ---------  --------
       Total gross deferred tax assets.....................   325,580   219,455
     Less valuation allowance..............................  (184,102)  (26,672)
                                                            ---------  --------
       Net deferred tax assets.............................   141,478   192,783
                                                            ---------  --------
     Deferred tax liabilities:
      Deferred gain........................................   (59,203) (569,833)
                                                            ---------  --------
       Total gross deferred liabilities....................   (59,203) (569,833)
                                                            ---------  --------
       Net deferred tax assets............................. $  82,275  (377,050)
                                                            =========  ========
</TABLE>

  At March 3, 2001, the Company had domestic net operating loss ("NOL")
carryforwards for tax purposes of $229.2 million expiring in fiscal 2005
through fiscal 2020. Approximately $62.8 million of this NOL is attributable
to the pre-acquisition periods of acquired subsidiaries. The utilization of
these NOLs may be limited pursuant to Internal Revenue Code (S)382 as a result
of these prior ownership changes. In addition, the Company has $15.0 million
of U.S. income tax credit carryforwards as of March 3, 2001, which expire in
fiscal years 2019 through 2020.

  The net change in the total valuation allowance for the year ended March 3,
2001 was an increase of $157.4 million. The net change in total valuation
allowance for the year ended February 29, 2000 was a decrease of $8.0 million.
Subsequently recognized tax benefits relating to valuation allowances for
deferred tax assets will be allocated as follows: $25.6 million to additional
paid-in capital, $5.2 million to goodwill, and $153.3 million to the
consolidated statement of earnings.

                                      69
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(12) Other Income (Expense), Net

  The following schedule reflects the components of Other income (expense),
net.

<TABLE>
<CAPTION>
                                                       Years ended
                                           ------------------------------------
                                           March 3,   February 29, February 28,
                                             2001         2000         1999
                                           ---------  ------------ ------------
                                                     (In thousands)
<S>                                        <C>        <C>          <C>
Gain on sale of Flowpoint................  $     --     657,727        --
Recognition of Efficient deferred gain...     30,384     47,363        --
Net gain (loss) on sale of available for
 sale securities.........................    (21,380)     4,621        --
Loss on sale of DNPG division............   (143,108)       --         --
Other than temporary decline on available
 for sale securities ....................   (394,556)       --         --
Other income recognized from amended
 Digital/Compaq agreement................        --      37,200        --
Write down of privately held securities..     (8,931)       --         --
Other expense............................     (3,536)      (702)       --
                                           ---------    -------        ---
                                           $(541,127)   746,209        --
                                           ---------    -------        ---
</TABLE>

(13) Comprehensive Income (Loss)

  The Company's total comprehensive income (loss) was as follows:

<TABLE>
<CAPTION>
                                                      Years ended
                                         --------------------------------------
                                          March 3,    February 29, February 28,
                                            2001          2000         1999
                                         -----------  ------------ ------------
                                                    (In thousands)
<S>                                      <C>          <C>          <C>
Net income (loss)....................... $  (606,003)    464,271     (245,391)
Other comprehensive income:
  Unrealized gain (loss) on available-
   for-sale securities..................  (1,254,870)    899,284        1,958
  Foreign currency translation
   adjustment...........................         723      (1,041)      (1,574)
  Reclassification adjustment for gains
   (losses) on available-for-sale
   securities included in net income....     394,483     (40,811)         --
Income tax benefit (expense)............     344,242    (343,134)        (772)
                                         -----------    --------     --------
    Total comprehensive income (loss)... $(1,121,425)    978,569     (245,779)
                                         ===========    ========     ========
</TABLE>

  Income tax expense in years ended March 3, 2001 and February 29, 2000 is
allocated as follows: $344.5 million and $(343.1) million to unrealized gain
(loss) on available-for-sale securities, and ($0.2) million and $0.3 million
to foreign currency translation adjustments, respectively. Income tax expense
in the year ended February 28, 1999 relates to unrealized gain on available-
for-sale securities.

  The accumulated comprehensive income as of March 3, 2001 consists of:

<TABLE>
<CAPTION>
                                                                         Net
                                                        Gross    Tax     of
                                                        Item    Effect   Tax
                                                       -------  ------  -----
<S>                                                    <C>      <C>     <C>
Unrealized gain (loss) on available for sale
 securities........................................... $   357  $(142)  $ 215
Foreign currency translation adjustment...............  (1,435)   487    (948)
                                                       -------  -----   -----
    Total accumulated comprehensive income (loss)..... $(1,078) $ 345   $(733)
                                                       =======  =====   =====
</TABLE>

                                      70
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(14) Net Income (Loss) per Share

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

<TABLE>
<CAPTION>
                                                    2001      2000     1999
                                                  ---------  ------- --------
                                                  (In thousands, except per
                                                        share amounts)
<S>                                               <C>        <C>     <C>
Net income (loss) to common shareholders......... $(628,901) 464,271 (245,391)
                                                  =========  ======= ========
Weighted average number of common shares of
 common stock outstanding--basic.................   184,770  177,541  167,432
Dilutive effect:
  Contingent shares per acquisition agreement....       --     2,672      --
  Net additional common shares upon exercise of
   common stock options..........................       --     8,405      --
                                                  ---------  ------- --------
Weighted average number of common shares
 outstanding--diluted............................   184,770  188,618  167,432
                                                  =========  ======= ========
Net income (loss) per common share--basic........ $   (3.40)    2.62    (1.47)
                                                  =========  ======= ========
Net income (loss) per common share--diluted...... $   (3.40)    2.46    (1.47)
                                                  =========  ======= ========
</TABLE>

  For 2001 and 1999, stock options to purchase shares of common stock totaling
11.8 million and 18.9 million, respectively, were outstanding but were not
included in the calculation of diluted earnings per share since the effect was
anti-dilutive. In addition, the effect of the 5.5 million shares that were
contingently issuable related to the acquisition of Yago, as of the year ended
February 28, 1999, was not included since the effect was anti-dilutive.

(15) Financial Instruments and Concentration of Credit Risk

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

  At March 3, 2001 and February 29, 2000, the Company had forward exchange
contracts and purchased option contracts, all having maturities less than two
years, with a notional amount of $14.2 million (forward contracts were $9.2
million and option contracts were $5.0 million) and $31.9 million (forward
contracts were $3.9 million and option contracts were $28.0 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 March 3, 2001 and February 29, 2000.

                                      71
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  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 accounts payable and accrued expenses approximate fair
value because of the short maturity of these financial instruments.

  For the year ended March 3, 2001, no individual customer accounted for
greater than 10% of the Company's revenue. For the year ended February 29,
2000, one customer, Compaq, accounted for approximately 16% of net revenue and
the United States federal government accounted for approximately 8% of net
revenue. For the year ended February 28, 1999, one customer, Compaq, accounted
for approximately 11% of net revenue and the United States federal government
accounted for approximately 15% of net revenue.

(16) Legal Proceedings

  Since October 24, 1997, nine shareholder 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. By order dated
March 3, 1998 these lawsuits, which are similar in material respects, were
consolidated into one class action lawsuit, captioned In re Cabletron Systems,
Inc. Securities Litigation (C.A. No. 97-542-SD). The case has been transferred
to the District of Rhode Island. The complaint alleges that Cabletron and
several of its officers and directors disseminated materially false and
misleading information about Cabletron's operations and acted in violation of
Section 10(b) and Rule 10b-5 of the Exchange Act during the period between
March 3, 1997 and December 2, 1997. The complaint further alleges that certain
officers and directors profited from the dissemination of such misleading
information by selling shares of the common stock of Cabletron during this
period. The complaint does not specify the amount of damages sought on behalf
of the class. Cabletron and other defendants moved to dismiss the complaint,
and by Order dated December 23, 1998, the District Court expressed its
intention to grant Cabletron's motion to dismiss unless plaintiffs amended
their complaint within 30 days (or January 22, 1999). The plaintiffs served a
second consolidated class action complaint, and Cabletron filed a motion to
dismiss this second complaint. In a ruling dated May 23, 2001, the district
court dismissed this complaint with prejudice. The plaintiffs may choose to
appeal this ruling to the First Circuit Court of Appeals. If the plaintiffs
were to appeal, prevail upon appeal and subsequently prevail on the merits of
the case, Cabletron could be required to pay substantial damages.

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

(17) Stock Repurchase and Put Option Program

  On April 24, 2000, the Company's Board of Directors authorized the Company
to repurchase up to $400.0 million of the Company's outstanding shares of
common stock. The Company has repurchased approximately 2.1 million shares in
the open market for $56.5 million during the year ended March 3, 2001. During
the year, the Company sold equity put options as an enhancement to its ongoing
share repurchase program and received $4.9 million in premiums recorded as
additional paid-in capital. As of March 3, 2001, no put options remained
outstanding.


                                      72
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

(18) Preferred Stock, Warrants and Subsidiary Stock Purchase Rights

  On August 29, 2000, the Company and its Operating Subsidiaries issued
securities and granted rights for the purchase of additional securities to an
investor group (the "strategic investors"). The Company and its Operating
Subsidiaries received approximately $87.8 million in cash from the strategic
investors. The Company has issued to the strategic investors Series A and
Series B Preferred Stock (the "A&B Preferred Stock"), as well as warrants to
purchase Company common stock. The Operating Subsidiaries have agreed to issue
to the strategic investors warrants to purchase the Operating Subsidiary's
common stock upon the occurrence of certain events, including the sale of an
Operating Subsidiary or the failure of an Operating Subsidiary to consummate
an IPO. In addition, each of the Operating Subsidiaries has issued to the
strategic investors rights to purchase shares of its common stock, and each of
the Operating Subsidiaries have agreed to issue rights to purchase additional
shares of its common stock to the strategic investors upon the occurrence of
certain events. The initial exercise prices and the number of shares issuable
upon exercise of the subsidiary stock purchase rights are dependent upon
certain events. The Operating Subsidiaries may require the strategic investors
to exercise a portion of these stock purchase rights at the time of an
Operating Subsidiary IPO or at the time of a spin-off of the Operating
Subsidiary, which is not preceded by an IPO.

  The transaction with the strategic investors has been accounted for in
accordance with the Accounting Principles Board Pronouncement No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
("APB 14"), EITF 00-27, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, ETIF 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, EITF 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock, and EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. In
accordance with these pronouncements, the proceeds were allocated to the
various equity instruments issued by the Company and its Operating
Subsidiaries.

  A summary of the terms of these securities follows:

 Series A and B Preferred Stock

  As of March 3, 2001, 65,000 shares of 4% Series A Participating Convertible
Preferred Stock ("A Preferred Stock") were issued and outstanding and 25,000
shares of 4% Series B Participating Convertible Preferred Stock ("B Preferred
Stock") were issued and outstanding.

 Voting

  Shares of the Preferred Stock vote on an as-converted basis with the common
stock.

