##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|o  |  | ANNUAL REPORT UNDER SECTION 13 or
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934          
|  
|   |  | For the fiscal year ended                                                                       
|  
|OR
|  
|þ  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    or 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the ten month transition period ended
    December 29, 2001                                 

Commission File Number 1-10228



---

Enterasys Networks, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                                                                                                                     |  |                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                                                                                                             |  | 04-2797263                              
|(State or other jurisdiction of
    incorporation or organization)                                                                                                                                   |  | (I.R.S. Employer
    Identification No.)
|35 Industrial Way
    Rochester, New Hampshire 03866
    (603) 332-9400(Address, including zip code, and
    telephone number, including area code, of
    registrants principal executive offices)

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 o         No þ

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.    þ

As of October 31, 2002, 201,996,247 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 October 31,
2002 was approximately $234 million (based upon the closing
price for shares of the Registrants common stock on the
New York Stock Exchange on that date).

Explanatory Statement

We have restated our consolidated financial
statements for the fiscal year ended March 3, 2001, the
fiscal quarters within that fiscal year and the first three
fiscal quarters within the ten month transition period ended
December 29, 2001. On January 31, 2002, we discovered
that a previously recognized $4.0 million sale in our Asia
Pacific region did not qualify for revenue recognition during
the period in which we had originally reported the revenue. Also
on January 31, 2002, we learned that the SEC had opened a
formal order of investigation into the financial accounting and
reporting practices of us and our affiliates. In response to
these developments, our Board of Directors formed a Special
Committee to conduct an internal review into our financial
accounting and reporting for the fiscal year ended March 3,
2001 and the ten-month transition period ended December 29,
2001, which the Special Committee has recently completed. The
Special Committee appointed the law firm of Ropes &
Gray to conduct the internal review, and Ropes & Gray
hired the forensic accounting group of Deloitte & Touche LLP
to assist with the internal review. The principal adjustments to
restate the financial statements relate primarily to
sales/investment transactions, relationships with Asia Pacific
and Latin American distributors, pricing allowances and return
rights, and are discussed in more detail in notes 2 and 30
to our consolidated financial statements included in this
transition report on Form 10-K.



---






---

TABLE OF CONTENTS



|                                                                                  |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                
|Item 1. Business                                                                 
|Item 2. Properties                                                               
|Item 3. Legal Proceedings                                                        
|Item 4. Submission of Matters to a Vote of Security Holders                      
|PART II                                                                          
|Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
|Item 6. Selected Consolidated Financial Data                                     
|                                                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk              
|                                                                                  | Item 8. Consolidated Financial Statements and Supplementary Data                             
|                                                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                         
|                                                                                  | Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                  
|Item 12. Security Ownership of Certain Beneficial Owners and Management          
|Item 13. Certain Relationships and Related Transactions                          
|Item 14. Controls and Procedures                                                 
|                                                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                                       
|CERTIFICATIONS                                                                   
|AMEND & RESTATED BY-LAWS                                                         
|FORM OF STOCK CERTIFICATE                                                        
|FORM OF STOCK CERTIFICATE SERIES D                                               
|FORM OF STOCK CERTIFICATE SERIES E                                               
|FLATELY CO. STANDARD FORM OF LEASE                                               
|1989 EMPLOYEE STOCK PLAN                                                         
|1995 EMPLOYEE STOCK PLAN                                                         
|DEFERED PLAN FOR DIRECTORS                                                       
|PROMISSORY NOTE (J RIDDLE)                                                       
|AGREEMENT LETTER (PATEL)                                                         
|AGREEMENT LETTER (JAEGER)                                                        
|EMPLOYMENT LETTER (PATEL)                                                        
|EMPLOYMENT LETTER (JAEGER)                                                       
|EMPLOYMENT LETTER (KIRPATRICK)                                                   
|LIST OF SUBSIDIARIES                                                             
|CONSENT OF KPMG                                                                  
|CERTIFICATION OF WILLIAM O'BRIEN                                                 
|CERTIFICATION OF RICHARD HAAK                                                    



---



##### Table of Contents






TABLE OF CONTENTS

|                                      |     |  |     |                                                                                           |  |  |    | 
|------------------------------------- | --- |  | --- | ----------------------------------------------------------------------------------------- |  |  | -- | 
|Item                                  |     |  |     | Page(s)                                                                                  
|                                      |     |  |     |                                                                                          
|PART I                               
|                                      | 1.  |  |     | Business                                                                                  |  |  | 2  | 
|                                      | 2.  |  |     | Properties                                                                                |  |  | 11 | 
|                                      | 3.  |  |     | Legal Proceedings                                                                         |  |  | 11 | 
|                                      | 4.  |  |     | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 13 | 
|PART II                              
|                                      | 5.  |  |     | Market for the Registrants Common Equity
    and Related Stockholder Matters             |  |  | 14 | 
|                                      | 6.  |  |     | Selected Consolidated Financial Data                                                      |  |  | 15 | 
|                                      | 7.  |  |     | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 16 | 
|                                      | 7a. |  |     | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |  | 49 | 
|                                      | 8.  |  |     | Consolidated Financial Statements and
    Supplementary Data                              |  |  | 50 | 
|                                      | 9.  |  |     | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 50 | 
|PART III                             
|                                      | 10. |  |     | Directors and Executive Officers of the Registrant                                        |  |  | 51 | 
|                                      | 11. |  |     | Executive Compensation                                                                    |  |  | 53 | 
|                                      | 12. |  |     | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 60 | 
|                                      | 13. |  |     | Certain Relationships and Related Transactions                                            |  |  | 61 | 
|                                      | 14. |  |     | Controls and Procedures                                                                   |  |  | 65 | 
|PART IV                              
|                                      | 15. |  |     | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |  | 68 | 
|Chief Executive Officer Certification |     |  | C-1 |                                                                                          
|Chief Financial Officer Certification |     |  | C-1 |                                                                                          

1



---



##### Table of Contents






Item 1.     Business

This transition report on Form 10-K and
the following disclosure contain forward-looking statements. We
caution you that any statements contained in this report which
are not strictly historical statements constitute
forward-looking statements. Such statements include, but are not
limited to, statements reflecting managements expectations
regarding our future financial performance; strategic
relationships and market opportunities; and our other business
and marketing strategies and objectives. These statements may be
identified with such words as we expect, we
believe, we anticipate, or similar indications
of future expectations. These statements are neither promises
nor guarantees, and involve risks and uncertainties that could
cause actual results to differ materially from such
forward-looking statements. Such risks and uncertainties
include, among other things, the following factors: the pending
SEC investigation and our accounting restatements could
materially harm our business, operating results and financial
condition; worldwide economic weakness and deteriorating market
conditions have and may continue to negatively affect our
business and revenues and make forecasting more difficult, which
could harm our financial condition; we have a history of losses
in recent years and may not operate profitably in the future;
our quarterly operating results are likely to fluctuate, which
could cause us to fail to meet quarterly operating targets and
result in a decline in our stock price; we earn a substantial
portion of our revenue for each quarter in the last month of
each quarter, which reduces our ability to accurately forecast
our quarterly results and increases the risk that we will be
unable to achieve previously forecasted results; we may need
additional capital to fund our future operations and, if it is
not available when needed, our business may be harmed; in
February 2003, the holders of our Series D and E preferred
stock may require redemption of their shares for cash, which
could impair our cash position, or request the conversion of
their shares into shares of our common stock, which would dilute
our existing stockholders; pending and future litigation could
materially harm our business, operating results and financial
condition; the limitations of our director and officer liability
insurance may materially harm our financial condition; our
failure to improve our management information systems and
internal controls could harm our business; we have experienced
significant turnover of senior management and our current
management team has been together for only a limited time, which
could harm our business operations; retaining key management and
employees is critical to our success; there is intense
competition in the market for enterprise network equipment,
which could prevent us from increasing our revenue and achieving
profitability; we may be unable to expand our indirect
distribution channels, which may hinder our ability to grow our
customer base and increase our revenues; we expect the average
selling prices of our products to decrease over time, which may
reduce our revenue and gross margins; we use several key
components for our products that we purchase from single or
limited sources, and we could lose sales if these sources fail
to fulfill our needs; we depend upon a limited number of
contract manufacturers for substantially all of our
manufacturing requirements, and the loss of our primary contract
manufacturer would impair our ability to meet the demands of our
customers; and those discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward looking
statements, which speak only as of the date hereof. We expressly
disclaim any obligation to publicly update or revise any such
statements to reflect any change in these forward-looking
statements, or in events, conditions, or circumstances on which
any such statements may be based, or that may affect the
likelihood that actual results will differ from those set forth
in the forward-looking statements.

All references in this transition report to
Enterasys Networks, we, our,
or us mean Enterasys Networks, Inc.

Introduction

We design, develop, market and support
comprehensive networking solutions focusing on the network
security, availability and mobility needs of enterprises. Our
solutions empower customers to use their internal networks and
the Internet to facilitate the exchange of information, increase
productivity and reduce operating costs. Using our products,
customers make information, applications and services readily
available and customized to the needs of their employees,
customers, suppliers, business partners and other

2



---



##### Table of Contents



network users. Our significant installed base of
customers consists of commercial enterprises; governmental
entities; healthcare, educational and non-profit institutions;
and other organizations.


In February 2000, Cabletron Systems, Inc.
(Cabletron), as part of an effort to improve
strategic focus and better capitalize on market opportunities,
transferred substantially all of its operating assets and
liabilities to four operating subsidiaries as part of a plan to
make each of the subsidiaries independent. These subsidiaries
were Enterasys Networks, Inc. (Enterasys
Subsidiary), Riverstone Networks, Inc.
(Riverstone), Aprisma Management Technologies, Inc.
(Aprisma), and GlobalNetworkTechnology
Services, Inc. (GNTS). Each of these subsidiaries
had its own management team and board of directors. In July
2001, the operations of GNTS were discontinued through the
acquisition of a portion of GNTS by a third party, the
assumption of certain contracts and employees of GNTS by
Enterasys Subsidiary and Aprisma, and the discontinuance of the
remaining business operations of GNTS. Following the initial
public offering of a portion of Riverstones common stock
in February 2001, Cabletron distributed its holdings of
Riverstones common stock to Cabletrons stockholders
in a spin-off transaction on August 6, 2001. Also on
August 6, 2001, Enterasys Subsidiary was merged with and
into Cabletron, and the name of the surviving corporation was
changed to Enterasys Networks, Inc. On
August 9, 2002, the Company completed the sale of Aprisma
to a third party.

We were founded in 1983 as a Delaware corporation
and are listed on the New York Stock Exchange under the symbol
ETS. Our corporate headquarters are located at 35
Industrial Way, Rochester, New Hampshire 03866. Our telephone
number is 603-332-9400, and our web site is located at
www.enterasys.com. Enterasys Networks®, RoamAbout®,
X-Pedition, Matrix, Vertical Horizon, Aurorean, Dragon and
NetSight® are our trademarks and service marks.

SEC Investigation and Internal Review of
Accounting Practices

In January 2002, we discovered that a previously
recognized $4 million sale in our Asia Pacific region did
not qualify for revenue recognition during the period in which
we had originally reported the revenue. Separately in January
2002, we learned that the U.S. Securities and Exchange
Commission, or SEC, had opened a formal order of investigation
relating to us and our affiliates.

In response to these developments, our Board of
Directors formed a Special Committee to oversee an internal
review of our financial accounting and reporting practices for
the fiscal year ended March 3, 2001 and the ten-month
transition period ended December 29, 2001. As a result of
the internal review, we have restated our financial statements
for the fiscal year ended March 3, 2001, the fiscal
quarters within that fiscal year, and the first three fiscal
quarters within the ten-month transition period ended
December 29, 2001. The adjustments included in the
restatements are discussed in more detail in notes 2
and 30 of our consolidated financial statements included in
this transition report on Form 10-K.

Management Changes

During 2002, we have undergone numerous changes
in our management as a result of employee reductions,
resignations and, in some cases, terminations. In April 2002,
William K. OBrien was appointed Interim Chief Executive
Officer and joined our Board of Directors, and Yuda Doron was
appointed our President. In July 2002, Mr. OBrien
agreed to assume the role of Chief Executive Officer and the
interim designation was removed from his title. We also
appointed a number of other senior officers in the period from
March through October of 2002, including: Richard S. Haak, Jr.
as our Chief Financial Officer, Mads Lillelund as our Executive
Vice President of Worldwide Sales, Raymond G. Hunt as our
Executive Vice President of Supply Chain, Kimberly A. Buxton as
Vice President of Human Resources, Steven A. Caparco as Vice
President and Controller, and Michael A. Barry as Director of
Internal Audit.

Our Solutions

Todays enterprises require comprehensive
network solutions that provide users with real-time access to
information as well as technology applications. For enterprises
to remain competitive, information and applications must be
available on-demand, in a secure fashion, 24 hours a day,
7 days a week, from

3



---



##### Table of Contents



multiple locations around the world. Networks
must be accessible to a wide range of users, including
employees, customers, vendors, partners and other users, across
multiple network types, including hardware-based switching and
routing infrastructures, support services, wireless access
networks, and virtual private networks, or VPNs. In addition,
networks are increasingly required to prioritize and route
traffic to users and to allocate bandwidth to specified
applications based on business priorities instead of technology
standards. Our broad line of networking solutions provides
enterprises with the internal infrastructure and connectivity to
meet these needs.




| |                                     
| | ------------------------------------
| | Security, Availability,
    Mobility

We view security, availability and mobility as
key requirements for enterprise networks and have developed an
integrated portfolio of hardware, software and service solutions
to meet these needs. Our networking solutions provide network
users with secure, on-demand access to the network from a wide
range of access points, using a wise variety of interfaces.

Security.We believe
network security is a fundamental concern for all enterprises.
Our solutions offer a layered approach to security, integrating
a wide range of security devices, features and services
throughout the network, providing enterprise networks with
protection from both external and internal security threats. Our
solutions combine security products and technology, including
intrusion detection systems, VPNs, encryption, firewalls and
user authentication at all points of network access to create
security solutions at every level of the global enterprise
network. We deliver purpose-built security devices and
incorporate security features within many of our other
networking products, such as our switches and routers.

Availability.We
incorporate advanced design features in our products designed to
ensure high levels of network availability at both the device
and system levels, even during periods of heavy traffic. These
advanced design features include a distributed switching
architecture and redundant switch fabrics, which create multiple
connections between input and output ports to minimize network
disruption in the event of a failure or interruption in any
single path. In addition, our products employ a wide variety of
protocols and system level components to provide enhanced levels
of availability in large-scale, multi-device networks.

Mobility.Our
network solutions accommodate todays mobile workforce by
providing access throughout an enterprises deployed
network infrastructure and over the Internet using our VPN
solutions. Our RoamAbout wireless technology provides users with
secure, high-speed connectivity to network resources, generally
within a defined perimeter, using a mobile device such as a
laptop or handheld computer. Our VPN technology enables
authorized internal and external users to securely send and
receive information from and across enterprise networks through
encrypted dial-up or dedicated lines, or over the Internet
through broadband connections.



| |                         
| | ------------------------
| | Business Driven Networks

In addition to meeting security, availability and
mobility needs, our network solutions allow enterprises to
prioritize use of the network infrastructure and optimize
network performance consistent with business priorities. This
enables an enterprises network to allocate critical
network resources in a manner desired by the enterprise instead
of dictated by technology capacities, thereby improving network
performance and enabling enterprises to rapidly adjust their
networks in response to changing business requirements.

We refer to our method of delivering business
driven networking technology as User Personalized Networking, or
UPN. UPN allows an enterprise to restrict bandwidth and access
to specific applications, databases or servers by user,
department, division or geographic location. This technology
allows the network to authenticate and distinguish among
different types of users and network traffic, enabling
enterprises to create customized communications environments for
individuals or groups of users. For example, an enterprise might
allocate a significant portion of its network bandwidth to
individuals in the finance group at the end of financial
reporting cycles or allow visitors limited access to authorized
applications, such as the Internet, while maintaining network
security.

In addition, we believe our products help meet
enterprise customers business needs by addressing the
convergence of voice, video and data traffic as well as
providing for interoperability and cost-effective

4



---



##### Table of Contents



network expansion, Our products are designed to
take advantage of the trend toward multi-service infrastructures
that converge voice, video and data networks and contain
functionalities important to convergence such as the ability to
securely switch and route network traffic, assign different
priorities to different types of application-related traffic and
audit network traffic usage. By basing our products on industry
standards, our customers are able to operate our products with
prior generations of our products and with standards-based
products from other vendors, thereby reducing the operational
costs often incurred maintaining a multi-vendor network. Our
products also enable an enterprise to quickly and
cost-effectively upgrade its network for additional users,
greater capacity or the latest technology, delivering long-term
value to customers as their networking needs increase.




| |                              
| | -----------------------------
| | High-Quality Customer Support

We believe high-quality comprehensive customer
support is essential to building long-term customer
relationships. Accordingly, we are committed to providing
high-quality customer support to meet customer needs, and offer
a comprehensive portfolio of support services, including
pre-installation assessment, system installation and integration
assistance, and post-installation maintenance services. Our
support services are designed to help customers simplify network
operation and maintenance, with the goal of maximizing network
availability.

Our Products

Our products are classified into the following
principal categories: switching, routing, wireless networking,
security and support services. We believe our products provide
the key components that enable customers to build secure,
high-performance, highly adaptable networking infrastructures.
We design our products for both large multinational enterprises
with many locations, thousands of employees and advanced
communications requirements, as well as medium-sized businesses
seeking to take advantage of the latest improvements in network
communications. Our solutions and products are built with the
common goal of reducing the cost and complexity of network
administration and management.



| |          
| | ---------
| | Switching

Switches provide connectivity within a network.
Our Matrix and Vertical Horizon switches address the broad
market for secure, high-speed connectivity to individual users
and departments within the enterprise network. Matrix switching
products operate at multiple layers pursuant to international
standards to ensure that computer systems from different vendors
can exchange data using common languages or protocols. While
standard switches communicate over the data-link layer, or
Layer 2, our Matrix switches have the flexibility to
communicate at Layer 3, also called the network layer,
providing the added security and control over network traffic
that is associated with traditional software-based routers.

Our Matrix switches use proprietary
application-specific integrated circuits, or ASICs, which
process data and information much faster than software-based
routers while offering the desired security, network traffic
control, performance, auditing and management services that
enterprises require for day-to-day operation. Our Matrix
switches also incorporate our User Personalized Networking
technology, enabling these switches to differentiate among
network users and applications. This functionality, in
conjunction with our NetSight Atlas Policy Manager software,
allows our customers to deploy a network that is more aligned
with their business priorities than more traditional networks.



| |        
| | -------
| | Routing

Routers connect computer networks and transmit
information from one network to another. Our routers also
incorporate proprietary hardware-based ASIC designs that enable
them to process information faster than software-based routers.
Our routers are typically deployed in the core, or center, of
the enterprise network, where security and traffic control are
most important to enterprises. When linked to our multilayer
Matrix switches, our X-Pedition routers provide a complete
network solution, where both switches and routers share similar,
complementary security and management features and communicate

5



---



##### Table of Contents



over Layer 3. This allows network administrators
to better prioritize and more precisely control network usage,
resulting in improved productivity and network availability
throughout the enterprise.


We have also developed a standards-based
operating environment that gives our X-Pedition routers the
flexibility to operate in multi-vendor and multi-protocol
networks. The most widely used local area networking technology
in new installations is Ethernet. Our system also supports
multi-Gigabit Ethernet networks at speeds up to 10 billion
bits per second and operates over wide area networks, or WANs.

In 2002, we launched a series of WAN routers, the
X-Pedition 1800 Series of security routers, or XSRs, specially
designed for regional and branch office locations. These routers
combine high-performance routing, VPN capabilities, and a
built-in firewall all in a single compact device, providing a
simple, cost-effective solution for secure, high-speed
networking.



| |                    
| | -------------------
| | Wireless Networking

Wireless local area networks enable mobile
connectivity to the network. Our RoamAbout product family allows
easy, secure, authorized and economical access to the network
from within enterprise buildings or campuses located within 25
miles of each other. Our RoamAbout wireless networks function
like standard wired Ethernet networks, but use radio frequencies
instead of cables for network connection. Our RoamAbout access
products power themselves over the existing Ethernet connection,
allowing enterprises to deploy wireless local area networks
without concern for the location of power supplies.

RoamAbout technology is based on industry
standards, which currently enable two connection speeds to
support higher bandwidth applications. Our RoamAbout Access
Point 2000 provides a secure, 11 megabits per second, or Mbps,
wireless connection and a 10 Mbps Ethernet connection into the
wired network infrastructure. The RoamAbout R2 Access Point
provides support for multiple wireless networks enabling secure
connections at speeds of 11 Mbps and 54 Mbps with a 10/100 Mbps
Ethernet connection into the wired network infrastructure.



| |         
| | --------
| | Security

All of our products incorporate security features
to prevent unauthorized access to the network using
authentication procedures, encryption, and network monitoring.
We believe our security solutions offer a high level of
protection against both external and internal security threats.
We also offer dedicated security devices and products, which
include our Dragon, Netsight Atlas and Aurorean product lines.
Our Dragon intrusion detection system, or IDS, detects a wide
variety of security attacks using sophisticated algorithms and
an extensive library of over 3,000 patterns. Our Dragon
technology also offers an integrated management system for
monitoring selected devices throughout the network, enabling an
enterprise to quickly respond to security threats. NetSight
Atlas is a multi-device management application that provides
system level configuration and administration of our products
within the enterprise network. Our Aurorean products provide VPN
solutions for telecommuting, branch office and regional site
connectivity and enable secure access to the enterprise network
using dial-up, dedicated line, digital subscriber line or cable
modem.

Our Services

Our support services are designed to address our
enterprise customers unique needs, including initial
network assessment and design, system installation and
integration, and post-installation maintenance and technical
support, with the goals of maximizing a customers overall
network availability and performance. We provide high-quality
support for both standard and mission-critical network
environments using the appropriate level of expertise and
resources to supplement a customers internal capabilities.
To provide service at all levels, we complement our internal
service staff with those of our channel partners.

6



---



##### Table of Contents



Our post-installation maintenance and technical
support, or Availability Services, help customers minimize
network interruption and downtime, and consist of the following
options:



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extended Warrantyconsists of technical telephone
    support during our normal business hours, around the clock
    on-line support, and repair or replacement of failed products.
|
| |  | Technical Access Servicerepresents around the clock technical
    telephone support and on-line support, access to upgrades and
    repair or replacement of failed products.     
|
| |  | Express Parts Serviceincludes Technical Access Service and
    express shipment of products and parts in the event of equipment
    failure.                                      
|
| |  | On-Site Responseincludes all the features of our
    Express Parts Service and the on-site assistance of our customer
    support engineers.                                      

Sales Overview

Historically we sold most of our products and
services directly to our customers through our own sales force.
Although we continue to sell our solutions directly to large
enterprises, providing these enterprises with high levels of
customer service and technical support, we have transitioned our
business to a largely indirect sales model, selling most of our
products and services to end-users through distributors and
through channel partners, such as systems integrators,
value-added resellers, telecommunications service providers and
managed security service providers. We continue to provide our
channel partners with a high level of sales support.

We have increased our business with distributors,
which sell our products to value-added resellers, system
integrators and consultants, and provide us and these partners
with inventory management, credit and collection, product
shipment and other services. Our network of distributors allows
us to sell to and support a wide range of channel partners
across the world and in specific industries. We believe our
customers benefit from the broad service and product fulfillment
capabilities these distributors offer. We generally give our
distributors limited rights to rotate a portion of inventory,
exchanging slower moving products for faster moving products,
and to participate in various marketing programs designed to
promote the sale of our products.

Our channel partners identify, qualify and design
the optimal networking solution to meet the needs of end-users
and, as necessary, seek guidance from our sales and technical
support personnel. We have established, and are continuing to
establish, relationships with value-added resellers worldwide in
order to increase our market penetration and leverage the
expertise of these resellers in particular industries,
applications and/or geographic areas. In addition, we have
formed and seek to form relationships with system integrators
that provide complete technology solutions, an international
reach, broad technology integration and development
capabilities, and generally high-level service and outsourcing
offerings. We also intend to establish relationships with large
telecommunications service providers that offer data, voice
and/or video communication services to businesses, governments,
utilities and consumers and that will remarket our products to
their installed customer base. Such service providers include
regional, national and international telecommunications
carriers, as well as Internet, cable and wireless service
providers.

International sales represent a significant
portion of our business. We conduct sales operations in four
regions around the world including North America (United States
and Canada), EMEA (Europe, Middle East and Africa), Asia Pacific
(Asia and Australia), and Latin America (South America, Mexico
and Caribbean). Key countries include the United States,
Germany, the United Kingdom, France, Italy, Spain, Japan,
Australia, Korea and China. North America has the highest level
of direct sales followed by EMEA. Asian Pacific and Latin
American sales are generated primarily through channel partners.
In the transition period ended December 29, 2001, sales to
customers outside of North America, including exports, accounted
for approximately 51% of our consolidated net revenue, compared
to approximately 49% in 2001 and 37% in 2000.

7



---



##### Table of Contents



Marketing

Our marketing objectives are to build awareness
and acceptance of our brand and products; create demand for our
products and solutions; develop successful channel partnerships
to improve our market coverage and grow new business; and
provide education and training to customers and partners. To
accomplish these objectives, we market our products using direct
advertising, indirect publicity, press releases, publication of
educational articles in industry journals, and participation in
industry roundtables and speaker venues. We also maintain
relationships with industry analysts, such as Gartner, Current
Analysis, IDC and Meta Group, that produce and distribute
industry information and product analysis to customers.

We use a number of marketing programs to promote
new products and upgrades to our installed customer base and
prospective customers. These programs include participation in
prominent industry trade shows, co-sponsoring seminar series
with other industry leaders, communicating virtual advertorials
to broad audiences, as well as a number of local and field based
customer and tradeshow activities in targeted geographic
regions. Our channel partners and distributors extend our direct
marketing efforts to our current and prospective customers. We
provide some of these partners with marketing funds to
facilitate their marketing efforts and have developed various
incentive programs designed to encourage these partners to
market and sell our products.

We believe our training programs provide us with
the ability to educate and inform our partners and end-user
customers about our products and new product developments. We
have launched a number of new programs to advance the delivery
of these programs. For example, we recently introduced a new
virtual classroom and certification program to enable users to
participate in our training programs remotely.

Customers

Over the years we have developed a significant
installed base of end-user customers, which is an important
source of revenue. We seek to generate revenue from sales of our
products and solutions to new customers and by upgrading the
technology used by existing customers. Our end-user customers
include commercial enterprises, including financial
institutions; government entities; healthcare, educational and
non-profit institutions; and other organizations.

During the ten months ended December 29,
2001, Azlan Group PLC, a European distributor, accounted for 13%
of total net revenue. During the year ended March 3, 2001,
no individual end-user customer, distributor or channel partner
accounted for more than 10% of our revenue. During the year
ended February 29, 2000, Compaq Computer Corporation
accounted for 16% of total net revenue. Our top ten end-user
customers, distributors and channel partners represented in the
aggregate, approximately 53%, 31% and 30% of our total revenue
for the ten months ended December 29, 2001 and the fiscal
years ended March 3, 2001 and February 29, 2000,
respectively, reflecting our increased use of distributors and
channel partners.

During the ten months ended December 29,
2001 and the year ended March 3, 2001, the United States
federal government accounted for approximately 12% and 10% of
total net revenue, respectively; however, our sales to the
United States federal government are distributed across a wide
variety of government agencies and, therefore, we do not believe
our revenues would be materially impacted by fluctuations in
federal government spending.

Competition

The market for enterprise network communications
products is very competitive, subject to rapid technological
change and significantly affected by new product introductions
and other market activities of industry participants. This
market is dominated by several large companies, both
domestically and internationally, many of which, in particular
Cisco Systems, have substantially greater market share than any
other competitor, including us. The remainder of the network
communications products market is highly fragmented. Our
principal competitors include Alcatel, Avaya, Cisco, Extreme
Networks, Foundry

8



---



##### Table of Contents



Networks, Hewlett-Packard, Nortel Networks and
3Com, although we also experience competition from a number of
smaller public and private companies. Prospective customers may
be reluctant to replace or expand their current infrastructure
solutions, which may have been supplied by one or more of these
established competitors, with our products.


We believe that the principal competitive factors
in the enterprise networking market are:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | provision of effective customer solutions and
    service offerings;            
|
| |  | price of products and total cost of ownership;                                  
|
| |  | technology leadership;                                                          
|
| |  | conformity to industry standards;                                               
|
| |  | compatibility with other vendor products and
    prior generations;             
|
| |  | access to customers, installed customer base and
    cost to change vendors; and
|
| |  | customer service and support.                                                   

We believe that we compete favorably with our
competitors on the basis of the foregoing factors; however, we
operate in an extremely competitive marketplace and may not
compete favorably on the basis of one or more of these factors
in the future. We intend to compete by investing in product
development, expanding our customer base and focusing on
operating efficiencies. Because certain of our competitors have
greater name recognition, larger installed customer bases and
greater financial, technical, sales, marketing and other
resources, they may have greater access to customers, the
ability to more aggressively adjust product pricing, and greater
resources to devote to product development.

Manufacturing and Components

Since March 2000, we have outsourced all of our
manufacturing to third party contractors that provide
comprehensive services, including procurement of raw materials
and components, assembly and repair work. Our contract
manufacturers use automated testing equipment to perform
inspection testing and use statistical process controls to
assure the quality and reliability of our products. Our
engineering and supply chain management personnel work closely
with our contract manufacturers to ensure that products are
manufactured to specifications. We design and develop the key
components of our products, including ASICs and printed circuit
boards. We also determine the components that are incorporated
in our products and select the appropriate suppliers of these
components. In addition, we conduct quality assurance,
manufacturing engineering, document control and test development.

Flextronics International, Ltd. is our primary
contract manufacturer. Flextronics manufactures our products
primarily at its newly constructed facility in Portsmouth, NH as
well as at its facility in Limerick, Ireland. Our contract with
Flextronics expired in February 2002. Since that time, we have
been operating under an extension of the expired contract that
includes modifications primarily to provide us with more
flexibility with respect to production lead times and payment.
In addition, we have been negotiating a new manufacturing
agreement with Flextronics.

We also contract with Accton Technology
Corporation, which manufactures certain of our products at its
facility in Taiwan. Our agreement with Accton renews for
successive one year periods unless terminated by written notice
from either party at least ninety days prior to the expiration
of the then current term of the contract.

We source several key components used in the
manufacture of our products that may be considered custom or
unique, including ASICs, from single or limited sources and are
dependent upon these sources to meet our needs. These custom
components typically require longer lead times in order to
minimize the impact of shortages and delays. Although we may
have encountered shortages and delays in obtaining custom
components in the past, we do not believe that such shortages
have impaired our ability to provide products to customers on a
timely basis. Historically, we have relied heavily on custom
components and

9



---



##### Table of Contents



components that are not used across multiples
products, resulting in excess raw materials and finished goods
inventory. We continuously seek to incorporate more non-custom
components in our products and use more common components across
multiple products.


Research and Development

The networking industry is highly competitive and
subject to evolving industry standards and technological
advancements. We believe that strong product development
capabilities are essential to our strategy of enhancing our core
technology and developing new and enhanced products to maintain
our competitiveness in the enterprise network market.
Accordingly, our research and development efforts are focused on
improving our existing products and developing innovative
products that meet the evolving networking needs of enterprises.

As of September 30, 2002, we had
approximately 460 engineers in our research and development
organization, located in five research and development
facilities in the United States and Canada. Our research and
development organization has produced an international patent
portfolio that allows us to implement advanced technologies
within our network solutions. Our engineers and technologists
are active in key industry standards organizations, and have
leadership roles in several, allowing us to better understand
and influence technological developments in the networking
industry. We also have strong relationships with leading
component suppliers, including Intel, IBM, Broadcom, Motorola,
Marvell and LSI, which provide us with early insight into new
technologies.

We have made and will continue to make, a
substantial investment in research and development. We plan to
continue to invest in emerging technologies for use in existing
and future products primarily through internal efforts as well
as through alliances and acquisitions. However, we cannot assure
you that our investment in research and development will enable
us to successfully develop new and enhanced products or maintain
our competitiveness in the enterprise networking market.

Intellectual Property

We generally rely on a combination of patent,
copyright, trademark and trade secret laws and contractual
restrictions to establish and protect our technology. As of
September 30, 2002, we had a total of 649 issued patents
and an additional 135 patents pending for examination worldwide.
Our products are also protected by trade secret and copyright
laws of the United States and other jurisdictions. However,
these legal protections provide only limited protection.
Further, the market for network communications solutions is
subject to rapid technological change. Accordingly, while we
intend to continue to protect our proprietary rights where
appropriate, we believe that our success in maintaining a
technology leadership position is more dependent on the
technical expertise and innovative abilities of our personnel
than on these legal protections.

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

Backlog

Our products are often sold on the basis of
standard purchase orders that are cancelable prior to shipment
without significant penalties. In addition, purchase orders are
subject to changes in quantities of products and delivery
schedules in order to reflect changes in customer requirements
and manufacturing capacity. Our business is characterized by
quarter-end variability in demand and short lead-time orders

10



---



##### Table of Contents



and delivery schedules. Actual shipments depend
on the then-current capacity of our contract manufacturers and
the availability of materials and components from our vendors.
We believe that only a small portion of our order backlog is
non-cancelable and that the dollar amount associated with the
non-cancelable portion is immaterial. Accordingly, we do not
believe that backlog at any given time is a meaningful indicator
of future sales.


Employees

As of December 29, 2001, we had
approximately 2,300 full-time employees, compared with
approximately 2,400 full-time employees as of March 3,
2001, excluding all employees associated with businesses
accounted for as discontinued operations. The decrease in the
number of employees was largely a result of the termination of
employees in accordance with our cost reduction initiative
announced in October 2001. Our employees are not represented by
a union or other collective bargaining agent and we consider our
relations with our employees to be good. In April of 2002, we
announced a cost reduction plan which targeted a workforce
reduction of approximately 30%. As of October 31, 2002, we
had approximately 1,700 employees worldwide.






|        |           
|------- | ----------
|Item 2. | Properties

We own three buildings totaling 270,000 square
feet in Rochester, New Hampshire. These buildings accommodate
our engineering, information technology, finance and customer
support departments.

We lease several facilities, including a 152,000
square foot facility in Andover, Massachusetts, where our sales,
marketing, customer service and legal departments are located.
We also lease a 110,000 square foot warehousing and distribution
center located in Rochester, NH, a 75,000 square foot
warehousing and distribution center located in Shannon, Ireland,
and a 32,000 square foot building in Toronto, Canada. We lease a
47,000 square foot facility in Portsmouth, New Hampshire and a
41,000 square foot building in Salt Lake City, Utah. Remaining
leased sales offices range from 1,000 to 28,000 square feet.

We are in the process of consolidating several of
our worldwide facilities and as a part of this process may
pursue the sale, lease or sublease of one or more of our
existing facilities.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In the normal course of our business, we are
subject to proceedings, litigation and other claims. Litigation
in general, and securities and intellectual property litigation
in particular, can be expensive and disruptive to our normal
business operations. Moreover, the results of litigation are
difficult to predict. Described below are material legal
proceedings in which we are involved. The uncertainty associated
with these and other unresolved or threatened legal actions
could adversely affect our relationships with existing customers
and impair our ability to attract new customers. In addition,
the defense of these actions may result in the diversion of
managements resources from the operation of our business,
which could impede our ability to achieve our business
objectives. The unfavorable resolution of any specific action
could materially harm our business, operating results and
financial condition, and could cause the price of our common
stock to decline significantly. See also Cautionary
Statements  The pending SEC investigation and our
accounting restatements could materially harm our business,
operating results and financial conditionand
Cautionary Statements  Pending and future
litigation could materially harm our business, operating results
and financial condition.

Securities Class Action in the District
of Rhode Island.Between
October 24, 1997 and March 2, 1998, nine shareholder
class action lawsuits were filed against us and certain of our
officers and directors 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 we and
several of our officers and directors disseminated materially
false and misleading information about our 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

11



---



##### Table of Contents



December 2, 1997. The complaint further
alleges that certain officers and directors profited from the
dissemination of such misleading information by selling shares
of our common stock during this period. The complaint does not
specify the amount of damages sought on behalf of the class. In
a ruling dated May 23, 2001, the district court dismissed
this complaint with prejudice. The plaintiffs appealed that
ruling to the First Circuit Court of Appeals, and, in a ruling
issued on November 12, 2002, the Court of Appeals reversed
and remanded the case to the District Court for further
proceedings. If plaintiffs prevail on the merits of the case, we
could be required to pay substantial damages.