 Seniority

  With respect to liquidations, the A&B Preferred Stock ranks senior to the
common stock and pari passu with or senior to all other series of preferred
stock. However, at such time as less than 50% of the originally issued shares
of A&B Preferred Stock remain outstanding, the Company is permitted to issue
new series of A&B Preferred Stock ranking senior to these classes of A&B
Preferred Stock.


                                      73
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

 Liquidation Preference

  The A&B Preferred Stock has an initial liquidation preference equal to the
sum of $1,000 per share (adjusted for stock dividends, splits, combinations or
similar events) and accrued and unpaid dividends (such sum being the
"Liquidation Preference"). However, if greater, this Liquidation Preference is
increased upon the liquidation of the Company to an amount equal to the
liquidation proceeds payable with respect to the common stock into which the
A&B Preferred Stock is convertible.

 Dividends

  Dividends on the A&B Preferred Stock compound at the end of each of the
Company's fiscal quarters and accrue daily from the date of issue at a rate
equal to the greater of 4.00% per annum on its Liquidation Preference or the
aggregate cash dividends payable with respect to the common stock into which
the A&B Preferred Stock is convertible. However, cash dividends on the A&B
Preferred Stock are not payable without the consent of a majority of holders
of the A&B Preferred Stock.

 Conversion Feature

  Each share of A Preferred Stock is convertible at any time at the option of
the holder into that number of shares of common stock of the Company equal to
the Liquidation Preference of the share of A Preferred Stock at that time
divided by $40.00, adjusted for stock dividends, splits, combinations or
similar events (the "Series A Conversion Price"). Each share of B Preferred
Stock is convertible at any time at the option of the holder into that number
of shares of common stock of the Company equal to the Liquidation Preference
of the share of B Preferred Stock at that time divided by $30.00, adjusted for
stock dividends, splits, combination or similar events (the "Series B
Conversion Price," together with the Series A Conversion Price, the
"Conversion Price"). On the conversion of A&B Preferred Stock, any property
placed in escrow with respect to such stock (as described immediately below)
will be released to the holder of such stock. If certain restrictions prevent
the holders of the A&B Preferred Stock from exercising their redemption rights
(as described below under the heading "Shareholder Redemption Rights"), then
the Conversion Price will be adjusted to equal 90% of the market price of the
Company's common stock on the date specified for such redemption.

 Escrow Accounts

  If the Company makes a distribution of property (including shares of the
Company's stock) with respect to the Company's common stock prior to the
conversion of a holder's A&B Preferred Stock, the holder will participate in
such distribution as follows. If the distribution is of stock of the Company
or any of the Company's other Operating Subsidiaries ("Spin Shares"), the
holder will participate in such distribution immediately on an as-converted
basis; however, such Spin Shares will be placed in escrow on the holder's
behalf (a "Spin Escrow"). The holders of A&B Preferred Stock will have current
voting and dividend rights with respect to Spin Shares placed in a Spin Escrow
on their behalf. To the extent the Company makes a distribution of property
other than Spin Shares or pays cash dividends at a rate greater than the
stated accrual on the A&B Preferred Stock (an "Extraordinary Dividend"), the
amount of such Extraordinary Dividend that would be distributed to the holders
of the then outstanding A&B Preferred Stock (an "Extraordinary Dividend
Escrow," together with the Spin Escrow, the "Escrows"). Any Spin Shares or
Extraordinary Dividends held in Escrow with respect to a holder of A&B
Preferred Stock will be released to the holder when the holder converts the
A&B Preferred Stock. If a holder redeems (as opposed to converts) the A&B
Preferred Stock, any Spin Shares held in a Spin Escrow with respect to the
holder will be returned to such Operating Subsidiary on behalf of the holder,
and any

                                      74
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

Extraordinary Dividend held in an Extraordinary Dividend Escrow with respect
to the holder will revert to the Company.

 Shareholder Redemption Rights

  At any time on or after February 23, 2003, a holder of A&B Preferred Stock
may require the Company to redeem for cash all (but not less than all) of the
holder's A&B Preferred Stock at the Liquidation Preference then in effect. In
the event of a 50% change in control of the Company, holders of the A&B
Preferred Stock will have the right to require the Company to redeem for cash
all or any portion of the A&B Preferred Stock for the greater of (1) 101% of
the Liquidation Preference then in effect or (2) the aggregate market value of
the shares of common stock into which the A&B Preferred Stock is then
convertible (provided that if the change in control is triggered by a
transaction in which holders of common stock receive property, any amount
payable under clause (2) in excess of the amount payable under the clause (1)
may be paid in such property at the Company's election).

 The Company's Redemption Rights

  At any time on or after February 23, 2004, the Company will have the rights
to redeem for cash all (but not less than all) of the A&B Preferred Stock at
the Liquidation Preference then in effect (subject to the rights of the
holders of the A&B Preferred Stock to convert to common stock immediately
prior to such redemption).

 Class A Warrants

  The Company issued to the strategic investors warrants to purchase 250,000
shares of common stock at an initial exercise price of $45.00 per share,
adjusted for stock dividends, spits, combinations or similar events (the
"Class A Warrants"). The Class A Warrants are exercisable until August 2007
and otherwise contain customary terms and conditions (including provisions
with respect to "cashless" exercise and customary anti-dilutive provisions).

 Class B Warrants

  The Company issued to the strategic investors warrants to purchase 200,000
shares of common stock at an initial exercise price of $35.00 per share,
adjusted for stock dividends, splits, combinations or similar events (the
"Class B Warrants"). The Class B Warrants are exercisable until August 2007
and otherwise contain customary terms and conditions (including provisions
with respect to "cashless" exercise and customary anti-dilutive provisions).

 Subsidiary Stock Purchase Rights

  The Company may require the strategic investors to purchase 0.75% of the
common stock of each of the Operating Subsidiaries at the time of that
subsidiary's IPO or at the time of any spin-off of that subsidiary, which is
not preceded by an IPO. In addition, each of the Operating Subsidiaries has
granted to the strategic investors rights to purchase up to 4.25% (inclusive
of the 0.75%) of its common stock, which become exercisable upon the
occurrence of certain events. The exercise price of these rights will depend
upon the number of rights the strategic investors exercise and the timing of
the exercises.

 Contingent Subsidiary Warrants

  The Operating Subsidiaries have agreed to issue warrants to purchase
additional shares of their common stock to the investors under certain
circumstances, depending upon whether the valuation of that subsidiary at

                                      75
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

the time of its IPO exceeds certain thresholds. These warrants will have an
exercise price equal to the subsidiary's IPO price per share. In addition,
concurrently with a distribution by the Company of its common stock of a
subsidiary to the Company's stockholders, the Operating Subsidiary is required
to issue warrants to the investors to purchase additional shares at an
exercise price that will depend upon the market value of the Company and the
Operating Subsidiary at the time of issuance.

  The Company valued all equity instruments issued, on the transaction date,
to the strategic investors and has recorded the following values and charges
in fiscal 2001:

  .  $5.2 million to the Class A and Class B warrants, recorded as $3.4
     million to additional paid-in capital of the Company and $1.8 million to
     minority interest in the Operating Subsidiaries.

  .  $14.6 million to the Operating Subsidiary stock purchase rights,
     recorded as approximately $7.2 million to additional paid-in capital of
     the Company and approximately $7.4 million to minority interest in the
     Operating Subsidiaries.

  .  $68.0 million to the A&B Preferred Stock. A dividend was recognized at
     the time of the issuance (a beneficial conversion) of $16.9 million,
     which represents the excess of aggregate fair value of the common stock
     that the investor would receive at the earliest conversion date over the
     proceeds ascribed to the Preferred Stock.

In addition, an accretive dividend of $22.0 million will be recorded through
February 23, 2003, using the interest method, as a result of the difference
between the $90.0 million redemption value of the A&B Preferred Stock and the
$68.0 million ascribed value. The Company will also record the 4% dividend
associated with the preferred stock on a quarterly basis.

 Series C Preferred Stock

  As part of the acquisition of Indus River, completed on January 31, 2001,
Cabletron issued 45,471 shares of Series C Preferred Stock ("C Preferred
Stock") and options and warrants to purchase 5,293 shares of C Preferred
Stock.

 Dividend Rights

  The holders of C Preferred Stock will be entitled to receive cash dividends
to the same extent as holders of Cabletron common stock. Each share of C
Preferred Stock will be entitled to receive dividends at a rate per share
equal to the product of the dividend declared on each share of Cabletron
common stock and the applicable conversion rate. The applicable conversion
rate is currently 10, and will be adjusted for stock splits, stock dividends,
recapitalizations and other similar events. In addition, the Company's Board
of Directors may declare a dividend of shares of Enterasys common stock on the
C Preferred Stock.

 Conversion Rights

  The C Preferred Stock will be convertible into Cabletron common stock at the
option of the holder at any time following the earliest to occur of:

  .  an Enterasys spin-off that occurs on or after January 31, 2002;

  .  an Enterasys transaction (defined as a sale, other disposition,
     consolidation, merger or reorganization of Enterasys (other than an
     Enterasys spin-off), pursuant to which Cabletron no longer controls
     Enterasys) at any time; and

  .  January 31, 2003.

                                      76
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  A holder of C Preferred Stock that elects to convert its shares of C
Preferred Stock into Cabletron common stock will receive the number of shares
of Cabletron common stock equal to the number of shares of C Preferred Stock
held by that holder multiplied by the applicable conversion rate, which is
currently 10 and will be adjusted for events such as stock splits, stock
dividends or recapitalizations, as well as for an Enterasys spin-off or an
Enterasys transaction.

 Redemption

  Each holder of C Preferred Stock will have the right to require Cabletron to
redeem all, but not less than all, of that holder's shares of C Preferred
Stock immediately before the occurrence of the first to occur of:

  .  an Enterasys spin-off on or after January 31, 2002 and before January
     31, 2003; and

  .  an Enterasys transaction.

  If a holder of C Preferred Stock requests redemption of its shares in
connection with an Enterasys spin-off, Cabletron will pay the redemption price
upon consummation of the spin-off. The redemption price that Cabletron will
pay for each share of C Preferred Stock will be paid in shares of Enterasys
stock and will be equal to 1% of the fully-diluted stock of Enterasys,
determined as of January 31, 2001, adjusted for stock splits, stock dividends,
recapitalizations, extraordinary distributions and other similar events
affecting the stock of Enterasys, divided by 50,000.

  If a holder of C Preferred Stock seeks to redeem its shares in connection
with an Enterasys transaction, the Company will pay the redemption price on an
after-tax basis immediately following the Enterasys transaction. The
redemption price that the Company will pay for each share of C Preferred Stock
will be paid in securities or assets of the surviving corporation immediately
following the Enterasys transaction. The redemption price will be equal to 1%
of the fully-diluted stock of Enterasys, determined as of January 31, 2001,
adjusted for stock splits, stock dividends, recapitalizations, extraordinary
distributions and other similar events affecting the stock of Enterasys,
divided by 50,000.