Securities Class Action in the District
of New Hampshire.Between
February 7 and April 9, 2002, six class action
lawsuits were filed in the United States District Court for the
District of New Hampshire. Defendants are us, former chairman
and chief executive officer Enrique Fiallo and former chief
financial officer Robert Gagalis. By orders dated August 2,
2002 and September 25, 2002, these lawsuits, which are
similar in material respects, were consolidated into one class
action lawsuit, captioned In re Enterasys Networks, Inc.
Securities Litigation (C.A. No. 02-CV-71). The
complaints allege violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder. Plaintiffs allege
that during periods spanning from as early as August, 2001
through February, 2002, defendants issued materially false and
misleading financial statements and press releases that
overstated our revenues, income, and earnings per share, because
we purportedly recognized revenue in violation of Generally
Accepted Accounting Principles (GAAP) and our own
accounting policies in connection with transactions in our Asia
Pacific region. The complaints seek unspecified compensatory
damages in favor of the plaintiffs and the other members of the
purported class against all of the defendants, jointly and
severally. By order of the court, we have not yet been required
to file a responsive pleading. If plaintiffs prevail on the
merits of the case, we could be required to pay substantial
damages.

Shareholder Derivative Action in State of New
Hampshire.On February 22, 2002,
a shareholder derivative action was filed on our behalf in the
Superior Court of Rockingham County, State of New Hampshire. The
suit is captioned Nemes v. Fiallo, et al. Individual
defendants are former chairman and chief executive officer
Fiallo and certain members of our Board of Directors. Plaintiffs
allege that the individual defendants breached their fiduciary
duty to shareholders by causing or allowing us to conduct our
business in an unsafe, imprudent, and unlawful manner and
failing to implement and maintain an adequate internal
accounting control system. Plaintiffs allege that this breach
caused us to improperly recognize revenue in violation of GAAP
and our own accounting policies in connection with transactions
in our Asia Pacific region, and that this alleged wrongdoing
resulted in damages to us. Plaintiffs seek unspecified
compensatory damages. On October 7, 2002, the Superior
Court approved the parties joint stipulation to stay proceedings.

Shareholder Derivative Action in State of
Delaware.On April 16, 2002, a
shareholder derivative action was filed in the Court of Chancery
of the State of Delaware in and for New Castle County on behalf
of us. It is captioned, Meisner v. Enterasys Networks, Inc.,
et al.Individual defendants are former chairman and chief
executive officer Fiallo and members of our Board of Directors.
Plaintiffs allege that the individual defendants permitted
wrongful business practices to occur which had the effect of
manipulating revenues and earnings, inadequately supervised our
employees and managers, and failed to institute legal actions
against those officers, directors and employees responsible for
the alleged conduct. The complaint alleges counts for breach of
fiduciary duty, misappropriation of confidential information for
personal profit, and contribution and indemnification.
Plaintiffs seek judgment directing defendants to account to us
for all damages sustained by us by reason of the alleged
conduct, return all compensation of whatever kind paid to them
by us, pay interest on the damages as well as costs of the
action. On July 11, 2002, the individual defendants filed a
motion to dismiss the complaint. The plaintiff has not yet filed
a responsive brief with respect to this motion.

Securities and Exchange Commission
Investigation.After the close of
business on January 31, 2002, the Securities and Exchange
Commission, or SEC, notified us that it had commenced a
Formal Order of Private Investigation into our
financial accounting and reporting practices. This investigation
remains ongoing and we are fully cooperating with the SEC. We
cannot predict when this investigation will conclude or its
outcome. The SEC has not commenced legal proceedings against us
in connection with

12



---



##### Table of Contents



this investigation; however, if the SEC were to
conclude that legal action were appropriate, we could be
required to pay significant penalties and/or fines and could
become subject to an administrative order and/or a cease and
desist order.







|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

We held our annual meeting of shareholders on
October 9, 2001. At this meeting our shareholders voted
upon the election of Class III Directors with the
accompanying results:

|                    |  |           |             |                    |  |  |            | 
|------------------- |  | --------- | ----------- | ------------------ |  |  | ---------- | 
|                    |  | Number of |             | Number of Votes   
|Name                |  | Votes for |             | Withheld Authority
|                    |  |           |             |                   
|Craig R. Benson     |  |           | 152,844,749 |                    |  |  | 3,060,613  | 
|James E. Riddle     |  |           | 136,646,301 |                    |  |  | 19,259,061 | 
|Christine A. Varney |  |           | 152,157,534 |                    |  |  | 3,747,828  | 

13



---



##### Table of Contents






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 our Common Stock as reported on the New York
Stock Exchange (symbol  ETS since
August 6, 2001 and symbol CS prior to
August 6, 2001) during the last two fiscal years.

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Ten Months ended December 29, 2001     |  | High |       | Low
|                                       |  |      |       |    
|First quarter ended June 2, 2001       |  | $    | 22.00 |     |  | $ | 10.61 | 
|Second quarter ended September 1, 2001 |  |      | 24.38 |     |  |   | 8.50  | 
|Third quarter ended September 30, 2001 |  |      | 10.27 |     |  |   | 4.90  | 
|Fourth quarter ended December 29, 2001 |  | $    | 11.91 |     |  | $ | 5.90  | 

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Year ended March 3, 2001               |  | High |       | Low
|                                       |  |      |       |    
|First quarter ended June 3, 2000       |  | $    | 52.75 |     |  | $ | 17.50 | 
|Second quarter ended September 2, 2000 |  |      | 37.50 |     |  |   | 20.19 | 
|Third quarter ended December 2, 2000   |  |      | 37.44 |     |  |   | 15.00 | 
|Fourth quarter ended March 3, 2001     |  | $    | 23.25 |     |  | $ | 11.25 | 

As of October 31, 2002, we had approximately
2,500 stockholders of record. We have not paid dividends on our
common stock, and we anticipate we will continue to reinvest
earnings to finance future growth. On October 31, 2002, our
common stock traded at a high of $1.25 per share and a low of
$1.15 per share.

Our stock price history prior to August 6,
2001 reflects our value including Riverstone Networks, Inc.
Riverstone made an initial public offering of its common stock
in February 2001, and we distributed Riverstones common
stock to our stockholders on August 6, 2001. The price per
share of our common stock dropped $7.00 from the market close of
$20.75 on the day prior to our distribution of our Riverstone
shares to $13.75 at the opening trade on the day immediately
following our distribution of Riverstone shares.

14



---



##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The following table sets forth selected
consolidated financial data for the ten-month transition period
ended December 29, 2001 and the fiscal years ended
March 3, 2001, February 29, 2000, and
February 28, 1999 and 1998, which has been derived from our
Consolidated Financial Statements. For a detailed analysis of
the ten months ended December 29, 2001 and the fiscal years
ended March 3, 2001 and February 29, 2000, please
refer to Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Item 8 
Consolidated Financial Statements and Supplementary Financial
Data.

|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |           |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------ | ------- | ---------- | - | ------------ | -------- | ------------ | - | ------------ | ------- | --------- |  |  | ------- | --------- | - |  | ------- | --------- | -
|                                                                                                |                                                                                                                                |              |         |           
|                                                                                                |                                                                                                                                | Ten Months   |         | Year Ended
|                                                                                                |                                                                                                                                | Ended        |         |           
|                                                                                                |                                                                                                                                | December 29, |         | March 3,   |   | February 29, |          | February 28, |   | February 28,
|                                                                                                |                                                                                                                                | 2001         |         | 2001(1)    |   | 2000         |          | 1999(2)      |   | 1998(2)     
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |             
|(In thousands, except per share data)                                                           |                                                                                                                                |              |         | (Restated) |   |              |          |              |   |             
|Consolidated statements of operations
    data:                                                 |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|Net revenue:                                                                                    |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Enterasys segment                                                                                                              |              | $       | 415,263    |   |              | $        | 714,003      |   |              | $       | 642,540   |  |  | $       | 637,895   |   |  | $       | 527,309   |  
|                                                                                                | Other segment                                                                                                                  |              |         |           |   |              |          | 69,702       |   |              |         | 712,462   |  |  |         | 740,838   |   |  |         | 746,147   |  
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Total net revenue                                                                                                              |              | $       | 415,263    |   |              |          | 783,705      |   |              |         | 1,355,002 |  |  |         | 1,378,733 |   |  |         | 1,273,456 |  
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|Gross margin                                                                                    |                                                                                                                                |              | 36,764  |            |   |              | 337,203  |              |   |              | 594,975 |           |  |  | 587,957 |           |   |  | 628,929 |          
|Research and development                                                                        |                                                                                                                                |              | 76,471  |            |   |              | 81,723   |              |   |              | 131,852 |           |  |  | 158,819 |           |   |  | 136,602 |          
|Selling, general and administrative                                                             |                                                                                                                                |              | 277,330 |            |   |              | 329,906  |              |   |              | 346,199 |           |  |  | 378,430 |           |   |  | 344,578 |          
|Amortization of intangible assets                                                               |                                                                                                                                |              | 32,366  |            |   |              | 23,176   |              |   |              | 28,952  |           |  |  | 27,978  |           |   |  | 1,565   |          
|Stock-based compensation                                                                        |                                                                                                                                |              | 30,572  |            |   |              | 1,442    |              |   |              |        |           |  |  |        |           |   |  |        |          
|Special charges                                                                                 |                                                                                                                                |              | 47,168  |            |   |              | 63,187   |              |   |              | 21,096  |           |  |  | 84,505  |           |   |  | 234,285 |          
|Impairment of intangible assets                                                                 |                                                                                                                                |              | 104,147 |            |   |              | 14,104   |              |   |              | 12,318  |           |  |  |        |           |   |  |        |          
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Income (loss) from operations                                                                                                  |              |         | (531,290   | ) |              |          | (176,335     | ) |              |         | 54,558    |  |  |         | (61,775   | ) |  |         | (88,101   | )
|Interest income, net                                                                            |                                                                                                                                |              | 17,672  |            |   |              | 29,981   |              |   |              | 18,614  |           |  |  | 15,203  |           |   |  | 18,619  |          
|Other income (expense), net                                                                     |                                                                                                                                |              | (41,209 | )          |   |              | (557,355 | )            |   |              | 746,282 |           |  |  | 92      |           |   |  | (25     | )        
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Income (loss) from continuing operations
    before income taxes and cumulative effect of a change in
    accounting principle |              |         | (554,827   | ) |              |          | (703,709     | ) |              |         | 819,454   |  |  |         | (46,480   | ) |  |         | (69,507   | )
|Income tax expense (benefit)                                                                    |                                                                                                                                |              | 60,242  |            |   |              | (98,187  | )            |   |              | 317,185 |           |  |  | (2,659  | )         |   |  | (35,459 | )        
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Income (loss) from continuing operations
    before cumulative effect of a change in accounting principle                      |              | $       | (615,069   | ) |              | $        | (605,522     | ) |              | $       | 502,269   |  |  | $       | (43,821   | ) |  | $       | (34,048   | )
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|Income (loss) from continuing operations
    available to common shareholders per common share: |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Basic                                                                                                                          |              | $       | (3.24      | ) |              | $        | (3.40        | ) |              | $       | 2.83      |  |  | $       | (0.26     | ) |  | $       | (0.22     | )
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          
|                                                                                                | Diluted                                                                                                                        |              | $       | (3.24      | ) |              | $        | (3.40        | ) |              | $       | 2.66      |  |  | $       | (0.26     | ) |  | $       | (0.22     | )
|                                                                                                |                                                                                                                                |              |         |            |   |              |          |              |   |              |         |           |  |  |         |           |   |  |         |          

|                                       |  |              |         |            |  |              |           |              |  |              |           |  |  |   |           |  |  |   |           | 
|-------------------------------------- |  | ------------ | ------- | ---------- |  | ------------ | --------- | ------------ |  | ------------ | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                       |  | December 29, |         | March 3,   |  | February 29, |           | February 28, |  | February 28,
|                                       |  | 2001         |         | 2001       |  | 2000         |           | 1999(1)      |  | 1998(1)     
|                                       |  |              |         |            |  |              |           |              |  |             
|(In thousands)                         |  |              |         | (Restated) |  |              |           |              |  |             
|Consolidated balance sheet data:       |  |              |         |            |  |              |           |              |  |              |           |  |  |   |           |  |  |   |           | 
|Working capital                        |  | $            | 134,324 |            |  | $            | 848,179   |              |  | $            | 469,364   |  |  | $ | 365,669   |  |  | $ | 568,586   | 
|Total assets                           |  | $            | 716,722 |            |  | $            | 1,733,514 |              |  | $            | 3,121,705 |  |  | $ | 1,517,778 |  |  | $ | 1,644,283 | 
|Redeemable convertible preferred stock |  | $            | 61,789  |            |  | $            | 109,589   |              |  | $            |          |  |  | $ |          |  |  | $ |          | 
|Stockholders equity                   |  | $            | 329,704 |            |  | $            | 1,214,319 |              |  | $            | 2,147,439 |  |  | $ | 1,058,932 |  |  | $ | 1,050,385 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restated. See Note 2 to the consolidated
    financial statements included in Item 8 of this transition
    report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Results for the fiscal years ended
    February 28, 1998 and 1999 have been restated to
    appropriately reflect the deferral from fiscal 1998 to fiscal
    1999 of $35.0 million of revenue associated with products sold
    to a channel partner. This deferral reduced fiscal 1998 income
    from continuing operations before cumulative effect of a change
    in accounting principle by $15.5 million, or $0.10 per share,
    and increased fiscal 1999 earnings by a similar amount.

15



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

You should read the following discussion in
conjunction with the section below titled Cautionary
Statements, our Consolidated Financial Statements and
related Notes, and other financial information appearing
elsewhere in this transition report on Form 10-K. Our
current fiscal period consists of the ten-month transition
period from March 4, 2001 through December 29, 2001
which we refer to as transition 2001 throughout this
Item 7. For fiscal years prior to this period, our fiscal
year ended on the Saturday closest to last calendar day of
February in each year. We refer to the twelve-month periods
ended March 3, 2001 and February 29, 2000 as
fiscal 2001 and fiscal 2000,
respectively throughout this Item 7.

Overview

We design, develop, market and support
comprehensive networking solutions focusing on the network
security, availability and mobility needs of enterprises. Our
solutions empower customers to use their internal networks and
the Internet to facilitate the exchange of information, increase
productivity and reduce operating costs. Using our products,
customers make information, applications and services readily
available and customized to the needs of their employees,
customers, suppliers, business partners and other network users.
Our significant installed base of customers consists of
commercial enterprises; governmental entities; healthcare,
educational, financial and non-profit institutions; and other
organizations.

In February 2000, Cabletron Systems, Inc.
(Cabletron), as part of an effort to improve
strategic focus and better capitalize on market opportunities,
transferred substantially all of its operating assets and
liabilities to four operating subsidiaries as part of a plan to
make each of the subsidiaries independent. These subsidiaries
were Enterasys Networks, Inc. (Enterasys
Subsidiary), Riverstone Networks, Inc.
(Riverstone), Aprisma Management Technologies, Inc.
(Aprisma), and GlobalNetwork Technology
Services, Inc. (GNTS). Each of these subsidiaries
had its own management team and board of directors. In
July 2001, the operations of GNTS were discontinued through
the acquisition of a portion of GNTS by a third party, the
assumption of certain contracts and employees of GNTS by
Enterasys Subsidiary and Aprisma, and the discontinuance of the
remaining business operations of GNTS. Following the initial
public offering of a portion of Riverstones common stock
in February 2001, Cabletron distributed its holdings of
Riverstones common stock to Cabletrons stockholders
in a spin-off transaction on August 6, 2001. Also on
August 6, 2001, Enterasys Subsidiary was merged with and
into Cabletron and the name of the surviving corporation was
changed to Enterasys Networks, Inc. On
August 9, 2002, we completed the sale of Aprisma to a third
party.

SEC Investigation and Internal Review of
Accounting Practices

On January 31, 2002, we discovered that a
previously recognized $4.0 million sale in our Asia Pacific
region did not qualify for revenue recognition during the period
in which we had originally reported the revenue. Also on
January 31, 2002, we learned that the SEC had opened a
formal order of investigation into our and our affiliates
financial accounting and reporting practices. In response to
these developments, our Board of Directors formed a Special
Committee to conduct an internal review into our financial
accounting and reporting practices for the fiscal year ended
March 3, 2001 and the ten-month transition period ended
December 29, 2001. The Special Committee appointed the law
firm of Ropes & Gray to conduct the internal review, and
Ropes & Gray hired the forensic accounting group of Deloitte
& Touche LLP to assist with the internal review. We have
incurred costs of approximately $16.2 million related to
the internal review through October 2002. The Special
Committee has completed the internal review and we have restated
our financial statements for the fiscal year ended March 3,
2001, the fiscal quarters within that fiscal year, and the first
three fiscal quarters within the ten-month transition period
ended December 29, 2001 to reflect the results of the
internal review.

Since the identification of the matters leading
to the internal review, and in some cases in response to issues
identified in the course of the internal review, we have taken a
variety of remedial and other actions intended to improve our
policies, procedures and controls as discussed below, and as
discussed in more detail in Item 14 
Controls and Procedures.

16



---



##### Table of Contents



We hired new management in most senior finance
and operations capacities and bolstered our finance staff in
several key areas. We have also added an internal audit director
who reports directly to the Audit Committee of our Board of
Directors as well as to our Chief Financial Officer. We are in
the process of training our employees on improved financial and
accounting policies, procedures and controls. For example, we
have revised our revenue recognition policy, and have
distributed it to and discussed it with our sales and finance
personnel. We are also in the process of updating our code of
conduct, which we will distribute and emphasize to all
employees. We are also developing a formal acknowledgement
procedure whereby employees will be periodically asked to
certify their familiarity and compliance with our code of
conduct and various other policies and procedures relevant to
them.

The individuals identified as having participated
in, or who reasonably should have known about conduct contrary
to our internal policies, have left our organization, have been
terminated or have otherwise been disciplined. We have
established and publicized among our employees a zero
tolerance policy for employees who engage in unethical or
inappropriate business conduct. We have met with managers
throughout our organization to emphasize this zero tolerance
policy. To assist us in identifying any violations in the
future, we have established and publicized to all personnel an
employee help line, which employees are able to use for the
confidential, anonymous submission of concerns regarding
questionable accounting or auditing matters.

The principal adjustments to restate the
financial statements for the fiscal year ended March 3,
2001, the fiscal quarters within that fiscal year, and the first
three quarters within the ten-month transition period ended
December 29, 2001 are discussed in Notes 2 and 30
to our Consolidated Financial Statements included in Item 8
to this transition report on Form 10-K.