  If the Company intends to conduct an Enterasys spin-off before January 31,
2002, holders of C Preferred Stock will not be able to redeem their shares of
C Preferred Stock as part of the spin-off. They will be able to convert their
shares into the Company's common stock immediately before the spin-off. If the
Company conducts an Enterasys transaction before January 31, 2002, holders of
C Preferred Stock will be able to redeem their shares of C Preferred Stock in
that transaction. The Company may never conduct an Enterasys spin-off or
engage in an Enterasys transaction. It is possible that holders of the C
Preferred Stock will not be able to exercise the redemption right described
above.

  The redemption rights for the C Preferred Stock will terminate immediately
after the first to occur of:

  .  an Enterasys spin-off;

  .  an Enterasys transaction; and

  .  January 31, 2003.

 Liquidation Preferences

  Upon the Company's liquidation, dissolution or winding up, the holders of C
Preferred Stock will be entitled to be paid in full a liquidation amount,
determined as described below, after the distribution of any of the

                                      77
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

Company's assets to the holders of any other series or class of Cabletron's
stock ranking senior to the C Preferred Stock in a liquidation, including the
A&B Preferred Stock.

  If the Company's liquidation, dissolution or winding up occurs before the
first to occur of an Enterasys spin-off, an Enterasys transaction and January
31, 2003, then the liquidation amount will be equal to the greater of:

  .  $1.00; and

  .  the amount a holder would be entitled to receive on a share of C
     Preferred Stock in the liquidation, dissolution or winding up if the
     holder converted that share into Cabletron common stock immediately
     before the liquidation, dissolution or winding up is effective; and

  .  the amount a holder would be entitled to receive on a share of C
     Preferred Stock in the liquidation, dissolution or winding up if the
     holder converted that share into Cabletron common stock immediately
     before the liquidation, dissolution or winding up is effective, but
     without taking into account any adjustment to the applicable conversion
     rate occurring if the Company has not conducted an Enterasys spin-off or
     an Enterasys transaction on or prior to January 31, 2003.

  If Cabletron's liquidation, dissolution or winding up occurs after the first
to occur of an Enterasys spin-off, an Enterasys transaction and January 31,
2003, then the liquidation amount will be equal to the greater of:

  .  $1.00; and

  .  the amount a holder would be entitled to receive on a share of C
     Preferred Stock in the liquidation, dissolution or winding up if the
     holder converted that share into Cabletron common stock immediately
     before the liquidation, dissolution or winding up is effective,
     including taking into account any adjustment to the applicable
     conversion rate for an Enterasys spin-off, an Enterasys transaction or
     following January 31, 2003.

  If, after distribution of any of Cabletron's assets to the holders of stock
senior to the C Preferred stock, Cabletron's assets are insufficient to pay
the holders of C Preferred Stock and the holders of any stock ranking equally
with the C Preferred Stock, their full liquidation amounts, then Cabletron's
remaining assets legally available for distribution will be distributed
ratably among the holders of C Preferred Stock and the holders of any stock
ranking equally with the C Preferred Stock. The holders of stock ranking
junior to the C Preferred Stock, including the holders of Cabletron common
stock, will not be entitled to participate in the liquidation.

 Voting Rights

  Except as required by law, the holders of C Preferred Stock will have voting
rights and powers equal to the voting rights and powers of the holders of
Cabletron common stock. The holders of C Preferred Stock will vote with the
holders of Cabletron common stock and any other, shares of Cabletron's stock
which, by their terms, are entitled to vote with the Cabletron common stock as
a single class. Each holder of C Preferred Stock will be entitled to the
number of votes for each share of C Preferred Stock it holds equal to the
product of the number of shares of C Preferred Stock held by the holder and
the applicable conversion rate on the record date for holders entitled to
participate in the vote. The holders of a majority of the then outstanding
shares of C Preferred Stock must also approve any amendment or restatement of
Cabletron's certificate of incorporation or of the certificate of designation
for the C Preferred Stock that adversely affects the powers, preferences and
rights of the C Preferred Stock.


                                      78
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

 Escrow Agreement

  The shares of C Preferred Stock are held by an escrow agent, and are subject
to the provisions of the escrow agreement. The shares of C Preferred Stock
will be held in escrow only to facilitate any conversion or redemption of the
C Preferred Stock occurring on or prior to January 31, 2003. The shares will
remain in the escrow account until any conversion or redemption, after which
the stockholders on whose behalf the shares are being held will receive the
shares of Cabletron common stock issued upon the conversion of the C Preferred
Stock or the shares of Enterasys common stock or any other securities issued
upon the redemption of the C Preferred Stock. If no such redemption or
conversion occurs on or prior to January 31, 2003, the shares being held in
escrow will be distributed by the escrow agent to the stockholders on whose
behalf the shares are being held on or before June 30, 2003. The escrow
agreement provides that the shares of C Preferred Stock may not be transferred
except under the laws of descent and distribution or to the partners or equity
holders of any stockholder which is an entity.

 Undesignated Preferred Stock

  At March 3, 2001, Cabletron was authorized to issue up to 1,859,236 shares
of preferred stock (the "Undesignated Preferred Stock"). Issuances of the
Undesignated Preferred Stock may be made at the discretion of the Board of
Directors of Cabletron (without stockholder approval) with designations,
rights and preferences as the Board of Directors may determine from time to
time which may be more expansive than the rights of the current holders of the
Company's preferred stock and common stock.

(19) Stock Plans

 (A) Cabletron Equity Incentive and Directors Plans

  The Company's 1998 Equity Incentive Plan provides for the availability of
25,000,000 shares of common stock for the granting of a variety of incentive
awards to eligible employees. Plan options are granted at fair market value at
the date of grant, vest over a three to five year period and expire within six
to ten years from the date of grant.

  Prior to February 28, 1999, the Company maintained a Directors Option Plan
which provided for 1,250,000 shares of common stock for purchase by
nonemployee directors of the Company. The Directors Option Plan provided for
issuance of options with exercise prices equal to the underlying stock price
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 225,000 stock options are
outstanding under the Directors Option Plan at March 3, 2001. As of March 1,
1999, the nonemployee directors of the Company were granted options to
purchase shares of common stock in accordance with the Company's 1998 Equity
Incentive Plan.

                                      79
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  A summary of option transactions under the two plans follows:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                                      Number of      average
                                                       options    exercise price
                                                     -----------  --------------
   <S>                                               <C>          <C>
   Options outstanding at February 28, 1998.........  14,879,091      25.45
                                                     -----------
   Options exercised at February 28, 1998...........   4,134,623      22.99
                                                     -----------
   Granted and assumed..............................  20,023,369       7.69*
   Exercised........................................    (497,696)      5.58
   Cancelled........................................ (15,421,085)     16.43*
                                                     -----------
   Options outstanding at February 28, 1999.........  18,983,679       9.67
                                                     -----------
   Options exercised at February 28, 1999...........   4,518,681      13.32
                                                     -----------
   Granted and assumed..............................   6,030,560      16.25
   Exercised........................................  (4,158,603)     10.66
   Cancelled........................................  (4,857,380)     16.43
                                                     -----------
   Options outstanding at February 29, 2000.........  15,998,256      11.16
                                                     -----------
                                                                      10.26
   Options exercised at February 29, 2000...........   2,916,651
                                                     -----------
   Granted and assumed..............................   1,101,614      17.55
   Exercised........................................  (1,958,935)      8.94
   Cancelled........................................  (3,373,355)     12.73
                                                     -----------
   Options outstanding at March 3, 2001.............  11,767,580      11.66
                                                     ===========
   Options exercisable at March 3, 2001.............   4,340,530      11.51
                                                     ===========
</TABLE>
--------
* In September 1998, employees holding outstanding stock options with a value
  exceeding $7.25 per option were given the right to have their options
  canceled and repriced to $7.25 per option. The repriced options will vest
  over a period of four to six years.

                                      80
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  The following table summarizes information concerning currently outstanding
and exercisable options as of March 3, 2001:

<TABLE>
<CAPTION>
                              Weighted-
                               average
                              remaining    Weighted-                 Weighted-
  Range of                   contractual    average                   average
  exercise       Options        life       exercise      Options     exercise
   prices      outstanding     (years)       price     exercisable     price
------------   -----------   -----------   ---------   -----------   ---------
<S>            <C>           <C>           <C>         <C>           <C>
$ 0.05- 6.30      428,082        8.6        $ 3.77        170,725     $ 2.62
  6.31- 7.85    5,785,453        6.3          7.25      2,206,280       7.25
  7.86- 9.85      657,073        7.4          8.69        178,896       8.51
  9.86-11.85      365,562        6.7         10.50        292,323      10.33
 11.86-13.85    2,161,493        8.2         13.47        709,238      13.46
 13.86-23.85    1,098,501        8.7         17.54        258,665      16.46
 23.86-33.85    1,130,716        7.2         26.91        496,529      28.47
 33.86-56.74      140,700        9.0         38.54         27,874      36.63
               ----------        ---        ------      ---------     ------
               11,767,580        7.1        $11.66      4,340,530     $11.51
               ==========        ===        ======      =========     ======
</TABLE>

  The weighted average estimated fair values of stock options granted and
assumed during the years ended March 3, 2001, February 29, 2000 and February
28, 1999 were $17.24, $9.06 and $3.37 per share, respectively.

 (B) Subsidiary Stock Option Plans

  (Enterasys, Riverstone, Aprisma and GNTS) 2000 Equity Incentive Plans

  Each subsidiary's board of directors has adopted its 2000 Equity Incentive
Plan ("2000 Plan"), which provides for the grant of awards to employees or
directors of, or consultants or advisors to the subsidiary as well as to
certain employees of Cabletron and its subsidiaries. Awards under each 2000
Plan may consist of stock options (incentive or non-statutory), restricted and
unrestricted stock awards, stock appreciation rights, deferred stock awards,
performance awards, other stock-based awards and loans and supplemental
grants. The 2000 Plans are administered by the subsidiary board of directors
or by a committee of the board, which determines the terms of awards subject
to the terms of each 2000 Plan, subject to action by the compensation
committee of the board of directors of Cabletron in the event of certain
awards to executive officers. The table below provides additional information
concerning each plan:

<TABLE>
<CAPTION>
                                     Total
                                     shares
                                    reserved      Maximum number
                                      for       of shares for which
                                    issuance  options may be awarded   Maximum
                                   under each to a participant in any   annual
                                   2000 plan       calendar year      cash award
                                   ---------- ----------------------- ----------
   <S>                             <C>        <C>                     <C>
   Enterasys...................... 41,000,000        8,500,000        $5,000,000
   Riverstone..................... 45,000,000        8,500,000         5,000,000
   Aprisma........................ 16,400,000        8,500,000         5,000,000
   GNTS........................... 17,200,000        8,500,000         5,000,000
</TABLE>

  Each subsidiary has granted stock options under the respective 2000 Plan
that provide for provisional vesting as to one-quarter of the shares subject
to the options after one year (April 1, 2001 in the case of the initial
grants) with monthly provisional vesting of the remainder ratably over the
next three years. Actual vesting of these options, which have a maximum term
of ten years, is not scheduled to occur earlier than at the end of

                                      81
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

four years (April 1, 2004 in the case of the initial grants) or, if earlier,
upon a distribution by Cabletron of its shares of stock of the subsidiary or
upon a sale or other change in control of the subsidiary. In the event of a
sale or other change in control of the subsidiary, vesting would also
accelerate by ten months. The exercise price of these options has been set at
the fair market value of the subsidiary's stock on the date of grant, as
determined by the respective board. Upon termination of employment, the
unvested portion of these options would terminate and the remainder would
remain exercisable for up to ninety days, with special rules applicable in the
case of death.