Fiscal Year Changes.In September 2001, we amended our by-laws to change our
fiscal year-end from the Saturday closest to the last day in
February of each year to the Saturday closest to the last day in
December of each year. This transition report on Form 10-K
relates to the ten-month transition period ended
December 29, 2001 and our results of operations for this
period only include the ten-month period from March 4, 2001
to December 29, 2001. Fiscal 2000 and 2001 each include
twelve-months of operations.

We have not included a comparable ten-month
period for the period March 1, 2000 to December 30,
2000 because it was impracticable to do so given certain
inherent limitations in our interim monthly closing process and
the complexity of the restatement of our fiscal 2001 financial
statements.

Segment Reporting.As a result of our decision to discontinue or dispose of the
operations of Riverstone, GNTS and Aprisma, during transition
2001 we operated our business as two segments. Our
Enterasys Segment is in the business of developing,
selling and servicing standards-based networking solutions using
a switched Ethernet platform. We also include maintenance
services relating both to our standards-based and to our
non-standards-based products in our Enterasys Segment. We
currently derive all of our revenue from these products and
related services. In prior years, we also developed and sold
non-standards-based solutions. Over time, these solutions proved
unsuitable for the evolving networking requirements of
enterprise customers. As a result, the focus of our business
shifted to our switched Ethernet platform products. Beginning in
fiscal 2000, we started reducing our marketing and research and
development efforts relating to our non-standards-based products
and sold the remaining assets related to these products in
September 2000. Our Other Segment includes the
revenue and cost of revenue relating to non-standards-based
products. We do not anticipate that our Other Segment will
generate any future revenue or expense.

Application of Critical Accounting
Policies

Our significant accounting policies are described
in Note 3 to the consolidated financial statements included
in Item 8 of this transition report on Form 10-K. The
preparation of our consolidated financial statements in
accordance with generally accepted accounting principles
requires estimates and judgments that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
revenue and

17



---



##### Table of Contents



expenses during the period reported. By their
nature, these estimates and judgments are subject to an inherent
degree of uncertainty. We base estimates and judgments on
historical experience, market and industry trends, and other
factors that we believe are reasonable under the circumstances.
Actual results may differ materially from these estimates. We
believe the following critical accounting policies impact our
judgments and estimates used in the preparation of our
consolidated financial statements.


Revenue Recognition.Our revenue is comprised of product revenue, which includes
revenue from sales of our switches and routers, other network
equipment and software, and services revenue, which includes
revenue from maintenance, installation and system integration
services. Revenue from service obligations under maintenance
contracts is deferred and recognized on a straight-line basis
over the contractual period, which is typically 12 months.
We generally recognize product revenue from our end-user and
reseller customers at the time of shipment, provided that
persuasive evidence of an arrangement exists, the price is fixed
or determinable and collectibility of sales proceeds is
reasonably assured. When significant obligations remain after
products are delivered, such as integration or customer
acceptance, revenue and related costs are deferred until such
obligations are fulfilled.

We provide an allowance for sales returns based
on historical returns, return policies and contractual product
return rights granted to our customers. The allowance has been
reflected as a reduction to revenue in the consolidated
statement of operations. If the data used by us to calculate the
estimated sales returns and allowances does not properly reflect
future returns, these estimates would have to be modified, thus
impacting revenue recognized in future periods. Beginning in
September 2001, we determined that we could no longer estimate
the amount of future product returns from certain stocking
distributors located in the United States and Europe. We now
recognize revenue from these distributors when they ship our
product to their customers. Beginning in fiscal 2001, we began
recording revenue from certain distributors and resellers
located in Asia Pacific and Latin America on a cash basis due to
existing practices related to distribution/ reseller
arrangements.

In the past we sold products and services to
customers in exchange for minority investments, consisting of
debt or equity securities, accounted for under the cost method
of accounting. In some instances, we issued product credits, or
the right to purchase products which, when used, were exchanged
for debt or equity securities by the investee company, and in
other cases, we invested cash that was then used by the investee
company to purchase products from us. The amount of revenue that
we recognized in connection with minority investments was based
upon the nature of the transaction and fair value of the debt or
equity instrument received.

Allowance for Doubtful
Accounts.We estimate the
collectibility of our accounts receivable and the amount of bad
debts that may be incurred in the future. We analyze specific
customer accounts, historical experience, customer
concentrations, credit ratings and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts.

Reserve for Excess and Obsolete
Inventory.Inventory purchases and
commitments are based upon future demand forecasts. Reserves for
excess and obsolete inventory are established to account for the
differences between our forecasted demand and the amount of
purchased and committed inventory. We have experienced
significant variances between the amount of inventory purchased
and contractually committed to and our demand forecasts,
resulting in material excess and obsolete inventory charges.

Valuation of Long-lived
Assets.Long-lived assets are
comprised of intangible assets and property, plant and
equipment. We assess the impairment of identifiable intangibles,
fixed assets and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. When we determine that the carrying value of
intangibles, fixed assets and related goodwill may not be
recoverable, we measure any impairment by the amount by which
the carrying value of the long-lived asset or goodwill exceeds
the related fair value. Estimated fair-value is generally based
on projected discounted cash flows using a discount rate
determined by management to be commensurate with the risk
inherent in the underlying asset in question. In certain cases,
we obtain an independent valuation of intangible assets to
support the amount of our proposed impairment charge.

18



---



##### Table of Contents



Valuation of
Investments.Investments are comprised
of privately held corporate debt and equity securities and in
limited cases, common stock in thinly traded publicly held
companies. We review these investments for potential impairments
by monitoring significant declines in the investees stock
price in new rounds of financing, market capitalization relative
to book value, bankruptcy or insolvency and deterioration in the
financial condition or results of operations.

Restructuring
Reserves.We have recorded
restructuring charges in connection with our plans to reduce the
cost structure of our business. These restructuring charges,
which reflect managements commitment to a termination or
exit plan that will be completed within twelve months, are based
on estimates of the expected costs associated with fixed asset
valuation allowances, severance benefits and facility exit
costs. If the actual cost incurred exceeds the estimated cost,
an additional charge to earnings will result. If the actual cost
is less than the estimated cost, a reduction to special charges
will be recognized.

Deferred Tax Valuation
Allowance.We estimate our income
taxes in each of the jurisdictions in which we operate. This
process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenue, for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our
consolidated balance sheet. We then assess the likelihood that
our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely,
we establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we
increase or decrease our income tax provision in our statement
of operations. If any of our estimates of our prior period
taxable income or loss prove to be incorrect, material
differences could impact the amount and timing of income tax
benefits or payments for any period.

Summary of Critical Estimates Included in Our
Consolidated Results of Operations.The following table summarizes the
impact on our results of operations arising from our critical
accounting estimates:

|                                            |       |                 |       |             |  |             |       |       |  |   |      |      | 
|------------------------------------------- | ----- | --------------- | ----- | ----------- |  | ----------- | ----- | ----- |  | - | ---- | ---- | 
|                                            |       | Transition 2001 |       | Fiscal 2001 |  | Fiscal 2000
|                                            |       |                 |       |             |  |            
|                                            |       |                
|                                            |       | (Restated)     
|                                            |       |                
|                                            |       | (In millions)  
|Provision for doubtful accounts             |       | $               | 12.5  |             |  | $           | 17.8  |       |  | $ | 14.4 |     
|Provision for excess and obsolete inventory |       |                 | 72.9  |             |  |             | 44.7  |       |  |   | 10.2 |     
|Impairment of intangible assets             |       |                 | 104.1 |             |  |             | 14.1  |       |  |   | 12.3 |     
|Impairment of investments                   |       |                 | 65.9  |             |  |             | 17.2  |       |  |   |     |     
|Restructuring charges                       |       |                 | 22.7  |             |  |             | 24.3  |       |  |   | 21.1 |     
|Deferred tax asset valuation provision      |       |                 | 260.0 |             |  |             | 173.2 |       |  |   | 3.7  |     
|                                            |       |                 |       |             |  |             |       |       |  |   |      |     
|                                            | Total |                 | $     | 538.1       |  |             | $     | 291.3 |  |   | $    | 61.7 | 
|                                            |       |                 |       |             |  |             |       |       |  |   |      |     

19



---



##### Table of Contents



Results of Operations

The table below sets forth the principal line
items from our consolidated statement of operations, each
expressed as percentages of net revenue for transition 2001,
fiscal 2001 and fiscal 2000.

|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |      |  
|------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------ | --------------- | ------ | ----------- | - | ----------- | ----- | ----- | - |  | ----- | ---- | -
|                                                                               |                                                                                                                                | Transition 2001 |        | Fiscal 2001 |   | Fiscal 2000
|                                                                               |                                                                                                                                |                 |        |             |   |            
|                                                                               |                                                                                                                                |                
|                                                                               |                                                                                                                                | (Restated)     
|Net revenue                                                                    |                                                                                                                                |                 | 100.0  | %           |   |             | 100.0 | %     |   |  | 100.0 | %   
|Cost of revenue                                                                |                                                                                                                                |                 | 91.1   |             |   |             | 57.0  |       |   |  | 56.1  |     
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Gross margin                                                                                                                   |                 |        | 8.9         |   |             |       | 43.0  |   |  |       | 43.9 |  
|Research and development                                                       |                                                                                                                                |                 | 18.4   |             |   |             | 10.4  |       |   |  | 9.7   |     
|Selling, general and administrative                                            |                                                                                                                                |                 | 66.8   |             |   |             | 42.1  |       |   |  | 25.5  |     
|Amortization of intangible assets                                              |                                                                                                                                |                 | 7.8    |             |   |             | 2.9   |       |   |  | 2.1   |     
|Stock-based compensation                                                       |                                                                                                                                |                 | 7.4    |             |   |             | 0.2   |       |   |  |      |     
|Special charges                                                                |                                                                                                                                |                 | 11.4   |             |   |             | 8.1   |       |   |  | 1.6   |     
|Impairment of intangible assets                                                |                                                                                                                                |                 | 25.1   |             |   |             | 1.8   |       |   |  | 1.0   |     
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Income (loss) from operations                                                                                                  |                 |        | (128.0      | ) |             |       | (22.5 | ) |  |       | 4.0  |  
|Interest income, net                                                           |                                                                                                                                |                 | 4.3    |             |   |             | 3.8   |       |   |  | 1.4   |     
|Other income (expense), net                                                    |                                                                                                                                |                 | (9.9   | )           |   |             | (71.1 | )     |   |  | 55.1  |     
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Income (loss) from continuing operations
    before income taxes and cumulative effect of a change in
    accounting principle |                 |        | (133.6      | ) |             |       | (89.8 | ) |  |       | 60.5 |  
|Income tax expense (benefit)                                                   |                                                                                                                                |                 | 14.5   |             |   |             | (12.5 | )     |   |  | 23.4  |     
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Income (loss) from continuing operations
    before cumulative effect of a change in accounting principle                      |                 |        | (148.1      | ) |             |       | (77.3 | ) |  |       | 37.1 |  
|Discontinued operations:                                                       |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Operating loss (net of tax benefit)                                                                                            |                 |        | (14.2       | ) |             |       | (9.7  | ) |  |       | (2.8 | )
|                                                                               | Loss on disposal                                                                                                               |                 |        | (10.3       | ) |             |       |      |   |  |       |     |  
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|                                                                               | Loss from discontinued operations                                                                                              |                 |        | (24.5       | ) |             |       | (9.7  | ) |  |       | (2.8 | )
|Cumulative effect of a change in accounting
    principle (net of tax expense) |                                                                                                                                |                 | 3.0    |             |   |             |      |       |   |  |      |     
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     
|Net income (loss)                                                              |                                                                                                                                |                 | (169.6 | )%          |   |             | (87.0 | )%    |   |  | 34.3  | %   
|                                                                               |                                                                                                                                |                 |        |             |   |             |       |       |   |  |       |     

Comparison of Transition 2001 with Fiscal
2001

As a result of the change in our fiscal year
in September 2001, transition 2001 consists only of ten months
while fiscal 2001 consists of twelve months. Accordingly,
transition 2001 and fiscal 2001 results of operations and cash
flows are not comparable. Separately, as noted above, fiscal
2001 and 2000 have been adjusted to reflect the reclassification
of Riverstone, Aprisma and GNTS as discontinued operations.
Fiscal 2001 has also been restated for the adjustments described
above in this Item 7 under the heading SEC
Investigation and Internal Review of Accounting Practices
and in more detail in Notes 2 and 30 to our consolidated
financial statements included below in Item 8. The
discussion contained in this Item 7 has updated for the
restatement. The amounts shown for cost of revenue, research and
development expense, and selling, general and administrative
expense below exclude stock-based compensation, which has been
reported on a separate line in the consolidated statements of
operations included in Item 8.

20



---



##### Table of Contents





| |                         
| | ------------------------
| | Transition 2001 Overview

We incurred a significant net loss in transition
2001 due primarily to the following factors:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significantly lower sales volume;                                                                                                                    
|
| |  | reduced gross margins due to discounting and
    other incentive programs associated with our increased use of
    distributors and channel partners;
|
| |  | our cost structure, which was not aligned with
    our revenue base;                                                                                 
|
| |  | costs associated with our separation from our
    former operating subsidiaries;                                                                     
|
| |  | significant charges for asset impairments, excess
    and obsolete inventory, doubtful accounts and deferred taxes;                                  
|
| |  | costs related to our investment activities; and                                                                                                      
|
| |  | losses associated with discontinued operations.                                                                                                      

A more detailed discussion of the individual
components of our consolidated results of operations follows.



| |            
| | -----------
| | Net Revenue

We manage our sales and marketing based on four
geographic regions: the United States and Canada (North
America); Europe, the Middle East and Africa
(EMEA); Asia and Australia (Asia
Pacific); and South America, Mexico and the Caribbean
(Latin America). Net revenue includes product and
services revenue for each region and is summarized in the
following table:

|                      |                   |                 |       |             |  |            |      |         |   |   |       |       |  |  |      |       |  
|--------------------- | ----------------- | --------------- | ----- | ----------- |  | ---------- | ---- | ------- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                      |                   |                 |       |            
|                      |                   | Transition 2001 |       | Fiscal 2001
|                      |                   |                 |       |            
|                      |                   | Revenue         |       | Percent     |  | Revenue    |      | Percent
|                      |                   |                 |       |             |  |            |      |        
|(Amounts in millions) |                   |                 |       |             |  |           
|                      |                   |                 |       |             |  | (Restated)
|North America         |                   | $               | 209.0 |             |  |            | 50.3 | %       |   | $ | 415.1 |       |  |  | 53.0 | %    
|EMEA                  |                   |                 | 139.5 |             |  |            | 33.6 |         |   |   | 214.6 |       |  |  | 27.4 |      
|Asia Pacific          |                   |                 | 44.9  |             |  |            | 10.8 |         |   |   | 87.4  |       |  |  | 11.1 |      
|Latin America         |                   |                 | 21.9  |             |  |            | 5.3  |         |   |   | 66.6  |       |  |  | 8.5  |      
|                      |                   |                 |       |             |  |            |      |         |   |   |       |       |  |  |      |      
|                      | Total net revenue |                 | $     | 415.3       |  |            |      | 100.0   | % |   | $     | 783.7 |  |  |      | 100.0 | %
|                      |                   |                 |       |             |  |            |      |         |   |   |       |       |  |  |      |      

Our segment revenue is summarized in the
following table:

|                  |                   |                 |       |             |  |   |       |       | 
|----------------- | ----------------- | --------------- | ----- | ----------- |  | - | ----- | ----- | 
|                  |                   | Transition 2001 |       | Fiscal 2001
|                  |                   |                 |       |            
|(In millions)     |                   |                 |       | (Restated) 
|Enterasys segment |                   | $               | 415.3 |             |  | $ | 714.0 |      
|Other segment     |                   |                 |      |             |  |   | 69.7  |      
|                  |                   |                 |       |             |  |   |       |      
|                  | Total net revenue |                 | $     | 415.3       |  |   | $     | 783.7 | 
|                  |                   |                 |       |             |  |   |       |      

Net revenue declined by $368.4 million, or
47%, from $783.7 million in fiscal 2001 to
$415.3 million in transition 2001. Services revenue
decreased by $38.3 million, or 22%, from
$174.9 million in fiscal 2001 to $136.6 million in
transition 2001. Transition 2001 included only ten months of
operations compared with twelve months in fiscal 2001, which
accounted for approximately $11 million of the decline
based on average monthly services revenue for transition 2001.
Lower product sales, which typically include associated
maintenance, is the principal reason for the remaining decrease.

21



---



##### Table of Contents



Product revenue decreased by $330.2 million,
or 54%, from $608.8 million in fiscal 2001 to
$278.7 million in transition 2001 due primarily to the
following factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transition 2001 included only ten months of
    operations compared with twelve months in fiscal 2001, due to
    the change in our fiscal year. Based on average monthly product
    revenue for transition 2001, approximately $125 million of
    the decrease may be attributable to the shorter fiscal period.                                                                                                                                                                                                                                                                   
|
| |  | We eliminated non-standards-based products from
    our product portfolio, resulting in a decline of approximately
    $70 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | As a result of a change in accounting made in the
    third quarter of transition 2001, we began recognizing revenue
    when product was shipped by North American and EMEA distributors
    to their customers. Approximately $69 million of
    inventory held by these distributors at December 29, 2001
    was not recorded as revenue in transition 2001 as the products
    had not yet been shipped to their customers. In contrast, in
    fiscal 2001 we recognized revenue from these distributors when
    we shipped product to them, subject to provisions for returns.
|
| |  | Increased use of and higher levels of pricing
    incentives associated with distributors and other channel
    partners.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The remaining decline in revenue was attributable
    to a variety of factors, including an industry-wide slowdown;
    and lengthening sales cycles, particularly in the fourth quarter
    of transition 2001.                                                                                                                                                                                                                                                                                                                                                                      

During the first nine months of fiscal 2002, the
market for telecommunications and networking equipment and
solutions was challenging. In addition, we faced some unique
challenges given the lack of availability of our detailed
current financial information. Our revenue declined from $143.7
million in the fourth quarter of transition 2001 to an estimated
$120 million in the first quarter of fiscal 2002. We
estimate that revenue in each of the second and third quarters
of fiscal 2002 was stable compared with the first quarter of
fiscal 2002. We were favorably impacted by the stability of our
services revenue during these periods. We believe that our
future revenue will generally fluctuate with overall changes in
the markets that we currently serve. Our future revenue will be
affected by the nature and timing of new product introductions
by our competitors and us, as well as other competitive factors.



| |             
| | ------------
| | Gross Margin

Total gross margin declined from
$337.2 million, or 43% of revenue, in fiscal 2001 to
$36.8 million, or 9% of revenue, in transition 2001.
Service gross margin declined by $29.9 million from
$118.9 million in fiscal 2001 to $89.0 million in
transition year 2001, due primarily to the shorter transition
year. Service gross margin as a percent of service revenue
remained relatively constant.