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

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

 (a) Enterasys 2000 Equity Incentive Plan

  The following table reflects activity and exercise prices of stock options
under the Enterasys 2000 equity incentive plan for the year ended March 3,
2001:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                                      Number of      average
                                                        shares    exercise price
                                                      ----------  --------------
   <S>                                                <C>         <C>
   Options outstanding, beginning of period..........        --       $ --
     Granted......................................... 31,254,950       3.73
     Exercised.......................................        --         --
     Cancelled....................................... (3,847,350)      3.52
                                                      ----------      -----
     Options outstanding, March 3, 2001.............. 27,407,600       3.76
                                                      ----------      -----
   Options exercisable, March 3, 2001................        --       $ --
                                                      ==========      =====
</TABLE>

                                      82
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


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

<TABLE>
<CAPTION>
    Range of                             Weighted-average
    exercise         Options           remaining contractual         Weighted-average
     price         outstanding             life (years)               exercise price
   ----------      -----------         ---------------------         ----------------
   <S>             <C>                 <C>                           <C>
     $3.50         21,710,200                   9.2                       $3.50
    3.51-4.50         290,500                   9.5                        4.25
    4.51-5.00       5,406,900                   9.8                        4.79
                   ----------                   ---                       -----
                   27,407,600                   9.3                       $3.76
                   ==========                   ===                       =====
</TABLE>

 (b) Riverstone 2000 Equity Incentive Plan

  The following table reflects activity and exercise prices of stock options
under the Riverstone plan for the year ended March 3 2001:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                                      Number of      average
                                                        shares    exercise price
                                                      ----------  --------------
   <S>                                                <C>         <C>
   Options outstanding, beginning of period..........        --        $--
     Granted......................................... 36,888,330       4.98
     Exercised.......................................        --         --
     Cancelled....................................... (1,201,600)      4.31
                                                      ----------       ----
     Options outstanding, March 3, 2001.............. 35,686,730       5.01
                                                      ----------       ----
     Options exercisable, March 3, 2001..............        --        $--
                                                      ==========       ====
</TABLE>

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

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

 (c) Aprisma 2000 Equity Incentive Plan

  The following table reflects activity and exercise prices of stock options
under the Aprisma 2000 equity incentive plan for the year ended March 3, 2001:

                                      83
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


<TABLE>
<CAPTION>
                                                                    Weighted-
                                                        Number of    average
                                                         shares   exercise price
                                                        --------- --------------
   <S>                                                  <C>       <C>
   Options outstanding, beginning of period............       --      $ --
     Granted........................................... 9,162,014      3.58
     Exercised.........................................       --        --
     Cancelled......................................... 1,063,780      3.51
                                                        ---------     -----
     Options outstanding, March 3, 2001................ 8,098,234      3.59
                                                        ---------     -----
   Options exercisable, March 3, 2001..................       --      $ --
                                                        =========     =====
</TABLE>

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

<TABLE>
<CAPTION>
                                        Weighted-average
      Range of          Options       remaining contractual     Weighted-average
   exercise price     outstanding         life (years)           exercise price
   --------------     -----------     ---------------------     ----------------
   <S>                <C>             <C>                       <C>
       $3.50           7,164,934              9.23                   $3.50
     3.51-4.25           933,300              9.70                    4.25
                       ---------              ----                   -----
                       8,098,234              9.28                   $3.59
                       =========              ====                   =====
</TABLE>

 (d) GNTS 2000 Equity Incentive Plan

  The following table reflects activity and exercise prices of stock options
under the GNTS 2000 equity incentive plan for the year ended March 3, 2001:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                                       Number of     average
                                                         shares   exercise price
                                                       ---------- --------------
   <S>                                                 <C>        <C>
   Options outstanding, beginning of period...........        --      $ --
     Granted.......................................... 12,782,849      3.63
     Exercised........................................        --        --
     Cancelled........................................  2,464,630      3.55
                                                       ----------     -----
     Options outstanding, March 3, 2001............... 10,318,219      3.66
                                                       ----------     -----
   Options exercisable, March 3, 2001.................        --      $ --
                                                       ==========     =====
</TABLE>

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

<TABLE>
<CAPTION>
                                           Weighted-average
                               Options   remaining contractual Weighted-average
   Range of exercise price   outstanding     life (years)       exercise price
   -----------------------   ----------- --------------------- ----------------
   <S>                       <C>         <C>                   <C>
            $3.50             8,554,746          9.22               $3.50
          3.51-4.25             636,818          9.49                4.25
          4.26-4.50           1,126,655          9.67                4.50
                             ----------          ----               -----
                             10,319,219          9.29               $3.66
                             ==========          ====               =====
</TABLE>

                                      84
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  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. Had compensation cost for
the Company's and its subsidiaries' stock-based compensation 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:

<TABLE>
<CAPTION>
                                          March 3,   February 29, February 28,
                                            2001         2000         1999
                                          ---------  ------------ ------------
   <S>                                    <C>        <C>          <C>
   Net income (loss) attributable to
    common shareholders
     As reported......................... $(628,901)   $464,271    $(245,391)
     Pro forma...........................  (690,209)    413,280     (299,654)
   Loss per share
     Net income (loss) per share basic
      and diluted, as reported...........     (3.40)       2.46        (1.47)
     Net income (loss) per share basic
      and diluted, as adjusted...........     (3.74)       2.19        (1.79)
</TABLE>

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

  The fair value of each Cabletron option grant was estimated on the date of
grant using the Black-Scholes option pricing model, with the following
assumptions used for grants in the years ended March 3, 2001, February 29,
2000 and February 28, 1999:

<TABLE>
<CAPTION>
                                                             2001   2000   1999
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Risk-free interest rates................................  4.51%  6.59%   5.1%
   Expected option lives...................................    3.8    3.7    3.7
   Expected volatility..................................... 83.18% 70.14% 76.32%
   Expected dividend yields................................   0.0%   0.0%   0.0%
</TABLE>

  The fair value of each stock option grant under each of the subsidiary 2000
equity plans in the table below has been estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the year ended March 3, 2001:

<TABLE>
<CAPTION>
                                             Riverstone Enterasys Aprisma GNTS
                                             ---------- --------- ------- -----
   <S>                                       <C>        <C>       <C>     <C>
   Risk-free interest rate.................     5.75%      4.74%    4.74%  4.74%
   Expected option lives (in years)........      5.4        4.8      4.8    5.2
   Expected volatility.....................    83.18%     83.18%   83.18% 83.18%
   Expected dividend.......................        0%         0%       0%     0%
   Weighted average fair value per share of
    options granted during the year ended
    March 3, 2001..........................    $5.20       2.52     2.37   2.50
</TABLE>

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


                                      85
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

 (C) Employee Stock Purchase Plans

  The Company has two Employee Stock Purchase Plans ("ESPP") which provide for
the combined availability of 6,000,000 shares of common stock to be purchased
by employees. Under these plans, eligible employees, twice yearly through the
accumulation of employee payroll deductions from two to ten percent of
employee compensation as defined in the plan, allowing for a total withholding
percentage of 4% to 20% under both plans, to a maximum of $12,500 annually
(measured by reference to share values at the dates of grant of the Purchase
rights), for each plan, may purchase stock at 85 percent of the fair market
value of the common stock at the beginning or end of the applicable six-month
period, whichever amount is lower. In the year ended March 3, 2001, 905,699
shares were purchased at a weighted-average price of $14.85 per share
(1,043,962 shares at $7.49 and 572,087 shares at $9.41, were purchased during
the years ended February 29, 2000 and February 28, 1999, respectively). The
remaining balance of both ESPPs for purchase by employees at March 3, 2001 was
2,194,859 shares.

 (D) Stock-Based Compensation

  As of the end of the third quarter of fiscal year 2001, each of the
Company's four operating subsidiaries had granted options to purchase its
common stock to its employees and to certain non-employees. Of these options,
an aggregate total of approximately 8.0 million options were granted primarily
to three officers of Cabletron and certain other employees of Cabletron, who
are not employees of the subsidiaries. These individuals are generally
restricted from transferring these options and the underlying shares are
subject to restrictions that lapse over a period of time approximating the
standard vesting period of options granted by the Company, subject to partial
acceleration in certain circumstances. At the subsidiary level, these options
generate variable stock-based compensation over the vesting period at fair
value using the Black-Scholes option pricing model as the individuals are
considered non-employees of the subsidiaries. By approval of each subsidiary's
board of directors and the Company's board of directors, these options were
accelerated to become fully vested in November 2000. These options to purchase
shares of an operating subsidiary become exercisable at the time Cabletron
distributes to its shareholders its shares of that subsidiary's common stock
or April 1, 2004 or upon a sale of the subsidiary, if earlier. As a result of
the acceleration, each subsidiary recorded compensation expense, during the
third quarter of fiscal year 2001, that is eliminated in consolidation for
Company reporting. For consolidated reporting, the options are accounted for
in accordance with APB 25. Accordingly, the Company has measured the intrinsic
value at the date of the acceleration. Compensation expense will be recorded
by the Company when and if an employee leaves the Company based on the benefit
that the individual will receive as a result of the modification.

  In connection with certain subsidiary stock option grants to employees, the
Company recorded approximately $11.1 million of unearned stock-based
compensation for the excess of the deemed fair market value over the exercise
price at date of grant during the year ended 2001. The compensation expense is
recognized over the options' vesting period of four years. As a result of
these grants, the Company recorded stock-based compensation expense of $1.3
million for the year ended March 3, 2001. At March 3, 2001, $9.8 million of
unearned stock-based compensation remains to be amortized as expense.