Product gross margins declined from
$218.3 million, or 36% of product revenue, in fiscal 2001,
to a negative $52.3 million, or negative 19% of product
revenue, in transition 2001, due primarily to the following
factors:



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $330.2 million decline in product revenue,
    which accounts for approximately $118 million of the margin
    decrease, assuming constant fiscal 2001 margin.                                                                                                                                                          
|
| |  | An increase in excess and obsolete inventory
    charges of $28.2 million, due primarily to lower than forecasted
    sales volume. In addition, we incurred approximately
    $3 million in penalties to our contract manufacturers
    related to reducing production levels below minimum contractual
    requirements.
|
| |  | An increase in business development funding to
    distributors and channel partners, including funding for
    training, cooperative advertising and other special programs, of
    approximately $20 million.                                                                                                           
|
| |  | An increase in the use of stocking distributors
    and other indirect channel partners, the sales to which
    inherently carry lower margins than direct sales. In addition,
    we granted significant pricing concessions to these partners
    during the transition year.                                           

22



---



##### Table of Contents





| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | An increase in the levels of product rotations
    and returns, including associated handling and evaluation costs.
|
| |  | Our cost structure, which was designed to support
    a higher revenue base than we achieved.                      

During the first nine months of fiscal 2002 we
have sought to mitigate the factors contributing to depressed
product gross margins in transition 2001. Specifically, we have
reduced the level of business development funding and pricing
concessions granted to distributors and channel partners, taken
actions to better align our cost structure with our present
sales volume, and focused on lowering standard product costs. We
are restructuring our supply chain management organization, with
the goal of reducing excess and obsolete inventory costs and
improving the efficiency of sourcing and delivery of product to
our customers. We anticipate these initiatives will improve
gross margin to historical ranges in the first three fiscal
quarters of fiscal 2002.

Operating
Expenses

Research and development expenses declined by
$5.2 million from $81.7 million in fiscal 2001 to
$76.5 million in transition 2001 due primarily to the fact
that transition 2001 included only ten months of operations
compared with twelve months in fiscal 2001, offset by increased
spending in transition 2001. Based on average monthly spending
during transition 2001, research and development spending for
the full year would have exceeded fiscal 2001 by approximately
$10 million, or an increase of 12.3%, due primarily to
sustained investments in new product development initiatives.
Research and development spending in fiscal 2002 is expected to
remain consistent with spending levels during transition 2001.

Selling, general and administrative expenses
(SG&A) declined by $52.6 million from
$329.9 million in fiscal 2001 to $277.3 million in
transition 2001, due primarily to the fact that transition 2001
included only ten months of operations compared with twelve
months in fiscal 2001 and headcount reductions implemented in
connection with the Cabletron transformation, offset by
$17.4 million of net expense associated with lease
guarantee payments. In 2002, we implemented and expect to
continue to implement cost improvement initiatives to better
align our cost structure with our revenue base. However, we
expect SG&A expenses will be adversely impacted by the
increase in professional services fees incurred in connection
with the SEC investigation, our internal review and associated
stockholder litigation.

Amortization of intangibles increased by
$9.2 million from $23.2 million in fiscal 2001 to
$32.4 million in transition 2001, due primarily to the fact
that transition 2001 included ten months of Indus River Networks
intangible assets amortization as compared with one month of
such amortization in fiscal 2001. As a result of the impairment
charge relating to the acquired goodwill of Indus River Networks
recorded in the fourth quarter of transition 2001 and
implementation of new accounting rules concerning acquired
goodwill in 2002, amortization of intangibles is expected to
decline significantly in 2002.

Stock-based compensation in transition 2001 was
$30.6 million and related to the granting of options to
purchase shares of the Enterasys Subsidiary primarily to
employees of Cabletron of $1.9 million and the acceleration
of vesting of previously granted options to purchase our common
stock to our employees of $24.5 million. We recorded
stock-based compensation in transition 2001 and fiscal 2001 of
$4.2 million and $1.4 million, respectively, related
to stock and stock options issued in connection with the
acquisition of Network Security Wizards and Indus River Networks
that were contingent upon continued employment of key employees.

23



---



##### Table of Contents



Special charges consisted of the following:

|                                                               |                       |                 |      |             |  |   |      |      | 
|-------------------------------------------------------------- | --------------------- | --------------- | ---- | ----------- |  | - | ---- | ---- | 
|                                                               |                       | Transition 2001 |      | Fiscal 2001
|                                                               |                       |                 |      |            
|(In millions)                                                  |                       |                 |      | (restated) 
|In-process research and development related to
    acquisition |                       | $               |     |             |  | $ | 25.6 |     
|Transformation charges                                         |                       |                 | 24.5 |             |  |   | 13.3 |     
|Restructuring charges                                          |                       |                 | 22.7 |             |  |   | 24.3 |     
|                                                               |                       |                 |      |             |  |   |      |     
|                                                               | Total special charges |                 | $    | 47.2        |  |   | $    | 63.2 | 
|                                                               |                       |                 |      |             |  |   |      |     

In the second quarter of transition 2001, we
recorded special charges of $24.5 million related to the
transformation of Cabletrons business. We incurred
$13.3 million of similar expense in fiscal 2001. The
transformation-related charges include investment banking, legal
and accounting fees related to the establishment of the
Enterasys Subsidiary, Riverstone, Aprisma and GNTS as
independent, stand-alone entities.

Also during the second quarter of transition
2001, we recorded restructuring charges of $10.3 million to
reduce our expense structure. These charges reflected the
write-down of a vacant office building in Rochester, NH to its
estimated fair value of $1.5 million, exit costs associated
with the planned closure of eight sales offices worldwide and
executive severance costs. The exit costs that we incurred
related primarily to long-term lease commitments which will be
paid out over several years. In the fourth quarter of transition
2001, we recorded a restructuring charge of $12.4 million
for employee severance costs associated with the reduction of
approximately 400 individuals from our 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
organization.

In fiscal 2001, we recorded net restructuring
charges of $24.3 million. These charges reflected the
expected sale of an office building in Rochester, NH, exit costs
associated with the planned closure of 20 sales offices
worldwide, the write-off of certain assets that were not
required subsequent to the Cabletron transformation and the
planned reduction of approximately 570 individuals from our
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 organization. The exit costs that we incurred related
primarily to long-term lease commitments.

On January 31, 2001, we acquired Indus River
Networks, a designer and marketer of virtual private networks
for enterprise-class customers. In connection with the
acquisition, approximately $25.6 million of the purchase
price was allocated to in-process research development and
recorded in special charges for fiscal 2001.

Impairment of intangible assets reflects a charge
of $104.1 million in the fourth quarter of transition 2001
relating to goodwill recorded in connection with our acquisition
of Indus River Networks. This impairment was primarily due to
the complex, proprietary nature of the Indus River VPN
architecture, which had to be substantially redesigned in order
to conform with emerging industry standards and market
expectations; the introduction of new, low cost VPN products and
technologies by a leading provider of network security products
who captured a market leadership position in 2001; and
abandonment of our development efforts in conjunction with a
significant reduction in the acquired workforce in the fourth
quarter of transition 2001. These factors led to significantly
lower projections for future sales of products using the Indus
River VPN architecture.



| |                     
| | --------------------
| | Loss from Operations

Loss from operations increased from
$176.3 million in fiscal 2001 to $531.3 million in
transition 2001 due to the factors discussed above. Loss from
operations in transition 2001 included several significant
costs, including the Indus River impairment, excess and obsolete
inventory charges, stock-based compensation expense, Cabletron
transformation costs, and restructuring charges. While we may
incur some of these costs in fiscal 2002, we expect that they
will be significantly lower than in transition 2001.

24



---



##### Table of Contents



In addition, in fiscal 2002 we implemented cost
reduction programs, reduced the level of pricing incentives and
market development funding granted to our distributors and
channel partners, revised sales force compensation programs,
improved inventory management procedures and controls, developed
additional relationships with value-added resellers and systems
integrators to increase sales and market coverage, and adopted
other initiatives designed to reduce our loss from operations.
However, we expect to incur significant operating losses in 2002
due to continued weakness in the markets that we serve, expenses
associated with initiatives to align our cost structure with our
revenue base, and costs associated with the SEC investigation
and internal review. We expect our fiscal 2002 operating losses
will be substantially lower than our transition 2001 operating
losses.




| |                
| | ---------------
| | Interest Income

Interest income declined from $30.0 million
in fiscal 2001 to $17.7 million in transition 2001 due to
lower cash, cash equivalents and marketable securities balances
and lower interest rates. Interest income is expected to further
decline in fiscal 2002 due primarily to lower average cash
balances and lower interest rates.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

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

|                                                                                                  |                                                          |                 |       |             |   |   |        |        |  
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------- | ----- | ----------- | - | - | ------ | ------ | -
|                                                                                                  |                                                          | Transition 2001 |       | Fiscal 2001
|                                                                                                  |                                                          |                 |       |            
|(In millions)                                                                                     |                                                          |                 |       | (Restated) 
|Impairment of investments                                                                         |                                                          | $               | (65.9 | )           |   | $ | (17.2  | )     
|Loss on exchange of product for investments                                                       |                                                          |                 | (17.1 | )           |   |   | (13.0  | )     
|Transactions related to Flowpoint and Efficient:                                                  |                                                          |                 |       |             |   |   |        |       
|                                                                                                  | Recognition of deferred gain on Efficient
    investment |                 |       | 46.8        |   |   |        | 30.4   |  
|                                                                                                  | Other than temporary decline of Efficient
    investment |                 |       |            |   |   |        | (376.5 | )
|Other than temporary decline in available for
    sale securities, excluding Efficient investment |                                                          |                 | (1.7  | )           |   |   | (18.1  | )     
|Loss on sale of DNPG division                                                                     |                                                          |                 |      |             |   |   | (143.1 | )     
|Write-down of note receivable                                                                     |                                                          |                 | (6.1  | )           |   |   |       |       
|Unrealized gain on Riverstone stock derivative                                                    |                                                          |                 | 4.0   |             |   |   |       |       
|Net gain (loss) on sale of available for
    sale securities                                      |                                                          |                 | 4.1   |             |   |   | (21.4  | )     
|Other                                                                                             |                                                          |                 | (5.3  | )           |   |   | 1.5    |       
|                                                                                                  |                                                          |                 |       |             |   |   |        |       
|                                                                                                  | Total other income (expense)                             |                 | $     | (41.2       | ) |   | $      | (557.4 | )
|                                                                                                  |                                                          |                 |       |             |   |   |        |       

We recorded, in other income (expense), net
impairments of investments of $65.9 million for transition
2001, and $17.2 million for fiscal 2001. These impairments
of value are based on investee-specific events including
declines in the investees stock price in new rounds of
financing, market capitalization relative to book value,
deteriorating financial condition or results of operations and
bankruptcy or insolvency.

We entered into a number of transactions in which
we made an investment in a customer in exchange for cash and/or
our products and services. In certain of these transactions we
recorded the difference between the cost of the consideration
given and the fair value of the investment received as other
expense. These transactions resulted in other expense of $17.1
for transition 2001 and $13.0 million for fiscal 2001.

During fiscal 2001, we sold 1.0 million
shares of Efficient common stock for net proceeds of
approximately $46.6 million and recognized approximately
$30.4 million of deferred gain to other income. Also during
fiscal 2001, we wrote call options to sell 2.0 million
shares of Efficient at a weighted average price of $62.50 and
received premiums of approximately $14.0 million which were
recorded as a deferred gain. At March 3, 2001, we
determined that in accordance with SFAS No. 115, the
Efficient shares,

25



---



##### Table of Contents



classified as available-for-sale securities, had
experienced an other-than-temporary decline in value. We
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 other expense of $376.5 million during fiscal
2001.


During transition 2001, we sold 2.0 million
shares of Efficient common stock and tendered our remaining
8.5 million shares for proceeds of $242.7 million in
connection with a tender offer to acquire the outstanding shares
of Efficient common stock made by Siemens A.G. In connection
with these transactions, we recognized the remaining deferred
gain of $46.8 million to other income. Additionally, the
outstanding call options discussed above expired between
March 30, 2001 and December 4, 2001 and we recognized
the previously recorded deferred gain of $14.0 million, net
of the related transaction costs of $1.3 million as a
cumulative effect of a change in accounting principle during
transition 2001.

During fiscal 2001, we completed the sale of our
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 $143.1 million.



| |                             
| | ----------------------------
| | Income Tax Expense (Benefit)

We incurred income tax expense of
$60.2 million in transition 2001 due primarily to the
increase in the deferred tax asset valuation reserve of
$82.3 million, partially offset by a reduction in current
tax liabilities of $22.0 million. In addition, we did not
record any income tax benefit relating to losses incurred in the
period because expected income from operations and gains did not
materialize in transition 2001. In fiscal 2001, we recorded an
income tax benefit of $98.2 million which was a result of
the losses incurred in that period, partially offset by a
non-deductible in-process research and development charge of
$25.6 million and an increase in the deferred tax asset
valuation allowance of $157.4 million.

In January 2002, a tax law change was enacted
whereby the allowable period to carry back net operating losses
was increased from three to five years. As a result, we received
approximately $102 million of federal income tax refunds
relating to tax losses incurred in fiscal and transition 2001.
In addition, we have approximately $110 million of prior
period taxable income available to offset potential losses in
fiscal 2002, the use of which is expected to generate up to
approximately $30 million of federal income tax refunds in
2002.



| |                                      
| | -------------------------------------
| | Loss from Discontinued
    Operations

In transition 2001 we incurred $59.1 million
of operating losses from discontinued operations compared with
$76.3 million in fiscal 2001, principally as a result of
transition 2001 being two months shorter than fiscal 2001, and
the fact that Riverstone and GNTS were only a part of us for a
portion of transition 2001. In addition, we incurred a loss on
disposition in transition 2001 of $42.8 million relating to
the shutdown and sale of GNTS and the sale of Aprisma.

Comparison of Fiscal Year 2001 with Fiscal
Year 2000



| |            
| | -----------
| | Net Revenue

Net revenue declined from $1,355.0 million
in fiscal 2000 to $783.7 million in fiscal 2001 due
primarily to a $642.8 million decrease in sales of
non-standards-based-products. Offsetting this decrease,
Enterasys segment revenues increased 11% from
$642.5 million in fiscal 2000 to $714.0 million in
fiscal 2001 due to increased demand for our products and
increased product held by distributors at March 3, 2001
compared with February 29, 2000 as a result of our shift to
a more indirect sales model during the second half of fiscal
2001.

26



---



##### Table of Contents





| |             
| | ------------
| | Gross Margin

Gross margin decreased $257.8 million, or
43.3%, to $337.2 million in the fiscal 2001, compared with
$595.0 million in fiscal 2000 as a result of lower sales
volume. As a percentage of net revenue, gross margin declined
from 43.9% in fiscal 2000 to 43.0%, in fiscal 2001.



| |                   
| | ------------------
| | Operating Expenses

Research and development expenses decreased
$50.1 million, or 38%, to $81.7 million in fiscal
2001, compared with $131.9 million in fiscal 2000. The
decrease in research and development expenses was due to our
elimination of research and development projects associated with
non-standards-based products.

SG&A decreased $16.3 million, or 5%, to
$329.9 million in fiscal 2001, compared with
$346.2 million in the year ended February 29, 2000,
reflecting the impact of restructuring activities undertaken
during fiscal 2001. As a percentage of net revenue, SG&A
expenses increased to 42.1% in fiscal year 2001 from 25.5% in
fiscal 2000 as a result of lower revenue.

Amortization of intangible assets expense
decreased $5.8 million, or 20.0%, to $23.2 million in
fiscal 2001, compared with $29.0 million in fiscal 2000.
The decrease in amortization expense was primarily a result of
the divestiture of DNPG, partially offset by amortization that
resulted from the acquisition of Indus River Networks, both of
which were completed during fiscal 2001.

We incurred stock-based compensation expense of
$1.4 million during fiscal 2001, compared with no
stock-based compensation expense in fiscal year 2000. Our
stock-based compensation expense resulted from shares of common
stock issued in connection with our acquisition of Network
Security Wizards and held in escrow pending satisfaction of
continuing employment obligations and related to unvested stock
options assumed in the acquisition of Indus River Networks.

We incurred $63.2 million of special charges
during fiscal 2001, compared with $21.1 million in the
fiscal 2000. The special charges incurred during fiscal year
2001 consisted of $25.6 million of in-process research and
development costs related to our acquisition of Indus River
Networks, Cabletron transformation-related charges of
$13.3 million and a $25.8 million charge taken in
connection with a restructuring initiative, offset by a
$1.5 million adjustment to the prior year restructuring. In
fiscal 2000, we recorded $21.1 million of special charges which
were taken for a restructuring initiative undertaken in
connection with our decision to outsource our manufacturing
operations.

The impairment of intangible assets in fiscal
2001 of $14.1 million related to our decision to abandon
research and development on the NetVantage-related technology
and discontinued sales of NetVantage products. The impairment of
intangible assets in fiscal 2000 of $12.3 million related
to our decision to cease the operations of our Ariel division.



| |                            
| | ---------------------------
| | Income/Loss from Operations

Loss from operations was $176.3 million in
fiscal 2001, compared with income from operations of
$54.6 million in fiscal 2000. Our results from operations
were negatively impacted by eliminating sales of
non-standards-based products and in-process research and
development costs incurred in fiscal 2001, partially offset by
lower research and development expenses.



| |                
| | ---------------
| | Interest Income

Interest income increased $11.4 million, or
61.1%, to $30.0 million in fiscal 2001, compared with
$18.6 million in fiscal 2000. The increase in interest
income was due to higher interest rates and higher average
invested balances.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Other expense was $557.4 million in fiscal
2001. Of this total, $17.2 million related to investment
impairments, $13.0 million related to the loss on exchange
of product for investments, $394.6 million

27



---



##### Table of Contents



related to the other than temporary decline of
the Efficient investment and other available-for-sale
securities, $30.4 million related to the deferred gain on
the Efficient transaction described below under
Dispositions, $21.4 million related to
the loss on the sale of marketable securities,
$143.1 million related to the loss on the disposal of the
DNPG business and $11.5 million related to the other
non-operating expenses. Net other income in fiscal 2000 was
$746.3 million. Of this total, $705.1 million relates
to the realized gain from the sale of our FlowPoint subsidiary,
$37.2 million relates to the restructuring of our
relationship with Compaq and $4.6 million relates to the
sales of available-for-sale securities.


Our effective tax benefit rate was 14.0% in
fiscal 2001, compared with a tax rate of 38.7% in fiscal 2000.
The tax benefit during fiscal 2001 included a $25.6 million
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. Fiscal 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.



| |                        
| | -----------------------
| | Discontinued Operations

Our loss from discontinued operations increased
$38.3 million to $76.3 million in fiscal 2001,
compared with $38.0 million in fiscal 2000. The additional
loss from discontinued operations was primarily due to increased
losses related to our former Riverstone and GNTS businesses.

Business Combinations



| |             
| | ------------
| | Acquisitions

On January 31, 2001, we acquired Indus River
Networks, a designer and marketer of virtual private networks
for enterprise-class customers for common and preferred stock
valued at approximately $187.3 million, including direct
costs of $3.2 million. In addition, we assumed certain
stock options which were converted into our stock options. This
acquisition was accounted for under the purchase method of
accounting. Approximately $25.6 million of the purchase
price was allocated to in-process research development which we
recorded as a special charge of $25.6 million. We allocated
the excess of cost over the estimated fair value of net assets
acquired of $156.4 million to goodwill and other intangible
assets and are amortizing this excess on a straight-line basis
over periods of 3  10 years. We recorded a
$104.1 million impairment charge in transition 2001
relating to the Indus River goodwill, which was based upon
significantly lower projected cash flows from future sales of
products using the Indus River VPN architecture.

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

We recorded the cost of the acquisition at
approximately $8.3 million, including direct costs of
$0.3 million and accounted for this acquisition under the
purchase method. The cost represents 210,286 shares of common
stock at $35.00 per share and 32,000 options, valued at
approximately $0.6 million. We allocated the excess of cost
over the estimated fair value of the net assets acquired of
$8.1 million to goodwill and have been amortizing this
excess 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. Our consolidated results of operations
include the operating results of Network Security Wizards from
the acquisition date.

28



---



##### Table of Contents



Dispositions

On August 9, 2002, we completed the sale of
Aprisma to a third party and incurred a $1.3 loss on disposal
which was accrued for in transition 2001. The sale included all
of the assets and liabilities of Aprisma and all of its
employees. However, we guaranteed a total of approximately
$4.0 million of Aprismas lease obligations and
related maintenance and management fees through 2012. This
guarantee automatically reduces to $3.0 million on
February 1, 2009, to $2.0 million on February 1,
2010 and to $1.0 million on February 1, 2011 and
terminates on February 1, 2012. We are indemnified for any
losses we may incur in connection with this guarantee.

During the third quarter of transition 2001, we
sold a portion of GNTS to a third party, absorbed a portion of
GNTS into our operations, and discontinued the remainder of the
GNTS business. We and Aprisma assumed certain contracts and
employees of GNTS related to customers with whom each of us had
ongoing relationships. We recognized a net loss on disposal of
GNTS of $41.5 million, which included severance, office
closings and asset write-offs associated with the
discontinuation and sale of GNTS.

During fiscal 2001, we completed the sale of our
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.

In December 1999, we sold our FlowPoint,
Inc. subsidiary to 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,
we received 13.5 million shares of Efficient common stock,
including 6,300 shares of Efficient convertible preferred stock
that 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.

The FlowPoint transaction was valued at
approximately $946.2 million based upon an independent
valuation of the Efficient stock, reflecting a 10% discount from
the closing price of the Efficient stock on the NASDAQ as of the
sale date. This resulted in a pre-tax gain of approximately
$893.7 million.

On the transaction date, we held 26.4% of the
outstanding common stock of Efficient on an as-converted basis.
Accordingly, we deferred 26.4% of the pre-tax gain, or
$235.9 million, since through our ownership percentage of
Efficient; we effectively still had a 26.4% interest in
FlowPoint. Because we had irrevocably relinquished our voting
rights on all but 10% of Efficients common stock, the
Efficient stock has been classified as an available-for-sale
security. As we sold the Efficient shares, this deferred gain
was recognized into income in proportion to our reduction in its
percentage ownership of Efficient. Our effective interest in
FlowPoint at the end of transition 2001 and the 2001 and 2000
fiscal years was 0%, 17.7% and 21.1%, respectively.

During fiscal 2001 and 2000, we sold
1.0 million and 2.0 million shares of Efficient common
stock, respectively, for net proceeds of approximately $46.6
million and $135.3 million, respectively, and recognized
approximately $30.4 and $47.4 million, respectively, of
deferred gain to other income. Also during the fiscal year ended
March 3, 2001, we wrote call options to sell
2.0 million shares of Efficient at a weighted average price
of $62.50 and received premiums of approximately
$14.0 million which were recorded as a deferred gain. At
March 3, 2001, we determined that in accordance with SFAS
No. 115, the Efficient shares, classified as
available-for-sale securities, had experienced an
other-than-temporary decline in value. We 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 other expense of
$376.5 million during fiscal 2001.

During transition 2001, we sold 2.0 million
shares of Efficient common stock and tendered our remaining
8.5 million shares for proceeds of $242.7 million in
connection with a tender offer to acquire the outstanding shares
of Efficient common stock made by Siemens A.G. In connection
with these transactions, we recognized the remaining deferred
gain of $46.8 million to other income. Additionally, the
outstanding call options discussed above expired between
March 30, 2001 and December 4, 2001, and we

29



---



##### Table of Contents



recognized the previously recorded deferred gain
of $14.0, net of the related transaction costs of
$1.3 million, as a cumulative effect of a change in
accounting principle during transition year 2001.


On February 29, 2000, we sold our
manufacturing and repair services operations located in
Rochester, New Hampshire and Limerick, Ireland to Flextronics
for approximately $78.6 million. Flextronics purchased, at
net book value, approximately $18.1 million of our
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, we entered into an agreement with
Flextronics to manufacture most of our products. Our original
agreement with Flextronics ended on March 1, 2002 and has
been extended on a month-to-month basis.

Liquidity and Capital Resources

We hold our cash and cash equivalents with
banking institutions and money management firms that invest
primarily in highly rated short and medium term debt securities
issued by the U.S. Government or its agencies. In connection
with the issuance of letters of credit by several banking
institutions, we have agreed to maintain specified amounts of
cash, cash equivalents and marketable securities in collateral
accounts controlled by those institutions. The assets totalled
$27.9 million at December 29, 2001.

A summary of liquid investments follows:

|                                   |                          |                   |       |               |  |   |       |       | 
|---------------------------------- | ------------------------ | ----------------- | ----- | ------------- |  | - | ----- | ----- | 
|                                   |                          | December 29, 2001 |       | March 3, 2001
|                                   |                          |                   |       |              
|(In millions)                      |                          |                   |       | (Restated)   
|Cash and cash equivalents          |                          | $                 | 114.8 |               |  | $ | 64.4  |      
|Marketable securities(1)           |                          |                   | 47.6  |               |  |   | 400.2 |      
|Long-term marketable securities(1) |                          |                   | 63.9  |               |  |   | 140.8 |      
|                                   |                          |                   |       |               |  |   |       |      
|                                   | Total liquid investments |                   | $     | 226.3         |  |   | $     | 605.4 | 
|                                   |                          |                   |       |               |  |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents highly rated debt securities of the
    U.S. Government or its agencies that are expected to be held
    until maturity or are readily convertible into cash or cash
    equivalents. Includes Efficient common stock that was sold
    during transition 2001 for net proceeds of $242.7 million.

Our total liquid investments decreased by
$379.1 million during transition 2001. We realized
$60.0 million of proceeds from the exercise of employee
stock options and employee purchases of common stock. Offsetting
these proceeds were the following uses of cash:
(i) $196.5 million of net cash used in operating
activities, (ii) the allocation and distribution of $182.7
million of liquid investments to Riverstone and Aprisma, of
which $70 million was returned to us by Aprisma in March
2002, (iii) capital expenditures of $21.0 million, and
(iv) investments of $22.8 million.

In addition, under the terms of a previously
authorized share repurchase program, we repurchased 953,201
shares of our common stock during fiscal 2001 at a total cost of
$8.4 million. We have no current plans to make additional
share repurchases.

Accounts receivable, net of allowance for
doubtful accounts, were $67.7 million at December 29,
2001 compared with $137.7 million at March 3, 2001.
The decline in accounts receivable is due primarily to the
decline in net revenue in transition 2001 and a
$25.4 million reduction to the accounts receivable balance
at December 29, 2001 for shipments to stocking distributors
that will not be recognized as revenue until our products are
sold to their customers. We anticipate that in the future our
accounts receivable balance will fluctuate at approximately the
same rate of change as our revenue.

Inventories were $118.2 million at
December 29, 2001, or 2.8 turns per annum, compared with
$97.8 million, or 4.0 turns per annum, at
March 3, 2001. The lower inventory turnover rate in
transition 2001 was due to high inventory balances caused by
sales forecasts and contractual purchase commitments that were
higher than our actual sales. We believe that our inventory
turnover rate will improve in the future as we implement better
forecasting procedures and restructure arrangements with our
contract manufacturers.

30



---



##### Table of Contents



Our capital expenditures in transition 2001,
fiscal 2001 and fiscal 2000 were $21.0, $16.9 and
$37.1 million, respectively and related primarily to
information technology purchases and upgrades, equipment and
software used in research and development activities, and
facility-related expenditures. We anticipate that capital
expenditures in 2002 will be higher than the amounts incurred
during transition 2001 primarily due to fiscal 2002 being
two months longer than transition 2001.

Our liquid investments (as defined in the table
above) have increased approximately $14 million during the
first three quarters of fiscal 2002 as a result of approximately
$89 million in net income tax refunds after payments for a
prior period audit settlement and approximately $78 million
received from Aprisma prior to, and in conjunction with, its
sale. Offsetting these inflows were on-going losses from
operations, severance costs associated with further workforce
reductions, legal, accounting and additional audit fees related
to the internal review of our past accounting practices,
payments to contract manufacturers to purchase excess raw
materials, and capital expenditures.

We are focused on achieving cash-positive
operations in the near-term and believe we have made, and will
continue to make, substantial progress toward that goal. In the
third quarter of fiscal 2002 our net use of cash declined to
approximately $25 million, including approximately
$22 million of non-recurring items.

Based on our current liquid investment position
and $30 million of estimated federal income tax refunds
that we expect to receive in 2003 relating to losses expected to
be incurred in 2002, we believe that we have sufficient liquid
investments to fund our on-going operations and future
obligations for the foreseeable future.

The following is a summary of our significant
contractual cash obligations and other commercial commitments:

|                                                    |  |               |       |           |  |       |      |       |  |        |       |  |  |   |      |  |  |   |      | 
|--------------------------------------------------- |  | ------------- | ----- | --------- |  | ----- | ---- | ----- |  | ------ | ----- |  |  | - | ---- |  |  | - | ---- | 
|                                                    |  |               |       | Less than |  | 1-3   |      | 4-5   |  | Over 5
|Contractual Cash Obligations                        |  | Total         |       | 1 Year    |  | Years |      | Years |  | Years 
|                                                    |  |               |       |           |  |       |      |       |  |       
|                                                    |  |              
|                                                    |  | (In millions)
|Potential series D&E preferred stock
    redemption |  | $             | 99.4  |           |  | $     |     |       |  | $      | 99.4  |  |  | $ |     |  |  | $ |     | 
|Non-cancelable lease obligations                    |  |               | 59.9  |           |  |       | 13.6 |       |  |        | 19.1  |  |  |   | 14.1 |  |  |   | 13.1 | 
|Non-cancelable purchase commitments                 |  |               | 56.6  |           |  |       | 56.6 |       |  |        |      |  |  |   |     |  |  |   |     | 
|                                                    |  |               |       |           |  |       |      |       |  |        |       |  |  |   |      |  |  |   |      | 
|Total contractual cash obligations                  |  | $             | 215.9 |           |  | $     | 70.2 |       |  | $      | 118.5 |  |  | $ | 14.1 |  |  | $ | 13.1 | 
|                                                    |  |               |       |           |  |       |      |       |  |        |       |  |  |   |      |  |  |   |      | 

|                                 |  |               |      |           |  |       |      |       |  |        |     |  |  |   |     |  |  |   |     | 
|-------------------------------- |  | ------------- | ---- | --------- |  | ----- | ---- | ----- |  | ------ | --- |  |  | - | --- |  |  | - | --- | 
|                                 |  | Total Amounts |      | Less than |  | 1-3   |      | 4-5   |  | Over 5
|Other Commercial Commitments     |  | Committed     |      | 1 Year    |  | Years |      | Years |  | Years 
|                                 |  |               |      |           |  |       |      |       |  |       
|                                 |  |              
|                                 |  | (In millions)
|Aprisma lease payment guarantees |  | $             | 4.0  |           |  | $     |     |       |  | $      |    |  |  | $ |    |  |  | $ | 4.0 | 
|Equipment lease guarantees       |  |               | 13.7 |           |  |       | 12.9 |       |  |        | 0.8 |  |  |   |    |  |  |   |    | 
|Letters of credit                |  |               | 1.2  |           |  |       | 1.2  |       |  |        |    |  |  |   |    |  |  |   |    | 
|Venture capital commitments      |  |               | 20.0 |           |  |       | n/a  |       |  |        | n/a |  |  |   | n/a |  |  |   | n/a | 
|                                 |  |               |      |           |  |       |      |       |  |        |     |  |  |   |     |  |  |   |     | 
|Total commercial commitments     |  | $             | 38.9 |           |  | $     | 14.1 |       |  | $      | 0.8 |  |  | $ |    |  |  | $ | 4.0 | 
|                                 |  |               |      |           |  |       |      |       |  |        |     |  |  |   |     |  |  |   |     | 

Beginning on February 23, 2003, the holders
of our Series D and E preferred stock have the right to
redeem these shares for approximately $99 million in cash,
less the proceeds from the sale of the approximately
1.3 million shares of Riverstone stock distributed to them
in connection with our spin-off of Riverstone. We expect to
engage in discussions with the preferred stockholders concerning
alternatives to this potential redemption right, although there
can be no assurance as to the outcome of any such discussions.

Aprisma lease obligations of $4 million are
offset by full rights of indemnification. The Aprisma lease has
a remaining term of approximately nine years.

We committed to make up to $20 million of
additional capital contributions to a venture capital fund in
which we already are an investor. In the event of future capital
calls, we could be required to fund some

31



---



##### Table of Contents



or all of this commitment. If we fail to make a
required contribution, then our existing investment would be
significantly diluted. The fund has indicated that it does not
anticipate issuing a capital call in the near future.


Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations which addresses the financial
accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises.
SFAS No. 141 requires that all business combinations be
accounted for by the purchase method, modifies the criteria for
recognizing intangible assets, and expands disclosure
requirements. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. The
adoption of SFAS No. 141 has not had a material impact on
the consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets which
addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion
No. 17, Intangible Assets. SFAS No. 142
addresses how intangible assets that are acquired individually
or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have
been initially recognized in the financial statements. SFAS
No. 142 requires that goodwill and intangible assets that
have indefinite useful lives not be amortized but rather tested
at least annually for impairment, and intangible assets that
have finite useful lives be amortized over their useful lives.
SFAS No. 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for
impairment. In addition, SFAS No. 142 expands the
disclosure requirements about goodwill and other intangible
assets in the years subsequent to their acquisition. SFAS
No. 142 is effective for our fiscal year ending
December 28, 2002. Goodwill and intangible assets acquired
after June 30, 2001 will be subject immediately to the
provisions of SFAS No. 142. Impairment losses for goodwill
and indefinite-lived intangible assets that arise due to the
initial application of SFAS No. 142 are to be reported as
resulting from a change in accounting principle. Subsequent
impairment losses are to be included in income from operations.
Our annual impairment reviews may result in future periodic
write-downs; however, the application of the non-amortization
provisions of SFAS No. 142 for goodwill is expected to
result in a decrease in the loss from operations of
approximately $0.8 million per quarter in fiscal year 2002.
We are presently assessing the impact of the new impairment
rules.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS No. 143 requires recognition of asset retirement
obligations as a liability rather than a contra-asset. SFAS
No. 143 is effective for our fiscal year ending
January 3, 2004. Any impact that adoption will have on the
consolidated financial statements will be based on future
transactions.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which excludes from the
definition of long-lived assets goodwill and other intangibles
that are not amortized in accordance with SFAS No. 142.
SFAS No. 144 requires long-lived assets disposed of by sale
to be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or
in discontinued operations. SFAS No. 144 also expands the
reporting of discontinued operations to include components of an
entity that have been or will be disposed of rather than
limiting such discontinuance to a segment of a business. SFAS
No. 144 is effective for our 2002 fiscal year, and early
adoption is encouraged. We do not anticipate any adjustment to
the book value of its long-lived assets as a result of adopting
the provisions of SFAS No. 144.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145, among other things,
rescinds SFAS No. 4, which required all gains and losses
from the extinguishment of debt to be classified as an
extraordinary item and amends SFAS No. 13 to require that
certain lease modifications that have

32



---



##### Table of Contents



economic effects similar to sale-leaseback
transactions be accounted for in the same manner as
sale-leaseback transactions. We do not expect this statement
will have an impact on its consolidated financial statements.


The Emerging Issues Task Force of the FASB issued
EITF No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products. This EITF is effective for annual
and interim financial statements beginning after
December 15, 2001. EITF No. 00-25, as further defined
by EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products), requires among other things,
that payments made to resellers by us for cooperative
advertising, buy-downs and similar arrangements should be
classified as reductions to net sales or an increase in selling
expenses, depending upon the application of the funds by the
customer. We adopted this consensus in the first quarter of
fiscal year 2002. If this standard had been adopted at
December 29, 2001, including required retroactive
application to prior periods, net revenue would have been
reduced by $23.1 million for the ten month period ended
December 29, 2001, $8.7 million for the fiscal years
ended March 3, 2001 and $4.2 million for the fiscal
year ended February 29, 2000. Cost of revenues would have
been reduced by $34.1 million for the ten-month period
ended December 29, 2001, $14.7 million for the fiscal
years ended March 3, 2001 and $7.0 million for the
fiscal year ended February 29, 2000. Selling, general and
administrative expenses would have been increased by
$11.1 million for the ten-month period ended
December 29, 2001, $6.0 million and $2.8 million
for the fiscal years ended March 3, 2001 and
February 29, 2000, respectively. The above reclassification
would have had no impact on net loss or loss per share.

In July 2002 the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires companies to recognize
costs associated with exit or disposal activities when a
liability is incurred rather than at the date of a commitment to
an exit or disposal plan.