(20) Restructuring

  In the first quarter of fiscal 2001, the Company recorded a special charge
of $27.1 million related to the restructuring initiative undertaken during May
2000 in connection with the Company's transformation. The special charges
consisted of $13.5 million related to asset impairments, $11.9 million related
to severance benefits and $1.7 million related to exit costs. These charges
reflect the expected sale of an office building in Rochester, NH, exit costs
associated with the planned closure of 20 sales offices worldwide (11 of which
were closed as of March 3, 2001), the write-off of certain assets that were
not required subsequent to the

                                      86
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999

transformation of the Company and the planned reduction of approximately 570
individuals from the Company's global workforce. The reduction in the global
workforce involved principally sales, engineering and administrative personnel
and has also included targeted reductions impacting most functions within the
Company. The exit costs which the Company expects to incur relate primarily to
long-term lease commitments. This initiative is intended to establish the
proper sizing of the transformed Company and to align the revenue
opportunities with cost models. As of March 3, 2001, 567 employees have been
terminated in accordance with the plan.

  The following table summarized the recorded accruals and uses of the
restructuring initiative from inception through March 3, 2001:

<TABLE>
<CAPTION>
                                            Asset    Severance Exit
                                         impairments benefits  costs   Total
                                         ----------- --------- -----  -------
                                                   (In thousands)
   <S>                                   <C>         <C>       <C>    <C>
     Total charge.......................  $ 13,512     11,872  1,667   27,051
     Cash payments since inception......       --     (10,490)  (520) (11,010)
     Non-cash items since inception.....   (13,512)       --     --   (13,512)
                                          --------    -------  -----  -------
     Accrual balance as of March 3,
      2001..............................  $    --       1,382  1,147    2,529
                                          ========    =======  =====  =======
</TABLE>

  In the year ended February 29, 2000, the Company recorded $21.1 million of
special charges for the restructuring initiative undertaken during March 1999.
These charges reflect the closure of the Company's manufacturing facility in
Ohio, the planned closure of 40 sales offices worldwide (37 of which were
closed as of February 29, 2000), the consolidation and outsourcing of
manufacturing operations, the write-off of certain assets that were not
required subsequent to the restructuring and the planned reduction of
approximately 1,000 individuals from the Company's global workforce. The
reduction in the global workforce is expected to be principally manufacturing
and distribution personnel but will also include targeted reductions impacting
most functions within the Company. The exit costs which the Company expects to
incur relate primarily to long-term lease commitments which will be paid out
over a few years and repayments of economic development grants. This
initiative is intended to reduce the expense structure of the Company; lower
cost of goods sold; increase cash reserves; provide higher return on assets
and revenue per employee; enable aggressive asset reduction and consolidation
initiatives and increase net income. These actions were completed during the
first quarter of fiscal year 2001. This restructuring plan was undertaken
after the Company had decided to outsource its manufacturing operations. An
adjustment to the original charge was required, because the Company signed an
agreement to sell its manufacturing assets to a different OEM than originally
planned. This OEM, Flextronics, hired more personnel than originally
estimated.

(21) Compaq Agreement

  The Company acquired certain assets of the Network Products Group of Digital
Equipment Corporation, on February 7, 1998. With this acquisition, Digital
Equipment Corporation ("Digital") entered into a reseller agreement with the
Company pursuant to which Digital committed to purchase from the Company a
minimum amount of product bearing the Digital brand name. The reseller
agreement was scheduled to expire on June 30, 2001. On June 11, 1998, Digital
was acquired by Compaq Computer Corporation ("Compaq"). On May 25, 1999,
Compaq entered into an OEM agreement with the Company pursuant to which Compaq
committed to purchase from the Company a minimum amount of networking product
bearing the Compaq brand name as well as product bearing the Digital brand
name. The OEM agreement contained, among other things, a pricing rebate that
compensated the Company for Compaq purchase shortfalls. The OEM agreement was
scheduled to expire on June 30, 2001.

                                      87
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


  On September 20, 1999, as a result of Compaq's decision to exit certain non-
core businesses, including the business of reselling Compaq and Digital
branded network products, Compaq and the Company agreed to terminate the OEM
agreement and enter into a new agreement. Under the agreement, the two
companies intended to transition sales of legacy Digital branded products from
Compaq and its resellers to the Company. Further, the two companies agreed to
expand the relationship between the Company and Compaq's professional services
organization and Cabletron would continue to resell, and Compaq was expected
to continue servicing, Digital branded products. Further, Compaq was to
continue as a reseller of Cabletron-branded networking hardware and
Cabletron's Spectrum network management software. In terminating the OEM
agreement, Compaq agreed to pay the Company approximately $85.0 million, in
November 1999, as a final purchase of Compaq and Digital branded products in
the Company's manufacturing pipeline. As of February 29, 2000, all such
product in the pipeline was accepted by Compaq and recorded in sales by the
Company. $48.7 million was recorded in sales in the three months ended
February 29, 2000 and $36.3 million was recorded in sales for the three months
ended November 30, 1999 relating to such product in the pipeline.

  In addition, Compaq paid the Company $25.0 million to eliminate Compaq's
quarterly purchase commitments going forward. This $25.0 million was recorded
in other income during fiscal year 2000 since the payment was not refundable
under any circumstances.

  Additionally, as part of the transition from the OEM agreement, Compaq
returned to the Company certain networking product inventory, previously
purchased and paid for, was reworked and resold as Cabletron branded product.
The Company had no further obligation to compensate Compaq for this returned
product. The original cost, less estimated rework, of this inventory was $12.2
million and was recorded as other income during fiscal year 2000.

  As part of the agreement, Compaq agreed to continue to act as a reseller of
Cabletron hardware and software products through the third quarter of fiscal
year 2002; pursuant to this agreement, Compaq issued $34.0 million of prepaid
purchase orders for Company product of which $32.4 million has been shipped as
of March 3, 2001. The remaining $5.6 million has been recorded as deferred
revenue as of March 3, 2001 and will be recorded in sales as Compaq accepts
the product through the third quarter of fiscal year 2002.

  In addition, the parties have agreed to pursue a strategic alliance focused
on Cabletron's Spectrum network management software. Compaq, in furtherance of
this alliance, has made a $14.0 million equity investment in Cabletron's
subsidiary, Aprisma, which markets Spectrum products. The proportionate
interest in Aprisma has been reflected as minority interest in the Company's
consolidated financial statements.

(22) Initial Public Offering of Riverstone

  On February 16, 2001, Riverstone completed the initial public offering of
10.0 million shares of common stock of Riverstone at $12 per share. Prior to
the offering, Riverstone was a wholly owned subsidiary of Cabletron. Net
proceeds from the offering totaled $108.8 million and were used for general
working capital purposes. No gain or loss was recorded by the Company
associated with this transaction.

  After Riverstone's registration statement relating to the initial public
offering had been declared effective, the strategic investors elected to
exercise stock purchase rights such that Riverstone issued 5.4 million shares
of its common stock in respect of such rights. Net proceeds from the purchase
rights exercise were approximately $46.6 million. Cabletron continued to own
approximately 85 percent of Riverstone subsequent to the offering and exercise
by the strategic investors of the stock purchase.

                                      88
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(23) Employee Benefit Plan

  The Company's eligible employees may participate in a plan known as the
Cabletron Systems, Inc. 401(k) Plan (the "401(k) Plan") which provides
retirement benefits to the eligible employees of participating employers. As
allowed under Section 401(k) of the Internal Revenue Code, the 401(k) Plan
provides tax-deferred salary deductions for eligible employees. Participants
may elect to contribute from 1% to 18% of their annual compensation to the
401(k) Plan each year, limited to a maximum annual amount as set periodically
by the Internal Revenue Service. In addition, unless determined otherwise by
the Cabletron board of directors, the 401(k) Plan provides for a basic
matching contribution each quarter on behalf of each eligible participant
equal to the lesser of $250 or 50% of the participant's elective contributions
for the quarter. The 401(k) Plan also provides for a quarterly supplemental
matching contribution equal to the lesser of $250 or 5% of the participant's
elective contributions if Cabletron's performance meets a specified threshold.
The 401(k) Plan also provides for make-up matching contributions to address
specified circumstances where fluctuations in a participant's level of
deferrals result in lower basic or supplemental matching contributions than
would be the case with a level rate of deferrals. Employees become vested in
the matching contributions according to a three-year vesting schedule based on
initial date of hire. The Company's expenses related to matching contributions
to the 401(k) Plan for the years ended March 3, 2001, February 29, 2000 and
February 28, 1999 and were $1.5 million, $1.4 million, and $1.5, respectively.

(24) Related Party Transactions

 Investments

  The Company maintains investments in private debt and equity securities of
certain companies and accounts for these investments under the cost method of
accounting. The Company does not maintain a controlling interest in these
entities. In limited instances the Company recorded revenue in transactions
where the Company received equity instruments in exchange for products sold.
During the fiscal years ended March 3, 2001, February 29, 2000 and February
28, 1999, the Company recorded revenues of $19.9 million, $12.5 million and
$2.5 million, respectively, from these companies in which the Company
maintained an investment.

(25) Manufacturing and Key Suppliers

  The Company does not have internal manufacturing capabilities. The Company
outsources substantially all of its manufacturing to one company, Flextronics,
which procures material on the Company's behalf and provides comprehensive
manufacturing services, including assembly, test and control. Flextronics
manufactures the Company's products in Rochester, New Hampshire, San Jose,
California and Limerick, Ireland. Also, the Company and/or Flextronics
purchase several key components used in the manufacture of its products from
single or limited sources and is dependent upon supply from these sources to
meet its needs.

                                      89
<PAGE>

                            CABLETRON SYSTEMS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

            March 3, 2001, February 29, 2000 and February 28, 1999


(26) Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                                          Net
                                                          Net income     income
                                            Income        (loss) to      (loss)
                          Net      Gross  (loss) from       common        per
                        revenues  margin  operations     shareholders   share(a)
                       ---------- ------- -----------    ------------   --------
                             (In thousands, except per share amounts)

                                         Fiscal year 2001
                       ---------------------------------------------------------
<S>                    <C>        <C>     <C>            <C>            <C>
First quarter......... $  275,064 121,504   (69,948)(d)     (37,861)(d)  (0.21)
Second quarter........    261,434 122,243   (51,716)       (127,726)     (0.69)
Third quarter.........    248,939 123,943   (31,341)        (35,452)     (0.19)
Fourth quarter........    286,016 145,413   (45,179)(c)    (427,862)(e)  (2.30)
                       ---------- -------  --------        --------      -----
  Total year.......... $1,071,453 513,103  (198,184)       (628,901)     (3.40)
                       ========== =======  ========        ========      =====

<CAPTION>
                                         Fiscal year 2000
                       ---------------------------------------------------------
<S>                    <C>        <C>     <C>            <C>            <C>
First quarter......... $  349,533 139,940   (39,977)(b)     (22,525)(b)  (0.13)
Second quarter........    356,639 164,375     5,881          13,009       0.07
Third quarter.........    371,653 176,250    20,239          42,598       0.22
Fourth quarter........    381,768 175,208     8,082 (c)     431,189 (c)   2.23
                       ---------- -------  --------        --------      -----
  Total year.......... $1,459,593 655,773    (5,775)        464,271       2.46
                       ========== =======  ========        ========      =====
</TABLE>
--------
(a)  Due to rounding, some totals may not add.
(b)  Includes $23.7 million related to the restructuring initiative that was
     announced in March 1999.
(c)  Includes $2.6 million adjustment to decrease the aforementioned March
     1999 restructuring initiative.
(d)  Includes $27.1 million related to the restructuring initiative announced
     during the first quarter of fiscal 2001.
(e)  Includes $25.6 million of in-process research and development charges
     related to the acquisition of Indus River.