33



---



##### Table of Contents



CAUTIONARY STATEMENTS

We may occasionally make forward-looking
statements and estimates such as forecasts and projections of
our future performance or statements of our plans and
objectives. These forward-looking statements may be contained
in, among other things, SEC filings, including this transition
report on Form 10-K, and press releases made by us and in
oral statements made by our officers. Actual results could
differ materially from those contained in such forward-looking
statements. Important factors that could cause our actual
results to differ from those contained in such forward-looking
statement include, among other things, the risks described
below.

Risks Related to our Financial Results and
Condition



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | The SEC investigation and our accounting
    restatements could materially harm our business, operating
    results and financial condition

The uncertainty associated with the SEC
investigation into our accounting practices and the restatement
of our financial statements could seriously harm our business,
financial condition and reputation. In particular, this
uncertainty could harm our relationships with existing customers
and impair our ability to attract new customers. Purchasing
decisions by potential and existing customers have been and may
continue to be postponed, we believe in part due to the SEC
investigation. If potential and existing customers lose
confidence in us, our competitive position in the networking
industry may be seriously harmed and our revenues could decline.
In addition, this uncertainty has caused significant declines in
our stock price, and continued uncertainty or negative
developments could cause the price of our common stock to
decline further.

Our prior announcements regarding the SEC
investigation into our accounting practices and the restatement
of financial results have led to several class action lawsuits
alleging violations of the securities laws against us, as well
as derivative actions against our Board of Directors. The
restatement of our financial statements may lead to new
litigation, may strengthen and expand the claims and the class
period in pending litigation, and may increase the cost of
defending or resolving current litigation. We expect that
resolution of these lawsuits will continue to involve
significant management time and attention and significant
expenses for professional fees, and could lead to the payment of
significant damages, any of which could materially harm our
financial condition and results of operations.

As a result of the findings of the internal
review initiated by our Board of Directors, individuals
identified as having participated in, or who reasonably should
have known about conduct contrary to our internal policies, have
left our organization, have been terminated or have otherwise
been disciplined. We have also instituted new policies and
procedures designed to enhance our ability to monitor and
enforce our revenue recognition policies worldwide. In addition,
between March and October of 2002, several of our executive
officers resigned and were replaced with new management. In
October 2002, our Vice President of Finance was promoted to the
position of Chief Financial Officer. We also hired new managers
in several senior finance and operations capacities and
bolstered our finance staff in several key areas. In addition,
we added an internal audit director who reports directly to the
Audit Committee of our Board of Directors as well as to our
Chief Financial Officer. However, our new management team has
limited experience working together, and they, and our new
policies and procedures, may not enable us to prevent or timely
identify future accounting irregularities.

The SEC investigation remains pending and
continues to require significant management attention and
resources. An adverse finding by the SEC may lead to significant
fines and penalties, as well as limitations on our activities
and our inability to rely on certain securities law safe harbors
available to other companies. The filing of our restated
financial statements to correct the discovered accounting
irregularities will not necessarily resolve the pending SEC
investigation into our accounting practices. The resolution of
the SEC investigation could require the filing of additional
restatements of our prior financial statements, and/or our
restated financial statements, or require that we take other
actions not presently contemplated.

34



---



##### Table of Contents





| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Worldwide economic weakness and
    deteriorating market conditions have and may continue to
    negatively affect our business and revenues and make forecasting
    more difficult, which could harm our financial
    condition

Our business is subject to the effects of general
worldwide economic conditions, particularly in the United States
and EMEA, and market conditions in the networking industry,
which have been particularly unfavorable. Recent political and
social turmoil, such as terrorist and military actions, may put
further pressure on worldwide economic conditions. If economic
or market conditions fail to improve or worsen, our business,
revenues, and forecasting ability will continue to be negatively
affected, which could harm our results of operations and
financial condition.

Market conditions in the networking industry have
been particularly unfavorable over the past two years, as
companies have been reluctant to invest in their network
infrastructures in light of continued economic uncertainty. In
recent quarters, our product revenues have declined as a result
of reduced capital spending and a lengthened sales cycle
attributable to unfavorable economic and market conditions as
well as other factors. Continued economic weakness could result
in increased price competition in our industry and could further
reduce demand for our products, either of which could harm our
revenues and reduce our gross margin.

These unfavorable political, social and economic
conditions and uncertainties also make it extremely difficult
for us, our customers and our vendors to accurately forecast and
plan future business activities. In particular, it is difficult
for us to develop and implement strategies, forecast demand for
our products, and effectively manage contract manufacturing and
supply chain relationships. This reduced predictability
challenges our ability to operate profitably and to grow our
business.



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

We have experienced losses in recent years and
may not achieve or sustain profitability in the future. We will
need to generate higher revenues and reduce our costs to achieve
and maintain consistent profitability. We may not be able to
generate higher revenues or reduce our costs, and if we do
achieve consistent profitability, we may not be able to sustain
or increase our profitability over subsequent periods. Our
revenues have been negatively affected by weaker economic
conditions worldwide, which have reduced demand and increased
price competition for most of our products, as well as resulted
in longer selling cycles. If weaker worldwide economic
conditions continue for an extended period of time, our ability
to maintain and increase our revenues may be significantly
limited. In addition, while we recently implemented a cost
reduction plan designed to decrease our expenses, which included
a significant reduction in the size of our workforce and the
sale of our operating subsidiary, Aprisma, we will continue to
have large fixed expenses and expect to continue to incur
significant sales and marketing, product development, customer
support and service and other expenses. We continue to assess
whether additional cost-cutting efforts may be required.
Additional cost-cutting efforts may result in the recording of
additional charges, such as workforce reduction costs,
facilities reduction costs, asset write downs and contractual
settlements. Further, our workforce reductions may impair our
ability to realize our current or future business objectives,
and costs incurred in connection with our cost-cutting efforts
may be higher than the estimated costs of such actions and may
not lead to anticipated cost savings. As a result, our
cost-cutting efforts may not result in a return to profitability.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly operating results are likely
    to fluctuate, which could cause us to fail to meet quarterly
    operating targets and result in a decline in our stock
    price

Our operating expenses are largely based on
anticipated organizational size and revenue trends, and a high
percentage of these expenses are, and will continue to be, fixed
in the short term. As a result, if our revenue for a particular
quarter is below our expectations, we will be unable to
proportionately reduce our operating expenses for that quarter.
Any revenue shortfall in a quarter may thus cause our financial
results for that quarter to fall below the expectations of
public market analysts or investors, which could cause the price
of our common stock to fall. Any increase in our fixed expenses
will increase the magnitude of this

35



---



##### Table of Contents



risk. In addition, the unpredictability of our
operating results from quarter to quarter could cause our stock
to trade at lower prices than it would if our results were
consistent from quarter to quarter.


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



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | 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 length and variability of the sales cycle for
    our products;                                                               
|
| |  | the timing of implementation and product
    acceptance by our customers and by customers of our distribution
    partners;       
|
| |  | the timing and success of new product
    introductions;                                                                          
|
| |  | 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;                                       
|
| |  | price and product competition in the networking
    industry;                                                                     
|
| |  | our ability to source and receive from third
    party sources appropriate product volumes and quality;                           
|
| |  | manufacturing lead times and our ability to
    maintain appropriate inventory levels;                                            
|
| |  | the timing and level of research, development and
    prototype expenses;                                                         
|
| |  | the mix of products and services sold;                                                                                            
|
| |  | changes in the distribution channels through
    which we sell our products and the loss of distribution partners;                
|
| |  | the uncertainties inherent in our accounting
    estimates and assumptions and the impact of changes in
    accounting principles;
|
| |  | our ability to achieve targeted cost reductions;                                                                                  
|
| |  | the outcome of pending securities litigation and
    the pending SEC investigation into our accounting practices; and             
|
| |  | general economic conditions as well as those
    specific to the networking industry.                                             

Due to these and other factors, you should not
rely on quarter-to-quarter comparisons of our operating results
as an indicator of our future performance.



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We earn a substantial portion of our
    revenue for each quarter in the last month of each quarter,
    which reduces our ability to accurately forecast our quarterly
    results and increases the risk that we will be unable to achieve
    previously forecasted results

We have derived and expect to continue to derive
a substantial portion of our revenues in the last month of each
quarter, with such revenues frequently concentrated in the last
two weeks of the quarter. Because we rely on the generation of a
large portion of revenues at the end of the quarter, we
traditionally 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-quarter 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.

36



---



##### Table of Contents





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional capital to fund our
    future operations, commitments and contingencies and, if it is
    not available when needed, our business may be
    harmed

We believe our existing working capital, cash
available from operations and anticipated tax refunds will
enable us to meet our working capital requirements for at least
the next twelve months. Our working capital requirements and
cash flows historically have been, and are expected to continue
to be, subject to quarterly and yearly fluctuations, depending
on such factors as capital expenditures, sales levels,
collection of receivables, inventory levels, supplier terms and
obligations, and other factors impacting our financial
performance and condition. Also, in February 2003, the holders
of our Series D and E preferred stock have the right to
redeem these shares from us for cash. This redemption could
require that we pay them up to $99 million in cash for
their shares. Our inability to manage cash flow fluctuations
resulting from these and other factors could impair our ability
to fund our working capital requirements from operating cash
flows and other sources of liquidity or to achieve our business
objectives in a timely manner. We have not established any
borrowing relationships with financial institutions and are
primarily reliant on cash generated from operations to meet our
cash requirements. If cash from future operations is
insufficient, or if cash must be used for currently
unanticipated uses, we may need to raise additional capital or
reduce our expenses.

We cannot assure you that additional capital, if
required, will be available on acceptable terms, or at all. As a
result of the current unfavorable market environment, as well as
the SEC investigation into our accounting practices and related
litigation, our ability to access the capital markets and
establish borrowing relationships with financial institutions
has been impaired and may continue to be impaired for the
foreseeable future. If we are unable to obtain additional
capital when needed or must reduce our expenses, it is likely
that our product development and marketing efforts will be
restricted, which would harm our ability to develop new and
enhanced products, expand our distribution relationships and
customer base, and establish our brand name. This could
adversely impact our competitive position and cause our revenues
to decline. To the extent that we raise additional capital
through the sale of equity or convertible debt securities,
existing stockholders may suffer dilution. Also, these
securities may provide the holders with certain rights,
privileges and preferences senior to those of common
stockholders. If we raise additional capital through the sale of
debt securities, the terms of such debt could impose
restrictions on our operations.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In February 2003, the holders of our
    Series D and E preferred stock may require redemption of
    their shares for cash, which could impair our cash position, or
    request the conversion of their shares into shares of our common
    stock, which would dilute our existing
    stockholders

In February 2003, the holders of our
Series D and E preferred stock have the right to redeem
these shares for cash. This redemption could require us to pay
them up to approximately $99 million in cash for their
shares less proceeds from the sale of the Riverstone shares they
received in the Riverstone spin-off, which could impair our cash
position. If we fail to redeem the Series D and E shares,
pursuant to the terms of our Certificate of Incorporation the
Series D and E Preferred stock will become convertible into
a much larger number of shares of our common stock than it is
currently convertible into, which would dilute the ownership
interest of our existing common stockholders. Upon our failure
to redeem, these shares would be convertible into approximately
80 million shares of our common stock, resulting in these
holders holding 28% of our outstanding common stock, based on
the closing price of our common stock of $1.21 per share and
approximately 201.9 million shares outstanding on
October 31, 2002. It is also possible that, as an
alternative to the foregoing, we may renegotiate the terms of
the Series D and E preferred stock with the holders. We
cannot assure you that we will be successful in renegotiating
the terms. Any renegotiations will likely result in terms less
favorable to us that the current terms.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Pending and future litigation could
    materially harm our business, operating results and financial
    condition

Several lawsuits have been filed against us and
our directors in recent years, including nine shareholder class
action lawsuits filed between October 24, 1997 and
March 2, 1998, and, more recently,

37



---



##### Table of Contents



six shareholder class action lawsuits filed
between February 7, 2002 and April 9, 2002, as well as
shareholder derivative actions filed in the State of New
Hampshire on February 22, 2002 and in the State of Delaware
on April 16, 2002. We may be required to pay significant
damages as a result of these lawsuits. We are and may in the
future be subject to other litigation arising in the normal
course of our business or in connection with the recent
restatement of our financial statements.


The uncertainty associated with these lawsuits
could seriously harm our business, financial condition and
reputation by, among other things, harming our relationships
with existing customers and impairing our ability to attract new
customers. In addition, the continued defense of these lawsuits
will result in significant expense and the continued diversion
of our managements time and attention from the operation
of our business, which could impede our ability to achieve our
business objectives. The unfavorable resolution of any specific
lawsuit could materially harm our business, operating results
and financial condition, and could cause the price of our common
stock to decline significantly.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The limitations of our director and officer
    liability insurance may materially harm our financial
    condition

Our director and officer liability insurance for
the period during which events related to securities class
action lawsuits against us and certain of our current and former
officers and directors are alleged to have occurred, provides
only limited liability protection. If these policies do not
adequately cover expenses and certain liabilities relating to
these lawsuits, our financial condition could be materially
harmed. Our certificate of incorporation provides that we will
indemnify and advance expenses to our directors and officers to
the maximum extent permitted by Delaware law. The
indemnification covers any expenses and liabilities reasonably
incurred by a person, by reason of the fact that such person is
or was or has agreed to be a director or officer, in connection
with the investigation, defense and settlement of any
threatened, pending or completed action, suit, proceeding or
claim.

The facts underlying the SEC investigation and
shareholder lawsuits will likely increase the premiums we must
pay for director and officer liability insurance in the future,
and may make this insurance coverage prohibitively expensive or
unavailable. Increased premiums for this insurance could
materially harm our financial results in future periods. The
inability to obtain this coverage due to its unavailability or
prohibitively expensive premiums would make it more difficult
for us to retain and attract officers and directors.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Our failure to improve our management
    information systems and internal controls could harm our
    business

We currently use three disparate information
systems in our domestic and international operations, resulting
in delays in obtaining consistent and timely information on a
worldwide basis and use of extensive manual procedures to
generate our consolidated financial results. Further, our
systems do not provide all of the information that we believe is
necessary to successfully operate our business, and we have
identified weaknesses in our internal controls and accounting
procedures. We have implemented a number of changes designed to
improve our information systems and controls, including
organizational changes, communication of revenue recognition and
other accounting policies to all of our employees,
implementation of an internal audit function, new approval
procedures and various other initiatives. We are evaluating
additional changes which may require us to make investments in
our systems and controls, which could result in higher future
operating expenses and capital expenditures. If we fail to
strengthen our management information systems and internal
controls, our ability to manage our business and implement our
strategies may be impaired and our financial condition could be
harmed. In addition, even if we are successful in strengthening
these systems and controls, they may not sufficiently improve
our ability to manage our business and implement our strategies,
or be adequate to prevent or identify irregularities.

38



---



##### Table of Contents





| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have experienced significant turnover of
    senior management and our current management team has been
    together for only a limited time, which could harm our business
    and operations

In connection with the merger of Enterasys
Subsidiary into us in August 2001, our management team was
restructured to include several senior Enterasys Subsidiary
executives. In April 2002, we announced the departure of several
of these senior executives, including our President and Chief
Executive Officer. In October 2002, our Vice President of
Finance was promoted to the position of Chief Financial Officer.
Because of these recent changes and their recent recruitment,
our current management team has not worked together for a
significant length of time and may not be able to work together
effectively to successfully develop and implement business
strategies. In addition, as a result of these management
changes, management will need to devote significant attention
and resources to preserve and strengthen relationships with
employees and customers. If our new management team is unable to
develop successful business strategies, achieve our business
objectives, or maintain positive relationships with employees
and customers, our ability to grow our business and successfully
meet operational challenges could be impaired.



| |                                                                      
| | ---------------------------------------------------------------------
| | Retaining key management and employees is
    critical to our success

Our future success depends to a significant
extent on the continued services of our key employees, many of
whom have significant experience with the network communications
market, as well as relationships with many of our existing and
potential enterprise customers and business partners. The loss
of several of our key employees or any significant portion of
them could have a significant detrimental effect on our ability
to execute our business strategy. Our future success also
depends on our continuing ability to identify, hire, train,
assimilate and retain large numbers of highly qualified
engineering, sales, marketing, managerial and support personnel.
If we cannot successfully recruit and retain such persons,
particularly in our engineering and sales departments, our
development and introduction of new products could be delayed
and our ability to compete successfully could be impaired.

Despite the current economic downturn, the
competition for qualified employees in our industry is
particularly intense in the New England area, where our
principal operations are located, and it can be difficult to
attract and retain quality employees at reasonable cost. We have
from time to time experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining
highly skilled employees with appropriate qualifications. In
addition, the significant downturn in our business environment
has caused us to significantly reduce our workforce and
implement other cost-containment activities, including
consolidating our operating locations and relocating some of our
personnel to Rochester, New Hampshire and Andover,
Massachusetts. These actions, as well as the pending SEC
investigation of our accounting practices and shareholder
litigation, may lead to disruptions in our business, reduced
employee morale and productivity, increased attrition and
difficulty retaining existing employees and recruiting future
employees, any of which could harm our business and operating
results.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We maintain strategic investments in early
    stage, privately held technology companies to establish
    relationships that we believe may benefit us as we execute our
    business strategy, but these relationships may not prove helpful
    to us, and we could lose our entire investment in these
    companies

We have made strategic investments in
privately-held technology companies and value-added resellers,
many of which are in the start-up or development stage. The
benefits we expected to achieve by investing in these companies
may not be realized. Moreover, investments in these companies
are inherently risky as the technologies or products they have
under development, or the services they propose to provide, are
often in early stages of development and may never materialize.
We may never realize any benefits or financial returns from
these investments, and, if these companies are not successful,
we could lose our entire investment. The concentration of our
investments in a small number of related industries, primarily
telecommunications, exposes our investments to increased risk,
particularly if these industries continue to be adversely
affected by the worldwide economic slowdown. At
December 29, 2001, these investments totaled approximately
$64.1 million. During the ten-month transition period ended
December 29, 2001, we recorded impairment losses of
$65.9 million relating to these investments.