                                      90
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

  Not applicable.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Information relating to the Directors of the Company is set forth in the
section entitled "Proposal 1: Election of Class III Directors," appearing in
the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders
("Proxy Statement"), which is incorporated herein by reference. Information
relating to the executive officers of the Company is included in the section
titled "Executive Officers of the Registrant," appearing in Part I hereof.
Information with respect to directors and executive officers who failed to
timely file reports required by Section 16(a) of the Securities Exchange Act
of 1934 may be found in the Proxy Statement under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance." Such information is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

  See the information set forth in the section entitled "Executive
Compensation," appearing in the Company's Proxy Statement for its 2001 Annual
Meeting of Stockholders, which is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  See the information set forth in the section entitled "Securities Ownership
of Certain Beneficial Owners and Management," appearing in the Company's Proxy
Statement for its 2001 Annual Meeting of Stockholders, which is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  See the information set forth in the section entitled "Certain
Transactions," appearing in the Company's Proxy Statement for its 2001 Annual
Meeting of Stockholders, which is incorporated herein by reference.

                                      91
<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:

<TABLE>
<CAPTION>
                                                                       page(s)
                                                                       -------
   <S>                                                                 <C>
   Independent Auditors' Report.......................................    48
   Consolidated Balance Sheets at March 3, 2001 and February 29,
    2000..............................................................    49
   Consolidated Statements of Operations for years ended March 3,
    2001, February 29, 2000 and February 28, 1999 ....................    50
   Consolidated Statements of Redeemable Convertible Preferred Stock
    and Stockholders' Equity for years ended March 3, 2001, February
    29, 2000 and February 28, 1999....................................    51
   Consolidated Statements of Cash Flows for years ended March 3,
    2001, February 29, 2000 and February 28, 1999.....................    53
   Notes to Consolidated Financial Statements.........................    54
</TABLE>

  2. Consolidated financial statement schedule

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

<TABLE>
<CAPTION>
                                                                         page(s)
                                                                         -------
   <S>                                                                   <C>
   Independent Auditors' Report.........................................    99
   Schedule II--Valuation and Qualifying Accounts.......................   100
</TABLE>

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

  3. Exhibits

  The following exhibits unless herein filed are incorporated by reference.

<TABLE>
 <C> <S>
 2.1 Amended and Restated Transformation Agreement, effective as of June 3,
     2000, among Cabletron, Aprisma, Enterasys, GNTS and Riverstone,
     incorporated by reference to Exhibit 2.1 of Cabletron's quarterly report
     on Form 10-Q, filed on January 16, 2001 (the "Q3 2001 10-Q").

 2.2 Amended and Restated Asset Contribution Agreement, effective as of June 3,
     2000, between Cabletron and Aprisma, incorporated by reference to Exhibit
     2.2 of the Q3 2001 10-Q.

 2.3 Amended and Restated Asset Contribution Agreement, effective as of June 3,
     2000, between Cabletron and Enterasys, incorporated by reference to
     Exhibit 2.3 of the Q3 2001 10-Q.

 2.4 Amended and Restated Asset Contribution Agreement, effective as of June 3,
     2000, between Cabletron and GNTS, incorporated by reference to Exhibit 2.4
     of the Q3 2001 10-Q.

 2.5 Amended and Restated Asset Contribution Agreement, effective as of June 3,
     2000, between Cabletron and Riverstone, incorporated by reference to
     Exhibit 2.5 of the Q3 2001 10-Q.

 2.6 Tax Sharing Agreement, dated as of June 3, 2000, among Cabletron, Aprisma,
     Enterasys, GNTS and Riverstone, incorporated by reference to Exhibit 2.6
     of Cabletron's quarterly report on Form 10-Q, filed on October 18, 2000
     (the "Q2 2001 10-Q").
</TABLE>


                                       92
<PAGE>

<TABLE>
 <C>   <S>
 2.7   Distribution-Related Option Agreement among Cabletron, Aprisma,
       Enterasys, GNTS and Riverstone, incorporated by reference to Exhibit 2.7
       of the Q2 2001 10-Q.

 2.8   Assignment and Assumption Agreement, dated as of June 3, 2000, by and
       between Cabletron and Enterasys pertaining to the Manufacturing Services
       Agreement, dated as of February 29, 2000, between the Company and
       Flextronics International USA, Inc., incorporated by reference to
       Exhibit 2.8 of the Q2 2001 10-Q.

  2.9  Services Agreement, dated as of August 28, 2000, between Cabletron and
       Aprisma, incorporated by reference to Exhibit 2.19 of the Q2 2001 10-Q.

  2.10 Services Agreement, dated as of August 28, 2000, between Cabletron and
       Enterasys, incorporated by reference to Exhibit 2.20 of the Q2 2001 10-
       Q.

  2.11 Services Agreement, dated as of August 28, 2000, between Cabletron and
       GNTS, incorporated by reference to Exhibit 2.21 of the Q2 2001 10-Q.

  2.12 Services Agreement, dated as of August 28, 2000, between Cabletron and
       Riverstone, incorporated by reference to Exhibit 2.22 of the Q2 2001 10-
       Q.

  2.13 Sub-Services Agreement, dated as of August 28, 2000, between Cabletron
       and Enterasys, incorporated by reference to Exhibit 2.23 of the Q2 2001
       10-Q.

  3.1  Restated Certificate of Incorporation of Cabletron, as amended,
       incorporated by reference to Exhibit 3.1 of the Q2 2001 10-Q.

  3.2  Certificate of Designations, Preferences and Rights for Series A and
       Series B Convertible Preferred Stock of Cabletron, incorporated by
       reference to Exhibit 2.4 of Cabletron's current report on Form 8-K,
       filed on September 11, 2000 (the "Silver Lake 8-K").

  3.3  Certificate of Designations, Preferences and Rights for Series C
       Convertible Preferred Stock of Cabletron.

  3.4  Amended and Restated By-laws of Cabletron, incorporated by reference to
       Exhibit 3.6 of Cabletron's annual report on Form 10-K for the fiscal
       year ended February 29, 2000, filed on May 30, 2000 (the "2000 10-K").

  4.1  Specimen stock certificate of Cabletron common stock, incorporated by
       reference to Exhibit 4 of Cabletron's Registration Statement on Form S-
       1, No. 33-28055 (the "First Form S-1").

  4.2  Specimen stock certificate of Cabletron Series A Preferred Stock.

  4.3  Specimen stock certificate of Cabletron Series B Preferred Stock.

  4.4  Specimen stock certificate of Cabletron Series C Preferred Stock,
       incorporated by reference to Exhibit 4.2 of Cabletron's registration
       statement on Form S-4, No. 333-47854.

  4.5  Form of Escrow Agreement by and among the registrant, Indus River
       Networks, Inc., the stockholder representative and State Street Bank &
       Trust, as escrow agent, incorporated by reference to Exhibit 4.3 to
       Cabletron's registration statement on Form S-4, No. 333-47854.

  4.6  Amended and Restated Securities Purchase Agreement, dated as of August
       29, 2000, between Cabletron and Silver Lake, incorporated by reference
       to Exhibit 2.1 of the Silver Lake 8-K.

  4.7  Assignment Agreement among Silver Lake and the Investors named therein,
       dated August 29, 2000, incorporated by reference to Exhibit 4.2 of the
       Q2 2001 10-Q.

  4.8  Standstill Agreement, dated as of August 29, 2000, between Cabletron and
       the Investors, incorporated by reference to Exhibit 2.3 of the Silver
       Lake 8-K.
</TABLE>

                                       93
<PAGE>

<TABLE>
 <C>   <S>
  4.9  Form of Class A Warrant of Cabletron, incorporated by reference to
       Exhibit 2.5 of the Silver Lake 8-K.

  4.10 Form of Class B Warrant of Cabletron, incorporated by reference to
       Exhibit 2.6 of the Silver Lake 8-K.

  4.11 Form of Subsidiary Stock Purchase Right, incorporated by reference to
       Exhibit 4.6 of the Q2 2001
       10-Q.

  4.12 Form of Subsidiary Warrant, incorporated by reference to Exhibit 4.7 of
       the Q2 2001 10-Q.

 10.1  1989 Restricted Stock Purchase Plan, incorporated by reference to
       Exhibit 10.1 of the First Form S-1.

 10.2  1989 Restricted Stock Plan, incorporated by reference to Exhibit 10.2 of
       the First Form S-1.

 10.3  1989 Equity Incentive Plan, as amended, incorporated by reference to
       Exhibit 4 of Cabletron's registration statement on Form S-8, No. 33-
       50454.

 10.4  1989 Employee Stock Purchase Plan, as amended, incorporated by reference
       to Exhibit 4.1 of Cabletron's registration statement on Form S-8, No.
       33-31572.

 10.5  1989 Stock Option Plan for Directors, as amended, incorporated by
       reference to Exhibit 10.5 of Cabletron's registration statement on Form
       S-3, No. 33-54466.

 10.6  Agency Agreement between the Registrant and International Cable Networks
       Inc., incorporated by reference to Exhibit 10.6 of the First Form S-1.

 10.7  Lease dated October 19, 1992 between the Registrant and Heidelberg
       Harris, Inc., relating to leased premises in Durham, New Hampshire,
       incorporated by reference to Exhibit 10.9 of the First Form S-3.

 10.8  Letter Sublease Agreement, dated June 4, 1998, between Picturetel
       Corporation and Cabletron, together with related documents.

 10.9  Sublease, dated as of December 4, 2000, between 273 Corporate Drive, LLC
       and Aprisma, together with related documents.

 10.10 Lease Agreement (the "Santa Clara Lease") between WPM II Real Estate
       Limited Partnership and Cabletron Systems Sales and Service, Inc., dated
       January 6, 1999, together with Tenant Estoppel Certificate dated June
       13, 2000.

 10.11 Assignment of the Santa Clara Lease, effective August 28, 2000, between
       Cabletron Systems Sales and Service, Inc. and Riverstone.

 10.12 Registration Rights Agreement, dated as of August 29, 2000, among
       Cabletron and the Investors, incorporated by reference to Exhibit 2.7 of
       the Silver Lake 8-K.

 10.13 Registration Rights Agreement, dated as of August 29, 2000, among
       Aprisma and the Investors, incorporated by reference to Exhibit 2.8 of
       the Silver Lake 8-K.

 10.14 Registration Rights Agreement, dated as of August 29, 2000, among
       Enterasys and the Investors, incorporated by reference to Exhibit 2.9 of
       the Silver Lake 8-K.

 10.15 Registration Rights Agreement, dated as of August 29, 2000, among GNTS
       and the Investors, incorporated by reference to Exhibit 2.10 of the
       Silver Lake 8-K.

 10.16 Registration Rights Agreement, dated as of August 29, 2000, among
       Riverstone and the Investors, incorporated by reference to Exhibit 2.11
       of the Silver Lake 8-K.

</TABLE>

                                       94
<PAGE>

<TABLE>
 <C>   <S>
 10.17 Manufacturing Services Agreement, dated as of February 29, 2000, between
       the Company and Flextronics International USA, Inc., incorporated by
       reference to Exhibit 10.6 of Cabletron's quarterly report on Form 10-
       Q/A, filed on February 12, 2001.

 10.18 Standstill and Disposition Agreement, dated as of December 17, 1999,
       between Efficient Networks, Inc. and the Company, which is incorporated
       by reference to Exhibit 2.4 of Cabletron's current report on Form 8-K,
       filed on January 14, 2000.

 10.19 Amended and Restated Change-in-control Severance Benefit Plan for Key
       Employees.

 10.20 1998 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 of
       the Company's registration statement on Form S-8, No. 333-83991.

 10.21 Amended and Restated Aprisma 2000 Equity Incentive Plan, incorporated by
       reference to Exhibit 10.7 of the Q2 2001 10-Q.

 10.22 Amended and Restated GNTS 2000 Equity Incentive Plan, incorporated by
       reference to Exhibit 10.8 of the Q2 2001 10-Q.

 10.23 Amended and Restated Enterasys 2000 Equity Incentive Plan, incorporated
       by reference to Exhibit 10.9 of the Q2 2001 10-Q.

 10.24 Amended and Restated Riverstone 2000 Equity Incentive Plan, incorporated
       by reference to Exhibit 10.10 of the Q2 2001 10-Q.

 10.25 Riverstone Change-In-Control Severance Benefit Plan for Key Employees.

 10.26 Aprisma Change-In-Control Several Benefit Plan for Key Employees,
       incorporated by reference to Exhibit 10.2 of the Q3 2001 10-Q.

 10.27 Enterasys Change-In-Control Several Benefit Plan for Key Employees,
       incorporated by reference to Exhibit 10.2 of the Q3 2001 10-Q.

 10.28 GNTS Change-In-Control Several Benefit Plan for Key Employees,
       incorporated by reference to Exhibit 10.4 of the Q3 2001 10-Q.

 10.29 Form of Subsidiary Option Grant for Messrs. Patel, Kirkpatrick and
       Jaeger for options granted from the 2000 Equity Incentive Plans of
       Aprisma, Enterasys, GNTS and Riverstone, incorporated by reference to
       Exhibit 10.5 of the Q3 2001 10-Q.

 10.30 Employment Agreement with Piyush Patel, incorporated by reference to
       Exhibit 10.19 of Cabletron's quarterly report on Form 10-Q, filed on
       July 15, 1999 (the "Q1 1999 10-Q").

 10.31 Employment Agreement with Romulus Pereira, incorporated by reference to
       Exhibit 10.20 of the Q1 1999 10-Q.

 10.32 Promissory Note, dated April 12, 2000 of Piyush Patel, incorporated by
       reference to Exhibit 10.25 of the 2000 10-K.

 10.33 Promissory Note, dated January 1, 2000 of Earle Humphreys, incorporated
       by reference to Exhibit 10.26 of the 2000 10-K.

 10.34 Promissory Note, dated August 23, 1999 of Enrique P. (Henry) Fiallo,
       incorporated by reference to Exhibit 10.28 of the 2000 10-K.

 10.35 Promissory Note, dated January 1, 2000 of Enrique P. (Henry) Fiallo,
       incorporated by reference to Exhibit 10.27 of the 2000 10-K.

 10.36 Promissory Note, dated April 12, 2000, of Romulus Pereira.

</TABLE>

                                       95
<PAGE>

<TABLE>
 <C>   <S>
 10.37 Promissory Note, dated June 1, 2000, of David Kirkpatrick.

 10.38 Promissory Note, dated June 15, 2000, of David Kirkpatrick.

 10.39 Promissory Note, dated January 1, 2000, of Eric Jaeger.

 22.1  Subsidiaries of Cabletron Systems, Inc.

 23.1  Consent of Independent Auditors.
</TABLE>


                                       96
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

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

  Under date of April 12, 2001, except for the first paragraph of Note 16,
which is as of May 23, 2001, we reported on the consolidated balance sheets of
Cabletron Systems, Inc. and subsidiaries as of March 3, 2001 and February 29,
2000, and the related consolidated statements of operations, redeemable
convertible preferred stock, stockholders' equity, and cash flows for each of
the years in the three-year period ended March 3, 2001. 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.

                                          KPMG LLP

Boston, Massachusetts
April 12, 2001, except for the first paragraph of Note 16, which is as of May
23, 2001

                                      97
<PAGE>

                            CABLETRON SYSTEMS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
       Years Ended March 3, 2001, February 29, 2000 and February 28, 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Amounts
                                                attributable              Balance
                         Balance at            to changes in              at end
                         beginning  Charged to    foreign       Amounts     of
      Description        of period   expense   currency rates written off period
      -----------        ---------- ---------- -------------- ----------- -------
<S>                      <C>        <C>        <C>            <C>         <C>
Allowance for doubtful
 accounts
  March 3, 2001.........  $21,684    $20,605        $ 0        $(11,730)  $30,559
  February 29, 2000.....   23,260     17,650          0         (19,226)   21,684
  February 28, 1999.....   21,043     10,784          0          (8,567)   23,260
</TABLE>


                                       98
<PAGE>

                                  SIGNATURES

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

                                          Cabletron Systems, Inc.

                                                    /s/ Piyush Patel
                                          By: _________________________________
                                                        Piyush Patel
                                               Chairman, President and Chief
                                                     Executive Officer

                                          Date: June 1, 2001

                               POWER OF ATTORNEY

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
         /s/ Piyush Patel              Chairman, President and       June 1, 2001
______________________________________  Chief Executive Officer
             Piyush Patel

     /s/ David J. Kirkpatrick          Chief Operating Officer       June 1, 2001
______________________________________  and Chief Financial
         David J. Kirkpatrick           Operating Officer
                                        (Principal Financial and
                                        Accounting Officer)

      /s/ Michael D. Myerow            Secretary and Director        June 1, 2001
______________________________________
          Michael D. Myerow

       /s/ Craig R. Benson             Director
______________________________________
           Craig R. Benson

        /s/ Paul R. Duncan             Director                      June 1, 2001
______________________________________
            Paul R. Duncan

      /s/ James A. Davidson            Director                      June 1, 2001
______________________________________
          James A. Davidson
</TABLE>

                                      99
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.                             Exhibit Description
 -------                           -------------------
 <C>     <S>
 2.1     Amended and Restated Transformation Agreement, effective as of June 3,
         2000, among Cabletron, Aprisma, Enterasys, GNTS and Riverstone,
         incorporated by reference to Exhibit 2.1 of Cabletron's quarterly
         report on Form 10-Q, filed on January 16, 2001 (the "Q3 2001 10-Q").

 2.2     Amended and Restated Asset Contribution Agreement, effective as of
         June 3, 2000, between Cabletron and Aprisma, incorporated by reference
         to Exhibit 2.2 of the Q3 2001 10-Q.

 2.3     Amended and Restated Asset Contribution Agreement, effective as of
         June 3, 2000, between Cabletron and Enterasys, incorporated by
         reference to Exhibit 2.3 of the Q3 2001 10-Q.

 2.4     Amended and Restated Asset Contribution Agreement, effective as of
         June 3, 2000, between Cabletron and GNTS, incorporated by reference to
         Exhibit 2.4 of the Q3 2001 10-Q.

 2.5     Amended and Restated Asset Contribution Agreement, effective as of
         June 3, 2000, between Cabletron and Riverstone, incorporated by
         reference to Exhibit 2.5 of the Q3 2001 10-Q.

 2.6     Tax Sharing Agreement, dated as of June 3, 2000, among Cabletron,
         Aprisma, Enterasys, GNTS and Riverstone, incorporated by reference to
         Exhibit 2.6 of Cabletron's quarterly report on Form 10-Q, filed on
         October 18, 2000 (the "Q2 2001 10-Q").

 2.7     Distribution-Related Option Agreement among Cabletron, Aprisma,
         Enterasys, GNTS and Riverstone, incorporated by reference to Exhibit
         2.7 of the Q2 2001 10-Q.

 2.8     Assignment and Assumption Agreement, dated as of June 3, 2000, by and
         between Cabletron and Enterasys pertaining to the Manufacturing
         Services Agreement, dated as of February 29, 2000, between the Company
         and Flextronics International USA, Inc., incorporated by reference to
         Exhibit 2.8 of the Q2 2001 10-Q.

  2.9    Services Agreement, dated as of August 28, 2000, between Cabletron and
         Aprisma, incorporated by reference to Exhibit 2.19 of the Q2 2001 10-
         Q.

  2.10   Services Agreement, dated as of August 28, 2000, between Cabletron and
         Enterasys, incorporated by reference to Exhibit 2.20 of the Q2 2001
         10-Q.

  2.11   Services Agreement, dated as of August 28, 2000, between Cabletron and
         GNTS, incorporated by reference to Exhibit 2.21 of the Q2 2001 10-Q.

  2.12   Services Agreement, dated as of August 28, 2000, between Cabletron and
         Riverstone, incorporated by reference to Exhibit 2.22 of the Q2 2001
         10-Q.

  2.13   Sub-Services Agreement, dated as of August 28, 2000, between Cabletron
         and Enterasys, incorporated by reference to Exhibit 2.23 of the Q2
         2001 10-Q.

  3.1    Restated Certificate of Incorporation of Cabletron, as amended,
         incorporated by reference to Exhibit 3.1 of the Q2 2001 10-Q.

  3.2    Certificate of Designations, Preferences and Rights for Series A and
         Series B Convertible Preferred Stock of Cabletron, incorporated by
         reference to Exhibit 2.4 of Cabletron's current report on Form 8-K,
         filed on September 11, 2000 (the "Silver Lake 8-K").

  3.3    Certificate of Designations, Preferences and Rights for Series C
         Convertible Preferred Stock of Cabletron.
</TABLE>


                                      100
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                             Exhibit Description
 -------                           -------------------
 <C>     <S>
  3.4    Amended and Restated By-laws of Cabletron, incorporated by reference
         to Exhibit 3.6 of Cabletron's annual report on Form 10-K for the
         fiscal year ended February 29, 2000, filed on May 30, 2000 (the "2000
         10-K").

  4.1    Specimen stock certificate of Cabletron common stock, incorporated by
         reference to Exhibit 4 of Cabletron's Registration Statement on Form
         S-1, No. 33-28055 (the "First Form S-1").

  4.2    Specimen stock certificate of Cabletron Series A Preferred Stock.

  4.3    Specimen stock certificate of Cabletron Series B Preferred Stock.

  4.4    Specimen stock certificate of Cabletron Series C Preferred Stock,
         incorporated by reference to Exhibit 4.2 of Cabletron's registration
         statement on Form S-4, No. 333-47854.

  4.5    Form of Escrow Agreement by and among the registrant, Indus River
         Networks, Inc., the stockholder representative and State Street Bank &
         Trust, as escrow agent, incorporated by reference to Exhibit 4.3 to
         Cabletron's registration statement on Form S-4, No. 333-47854.

  4.6    Amended and Restated Securities Purchase Agreement, dated as of August
         29, 2000, between Cabletron and Silver Lake, incorporated by reference
         to Exhibit 2.1 of the Silver Lake 8-K.

  4.7    Assignment Agreement among Silver Lake and the Investors named
         therein, dated August 29, 2000, incorporated by reference to Exhibit
         4.2 of the Q2 2001 10-Q.

  4.8    Standstill Agreement, dated as of August 29, 2000, between Cabletron
         and the Investors, incorporated by reference to Exhibit 2.3 of the
         Silver Lake 8-K.

  4.9    Form of Class A Warrant of Cabletron, incorporated by reference to
         Exhibit 2.5 of the Silver Lake 8-K.

  4.10   Form of Class B Warrant of Cabletron, incorporated by reference to
         Exhibit 2.6 of the Silver Lake 8-K.

  4.11   Form of Subsidiary Stock Purchase Right, incorporated by reference to
         Exhibit 4.6 of the Q2 2001
         10-Q.

  4.12   Form of Subsidiary Warrant, incorporated by reference to Exhibit 4.7
         of the Q2 2001 10-Q.

 10.1    1989 Restricted Stock Purchase Plan, incorporated by reference to
         Exhibit 10.1 of the First Form S-1.

 10.2    1989 Restricted Stock Plan, incorporated by reference to Exhibit 10.2
         of the First Form S-1.

 10.3    1989 Equity Incentive Plan, as amended, incorporated by reference to
         Exhibit 4 of Cabletron's registration statement on Form S-8, No. 33-
         50454.

 10.4    1989 Employee Stock Purchase Plan, as amended, incorporated by
         reference to Exhibit 4.1 of Cabletron's registration statement on Form
         S-8, No. 33-31572.

 10.5    1989 Stock Option Plan for Directors, as amended, incorporated by
         reference to Exhibit 10.5 of Cabletron's registration statement on
         Form S-3, No. 33-54466.

 10.6    Agency Agreement between the Registrant and International Cable
         Networks Inc., incorporated by reference to Exhibit 10.6 of the First
         Form S-1.

 10.7    Lease dated October 19, 1992 between the Registrant and Heidelberg
         Harris, Inc., relating to leased premises in Durham, New Hampshire,
         incorporated by reference to Exhibit 10.9 of the First Form S-3.

 10.8    Letter Sublease Agreement, dated June 4, 1998, between Picturetel
         Corporation and Cabletron, together with related documents.
</TABLE>


                                      101
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                             Exhibit Description
 -------                           -------------------

 <C>     <S>
 10.9    Sublease, dated as of December 4, 2000, between 273 Corporate Drive,
         LLC and Aprisma, together with related documents.

 10.10   Lease Agreement (the "Santa Clara Lease") between WPM II Real Estate
         Limited Partnership and Cabletron Systems Sales and Service, Inc.,
         dated January 6, 1999, together with Tenant Estoppel Certificate dated
         June 13, 2000.

 10.11   Assignment of the Santa Clara Lease, effective August 28, 2000,
         between Cabletron Systems Sales and Service, Inc. and Riverstone.

 10.12   Registration Rights Agreement, dated as of August 29, 2000, among
         Cabletron and the Investors, incorporated by reference to Exhibit 2.7
         of the Silver Lake 8-K.

 10.13   Registration Rights Agreement, dated as of August 29, 2000, among
         Aprisma and the Investors, incorporated by reference to Exhibit 2.8 of
         the Silver Lake 8-K.

 10.14   Registration Rights Agreement, dated as of August 29, 2000, among
         Enterasys and the Investors, incorporated by reference to Exhibit 2.9
         of the Silver Lake 8-K.

 10.15   Registration Rights Agreement, dated as of August 29, 2000, among GNTS
         and the Investors, incorporated by reference to Exhibit 2.10 of the
         Silver Lake 8-K.

 10.16   Registration Rights Agreement, dated as of August 29, 2000, among
         Riverstone and the Investors, incorporated by reference to Exhibit
         2.11 of the Silver Lake 8-K.

 10.17   Manufacturing Services Agreement, dated as of February 29, 2000,
         between the Company and Flextronics International USA, Inc.,
         incorporated by reference to Exhibit 10.6 of Cabletron's quarterly
         report on Form 10-Q/A, filed on February 12, 2001.

 10.18   Standstill and Disposition Agreement, dated as of December 17, 1999,
         between Efficient Networks, Inc. and the Company, which is
         incorporated by reference to Exhibit 2.4 of Cabletron's current report
         on Form 8-K, filed on January 14, 2000.

 10.19   Amended and Restated Change-in-control Severance Benefit Plan for Key
         Employees.

 10.20   1998 Equity Incentive Plan, incorporated by reference to Exhibit 4.1
         of the Company's registration statement on Form S-8, No. 333-83991.

 10.21   Amended and Restated Aprisma 2000 Equity Incentive Plan, incorporated
         by reference to Exhibit 10.7 of the Q2 2001 10-Q.

 10.22   Amended and Restated GNTS 2000 Equity Incentive Plan, incorporated by
         reference to Exhibit 10.8 of the Q2 2001 10-Q.

 10.23   Amended and Restated Enterasys 2000 Equity Incentive Plan,
         incorporated by reference to Exhibit 10.9 of the Q2 2001 10-Q.

 10.24   Amended and Restated Riverstone 2000 Equity Incentive Plan,
         incorporated by reference to Exhibit 10.10 of the Q2 2001 10-Q.

 10.25   Riverstone Change-In-Control Severance Benefit Plan for Key Employees.
</TABLE>


                                      102
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                             Exhibit Description
 -------                           -------------------

 <C>     <S>
 10.26   Aprisma Change-In-Control Several Benefit Plan for Key Employees,
         incorporated by reference to Exhibit 10.2 of the Q3 2001 10-Q.

 10.27   Aprisma Change-In-Control Several Benefit Plan for Key Employees,
         incorporated by reference to Exhibit 10.2 of the Q3 2001 10-Q.

 10.28   Enterasys Change-In-Control Several Benefit Plan for Key Employees,
         incorporated by reference to Exhibit 10.3 of the Q3 2001 10-Q.

 10.29   GNTS Change-In-Control Several Benefit Plan for Key Employees,
         incorporated by reference to Exhibit 10.4 of the Q3 2001 10-Q.

 10.30   Form of Subsidiary Option Grant for Messrs. Patel, Kirkpatrick and
         Jaeger for options granted from the 2000 Equity Incentive Plans of
         Aprisma, Enterasys, GNTS and Riverstone, incorporated by reference to
         Exhibit 10.5 of the Q3 2001 10-Q.

 10.31   Employment Agreement with Romulus Pereira, incorporated by reference
         to Exhibit 10.20 of the Q1 1999 10-Q.

 10.32   Promissory Note, dated April 12, 2000 of Piyush Patel, incorporated by
         reference to Exhibit 10.25 of the 2000 10-K.

 10.33   Promissory Note, dated January 1, 2000 of Earle Humphreys,
         incorporated by reference to Exhibit 10.26 of the 2000 10-K.

 10.34   Promissory Note, dated August 23, 1999 of Enrique P. (Henry) Fiallo,
         incorporated by reference to Exhibit 10.28 of the 2000 10-K.

 10.35   Promissory Note, dated January 1, 2000 of Enrique P. (Henry) Fiallo,
         incorporated by reference to Exhibit 10.27 of the 2000 10-K.

 10.36   Promissory Note, dated April 12, 2000, of Romulus Pereira.

 10.37   Promissory Note, dated June 1, 2000, of David Kirkpatrick.

 10.38   Promissory Note, dated June 15, 2000, of David Kirkpatrick.

 10.39   Promissory Note, dated January 1, 2000, of Eric Jaeger.

 22.1    Subsidiaries of Cabletron Systems, Inc.

 23.1    Consent of Independent Auditors.
</TABLE>


                                      103
<PAGE>

DIRECTORS AND OFFICERS
-------------------------------------------------------------------------------

Board of Directors

Piyush Patel
Chairman of the Board, President
and Chief Executive Officer

Craig R. Benson
Director

James A. Davidson
Silver Lake Partners

Paul R. Duncan
Former Executive Vice President
Reebok International, Ltd.

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

Officers

Enrique P. Fiallo
President of Enterasys Networks, Inc.

Eric Jaeger
Executive Vice President

David J. Kirkpatrick
Chief Financial Officer and Chief Operating Officer

Piyush Patel
Chief Executive Officer and President

Michael A. Skubisz
President of Aprisma Management Technologies, Inc.

                                      107
<PAGE>

STOCKHOLDER INFORMATION
-------------------------------------------------------------------------------

Annual Meeting of Stockholders

  The Annual Meeting of Stockholders will take place at the Frank Jones
Center, 400 Route One By-Pass, Portsmouth, NH 03801 on a date to be determined
by the Board of Directors.

Stockholder Inquiries

  Inquiries relating to financial information of Cabletron Systems, Inc.
should be addressed to:

  Cabletron Systems, Inc.
  Investor Relations
  PO Box 5005
  Rochester, NH 03866-5005
  Telephone: (603) 332-9400
  Facsimile: (603) 337-2211

Listing

  Cabletron Systems, Inc. common stock is traded on the New York Stock
Exchange--symbol CS.

Transfer Agent

  EquiServe is the Transfer Agent and Registrar of the Company's common stock.
Inquiries regarding lost certificates, change of address, name or ownership
should be addressed to:

  BankBoston, NA
  EquiServe
  P.O. Box 8040
  Boston, MA 02266-8040

Independent Auditors

KPMG LLP
99 High Street
Boston, MA 02110

Legal Counsel

Ropes & Gray
One International Place
Boston, MA 02110

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