39



---



##### Table of Contents





| |                                                               
| | --------------------------------------------------------------
| | We are exposed to the credit risk of some
    of our customers

Our payment terms are typically 30 days in
the United States, and sometimes longer internationally. We
assess the payment ability of our customers in granting such
terms and maintain reserves that we believe are adequate to
cover doubtful accounts, however, as a result of the current
economic slowdown,our exposure to the credit risk of our
customers has increased. Some of our customers are experiencing,
or may experience, reduced revenues and cash flow problems, and
may be unable to pay, or may delay payment for, amounts owed to
us. Although we monitor the credit risk of our customers, we may
not be effective in managing our exposure. If our customers are
unable to pay amounts owed to us or cancel outstanding orders,
our forecasting ability, cash flow and revenues could be harmed
and our business and results of operations may be adversely
affected.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in effective tax rates, failure to
    realize anticipated tax refunds and adverse results of future
    tax audits could adversely affect our results of
    operations

Our future effective tax rates, and our results
of operations, could be adversely affected by earnings being
lower than anticipated in countries where we have lower
statutory rates, changes in the valuations of deferred tax
assets and liabilities, or by changes in tax laws or
interpretations thereof. Our results of operations could also be
adversely affected and our business harmed if the amount of
federal income tax refunds from anticipated losses in fiscal
2002 are lower than we anticipate as a result of our estimates
regarding our anticipated losses in fiscal 2002 are incorrect or
if future federal or local tax audits result in our paying
significant additional taxes.

Risks Related to the Markets for our
Products



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is intense competition in the market
    for enterprise network equipment, which could prevent us from
    increasing our revenue and achieving profitability

The network communications market is dominated by
a small number of competitors, some of which, Cisco Systems in
particular, have substantially greater resources and market
share than other participants 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. Competitive pressures could result in price
reductions, reduced margins or loss of market share, which would
materially harm our ability to increase revenues and
profitability.

Our principal competitors include Alcatel; Avaya,
formerly part of Lucent; Cisco Systems; Extreme Networks;
Foundry Networks; Hewlett-Packard; Nortel Networks; 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 will continue as companies attempt to
strengthen or maintain their market share positions.
Consolidation among our competitors and potential competitors
may result in stronger competitors with expanded product
offerings and a greater ability to accelerate their development
of new technologies.

Some of our competitors 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. Additional competitors with significant market
presence and financial resources may enter our rapidly evolving
market, thereby further intensifying competition.

40



---



##### Table of Contents





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to expand our indirect
    distribution channels, which may hinder our ability to grow our
    customer base and increase our revenues

Our sales and distribution strategy relies
heavily on our indirect sales efforts, including sales through
distributors and channel partners, such as value-added
resellers, systems integrators and telecommunications service
providers. We believe that our future success will depend in
part upon our ability to maintain and expand existing
relationships, as well as establish successful new
relationships, with a variety of these partners. If we are
unable to expand our indirect distribution channels, we may be
unable to increase or sustain market awareness or sales of our
products and services, which may prevent us from maintaining or
increasing our customer base and revenues.

Even if we are able to expand our indirect
distribution channels, our revenues may not increase. Our
distribution partners are not prohibited from selling products
and services that compete with ours and may not devote adequate
resources to selling our products and services. In addition, we
may be unable to maintain our existing agreements or reach new
agreements with distribution partners on a timely basis or at
all.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | 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, particularly as products reach
the end of their life cycles. 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 and our competitors. Our prices
will also likely be adversely affected by downturns in regional
or industry economies, such as the recent downturn in the United
States economy. We also expect our gross margins may be
adversely affected by increases in material or labor costs and
an increasing reliance on third party distribution channels. If
we are unable to achieve commensurate cost reductions and
increases in sales volumes, any decline in average selling
prices will reduce our revenues and gross margins.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not anticipate and respond to
    technological developments and evolving customer requirements,
    we may not retain our current customers or attract new
    customers

The markets for our products are characterized by
rapidly changing technologies and frequent new product
introductions. The introduction by us or our competitors of new
products and the emergence of new industry standards and
practices can render existing products obsolete and
unmarketable. Our success will depend upon our ability to
enhance our existing products and to develop and introduce, on a
timely and cost-effective basis, new products and functionality
that keep pace with technological developments and emerging
standards. Any failure to introduce new products and
enhancements on a timely basis will harm our future revenue and
prospects.

Our future success will also depend upon our
ability to develop and manage customer relationships and 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 anticipate and adapt to customer requirements and offer
products that meet those demands in a timely manner. Our failure
to develop products that satisfy evolving customer requirements
could seriously harm our ability to achieve or maintain market
acceptance for our products and prevent us from recovering our
product development investments.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We may expend significant resources
    educating potential customers about our products without
    achieving actual sales

Purchases of our products often represent a
significant capital investment by our customers related to their
enterprise network infrastructure. They are often subject to
budgetary constraints and typically involve significant internal
procedures involving the evaluation, testing, implementation and
acceptance of new technologies. We typically must provide a
significant level of education to enterprises on the benefits of
our products and services, which often results in a lengthy
sales process. During this time we may incur

41



---



##### Table of Contents



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.




| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our focus on sales to enterprise customers
    subjects us to risks that may be greater than those for
    providers with a more diverse customer base

We focus principally on sales of products and
services to enterprises, such as large corporations and
government agencies that rely on network communications for many
important aspects of their operations. This focus subjects us to
risks that are particular to this customer segment. For example,
many of our current and potential customers are health care,
education and governmental agencies, all of whom are generally
slower to incorporate information technology into their business
practices due to the regulatory and privacy issues that must be
addressed with respect to the sharing of their information. In
addition, the use and growth of the Internet is critical to
enterprises, which often have electronic networks, applications
and other mission-critical functions that use the Internet. To
the extent that there is any decline in use of the Internet for
electronic commerce or communications, for whatever reason,
including performance, reliability or security concerns, we may
experience decreased demand for our products and lower than
expected revenue growth.

Many of our competitors sell their products to
both enterprises and service providers, which are companies who
provide Internet-based services to businesses and individuals.
In the future, the demand for network communications products
from enterprises may not grow as rapidly as the demand from
service providers. Enterprises may turn to service providers to
supply them with services that obviate the need for enterprises
to implement many of our solutions. Because we sell our products
primarily to enterprises, our exposure to these risks is greater
than that of vendors that sell to a more diversified customer
base.

Risks Related to our Products



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products are very complex, and
    undetected defects may increase our costs, harm our reputation
    with our customers and lead to costly litigation

Our network communications products are extremely
complex and must operate successfully with complex products of
other vendors. Our products may contain undetected errors when
first introduced or as we introduce product upgrades. The
pressures we face to be the first to market new products or
functionality increases the possibility that we will offer
products in which we or our customers later discover problems.
We have experienced new product and product upgrade errors in
the past and expect similar problems in the future. These
problems may cause us to incur significant warranty and other
costs and divert the attention of our engineering personnel from
our product development efforts. If we are unable to repair
these problems in a timely manner, we may experience a loss of
or delay in revenues and significant damage to our reputation
and business prospects.

Many of our customers rely upon our products for
business-critical applications. Because of this reliance,
errors, defects or other performance problems in our products
could result in significant financial and other damage to our
customers. Our customers could attempt to recover these losses
by pursuing product liability claims against us, which, even if
unsuccessful, would likely be time-consuming and costly to
defend and could adversely affect our reputation.



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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 problems that
arise from technological changes and evolving industry
standards. We also may devote significant resources developing
products designed to meet

42



---



##### Table of Contents



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 may impose unique
requirements on network equipment providers before they are
permitted to sell to the government, such as that supplied
products qualify as made in the United States. Such requirements
may be imposed on some or all government procurements. We may
not always satisfy all such 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
revenues growth may be lower than expected.

Because several of our significant competitors
maintain dominant positions in selling network equipment
products to enterprises and others, they may have the ability to
establish de facto standards within the industry. Any actions by
these competitors or 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
network communication products would be damaging to our
reputation and our ability to generate revenue.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We intend to work with other companies to
    develop products, 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 network communications technology into products
and solutions sold by these organizations. We may be unable to
enter into agreements of this type 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 to selling these
products. If we are unable to enter into these agreements on
favorable terms, or if our 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 in 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.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | 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 resorted to litigation 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

43



---



##### Table of Contents



scope of the proprietary rights of others.
Litigation of this type 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 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 would suffer.



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

In the transformation agreement among Aprisma,
Riverstone and us and the related contribution agreements, each
of we, Aprisma and Riverstone received intellectual property
related to the products to be sold by each of us or to be used
in each of our respective businesses. In addition, we and
Riverstone both own rights in technology within a family of
application-specific integrated circuits used in both our
X-Pedition product family and Riverstones switch router
product family. Riverstone is primarily a provider of
infrastructure equipment to service providers in metropolitan
area networks. There are no contractual provisions between us
and Riverstone that prohibit Riverstone from developing products
that are competitive with our products, including products based
upon these commonly owned rights. If Riverstone is acquired by
one of our competitors, there are no contractual provisions that
would prohibit the combined entity from selling or developing
products competitive with our products.

Risks Related to our Manufacturing and
Components



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We use several key components for our
    products that we purchase 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 chips that we use in our wireless RoamAbout
solution, as well as several other key components used in the
manufacture of our products. We do not carry significant
inventories of these components, and we do not have a long-term,
fixed price or minimum volume agreements 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. We have encountered shortages and delays in obtaining
these components in the past and may experience similar
shortages and delays 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 may not be able to deliver our products to
our customers in accordance with 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.

44



---



##### Table of Contents



Even if we are able to obtain these components in
sufficient volumes 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. The existing competitive conditions may not
permit us to do so, in which case our operating results may
suffer.



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend upon a limited number of contract
    manufacturers for substantially all of our manufacturing
    requirements, and the loss of our primary contract manufacturer
    would impair our ability to meet the demands of our
    customers

We do not have internal manufacturing
capabilities. We outsource most 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. Our agreement with Flextronics expired in February
2002 and, since that time, we have been operating under an
informal extension of the expired contract while negotiating a
new agreement with Flextronics. Our secondary contract
manufacturer is Accton Technology Corporation, which provides
services similar to those of Flextronics. If we experience
increased demand for our products, we will need to increase our
manufacturing capacity with Flextronics and Accton or add
additional contract manufacturers. Flextronics and Accton also
build products for other companies, and we cannot be certain
that they will always have sufficient quantities of inventory
and capacity available or that they will allocate their internal
resources to fulfill our requirements. Further, qualifying a new
contract manufacturer and commencing volume production is
expensive and time consuming. The loss of our existing contract
manufacturers, the failure of our existing contract
manufacturers to satisfy their contractual obligations to us 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 products. 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 product requirements for our
contract manufacturer. 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. If we overestimate our requirements, our
contract manufacturers may have excess inventory, which we may
be obligated to pay for. If we underestimate our requirements,
our contract manufacturers may have inadequate inventory, which
could result in delays in delivery to our customers and our
recognition of revenue.

In addition, because our contract manufacturers
produce our products based on forward-looking demand projections
that we supply to them, we may be unable to respond quickly to
sudden changes in demand. For example, following the events of
September 11, 2001, we experienced a sudden drop in demand
for our products and were unable to reduce the amount of product
manufactured by our contract manufacturers in the short term,
which were based on demand forecasts provided prior to the
sudden change in demand. This contributed to a
$72.9 million charge for inventory obsolescence in
transition 2001. With respect to sudden increases in demand, we
may be unable to satisfy this demand with our products, thereby
forfeiting revenue opportunities and damaging our customer
relationships, and with respect to sudden decreases in demand,
we may find ourselves with excess finished goods inventory,
which could expose us to high manufacturing costs compared to
our revenue in a financial quarter and increased risks of
inventory obsolescence.

45



---



##### Table of Contents



Other Risks Related to our Business



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

Our sales to customers outside of the United
States accounted for approximately 53% of our revenue in the ten
months ended December 29, 2001, 51% of our revenue in the
fiscal year ended March 3, 2001 and 39% of our revenue in
the fiscal year ended February 29, 2000. We are seeking to
expand our international presence by establishing arrangements
with distribution partners as well as through strategic
relationships in international markets. Consequently, we
anticipate that sales outside of the United States will continue
to account for a significant portion of our revenues in future
periods.

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 reductions 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 international presence subjects us to risks,
including:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | political and economic instability and changing
    regulatory environments in foreign countries;                                              
|
| |  | increased time to deliver solutions to customers
    due to the complexities 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;                               
|
| |  | difficulties in hiring and managing employees in
    foreign countries; and                                                                    
|
| |  | political and economic instability.                                                                                                            



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market price of our common stock has
    historically been volatile, and the recent decline in the market
    price of our common stock may negatively impact our ability to
    make future strategic acquisitions, raise capital, issue debt,
    and retain employees

Shares of our common stock have experienced, and
may continue to experience, substantial price volatility,
including significant recent decreases, particularly as a result
of variations between our actual or anticipated financial
results and the published expectations of analysts,
announcements by our competitors and us, economic weakness and
political instability, high turnover in our senior management,
the pending SEC investigation of our accounting practices, and
class action lawsuits recently filed against us. In addition,
the stock markets have experienced extreme price fluctuations
that have affected the market price of many technology
companies. These price fluctuations have, in some cases, been
unrelated to the operating performance of these companies. A
major decline in capital markets generally, or in the market
price of our shares of common stock, may negatively impact our
ability to make future strategic acquisitions, raise capital,
issue debt, or retain employees. These factors, as well as
general economic and political conditions and the outcome of the
pending SEC investigation and class action lawsuits, may in turn
materially adversely affect the market price of our shares of
common stock.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to maintain our listing
    on the New York Stock Exchange, and if we fail to do so, the
    price and liquidity of our common stock may
    decline

The New York Stock Exchange has quantitative
maintenance criteria for the continued listing of common stock
on the exchange, including a requirement that we maintain a
minimum 30-day average

46



---



##### Table of Contents



closing price per share of $1.00. Throughout much
of 2002, our stock has traded below $2.00 per share. Recently,
the 30-day average closing price per share of our common stock
fell below $1.00, and we received a notice from the New York
Stock Exchange that our continued listing is under review.
Although we are currently in compliance with the 30-day average
closing price requirement, we must also meet this requirement
six months from receipt of the New York Stock Exchange notice to
maintain our listing.


The New York Stock Exchange recently proposed
significant amendments to its rules relating to corporate
governance. The proposed amendments to such rules, if adopted,
will require us to make a number of changes in our business in
order to remain in compliance. As a result, we are currently
evaluating our compliance with the proposed rule changes to
ensure our ability to comply with the proposed rules; however,
we cannot assure you that, if the proposed rules are adopted, we
will be able to achieve or maintain compliance with them.

If we fail to maintain the continued listing of
our shares on the New York Stock Exchange, our stock price would
likely decline, the ability of our stockholders to buy and sell
shares of our common stock may be materially impaired and the
efficiency of the trading market for our common stock would be
adversely affected. In addition, delisting of our shares could
harm our ability to recruit directors and employees, diminish
customer confidence in us, harming our revenues and our
financial condition, and would significantly impair our ability
to raise capital in the public markets should we desire to do so
in the future.



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have changed our name and the names of
    some of our products, and our existing and potential customers
    and business partners may not recognize our new brand, which
    could adversely affect our sales and marketing efforts and cause
    our revenue to decline

Before the transformation, we sold our products
and services under the Cabletron name, and we believe that the
sale of our products and services significantly benefited from
the use of the Cabletron brand name. We now sell our products
and services under our new name, Enterasys and have also changed
the names of some of our products. Our existing and potential
customers and business partners and investors may not recognize
our new brand or the new names of our products. We have incurred
and expect to continue to incur significant sales and marketing
expenses to build a strong new brand identity. The expenses we
incur toward building our brand, however, will not result in
immediate returns and it may be a long time before enterprises
and business partners recognize and make positive connections
with our new brand. If we fail to promote our new brand and new
product names successfully in local and international markets,
our business may suffer.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | The tax implications of Riverstone spin-off
    may place restrictions on us and subject us to
    risks

We have received a ruling from the Internal
Revenue Service that the distribution of Riverstone qualifies as
a tax-free spin-off under Section 355 of the Internal
Revenue Code of 1986, as amended. 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 the distribution of Riverstones
shares fails to qualify as a tax-free spin-off under
Section 355 of the Internal Revenue Code, we will recognize
a taxable gain equal to the difference between the fair market
value of Riverstone on the date of the distribution and our
adjusted tax basis in Riverstones 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 Riverstones
stock received by the stockholder on the date of distribution.
Any taxable gain recognized by us or our stockholders as a
result of a failure of the Riverstone distribution to qualify as
tax-free 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 the Riverstone distribution. These
limitations will generally prevent us from issuing capital stock
if the issuance of the capital stock occurs in conjunction with
the Riverstone distribution, and results in one or more persons
acquiring more than 50% of our capital stock. Stock issuance
transactions which occur during the two years following any
distribution are presumed to occur in conjunction with the

47



---



##### Table of Contents



distribution. These limitations may restrict our
ability to undertake transactions involving the issuance of our
capital stock that we believe would be beneficial.




| |                                                                                
| | -------------------------------------------------------------------------------
| | We have made and may make future
    acquisitions, which involve numerous risks

We have supplemented and may further supplement
our internal growth by acquiring complementary businesses,
technologies or product lines. We may be unable to identify and
acquire suitable candidates on reasonable terms, if at all. Our
financial condition and stock price may make it difficult for us
to complete acquisitions. We compete for acquisition candidates
with other companies that have substantially greater financial,
management and other resources than we do. This competition may
increase the prices we pay to acquire other companies, which are
often high when compared to the assets and sales of these
companies. Our acquisitions may not generate sufficient revenues
to offset increased expenses associated with the acquisition in
the short term or at all.

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 and unanticipated costs incurred in
    assimilating the operations of the acquired businesses;
|
| |  | 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;                                                            
|
| |  | operating inefficiencies associated with managing
    companies in different locations; and                 
|
| |  | impairment of relationships with employees,
    customers, suppliers and strategic partners.                

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 or to
amortize significant amounts of goodwill or other intangible
assets in connection with future acquisitions, which could
adversely affect our operating results. We have made
acquisitions and may make future acquisitions that result in
in-process research and development expenses being charged in a
particular quarter, which could adversely affect our operating
results for that quarter.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our articles of incorporation
    and bylaws and our investor rights plan could delay or prevent a
    change in control, which could reduce our stock
    price

Pursuant to our certificate of incorporation, our
Board of Directors has the authority to issue preferred stock
and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without
any vote or action by our stockholders. The issuance of
preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our
outstanding voting stock. Our certificate of incorporation
requires the affirmative vote of the holders of not less than
85% of the outstanding shares of our capital stock for the
approval or authorization of certain business combinations as
described in our certificate of incorporation. In addition, our
staggered Board of Directors and certain advance notification
requirements for submitting nominations for election to our
Board of Directors contained in our bylaws, as well as other
provisions of Delaware law and our certificate of incorporation
and bylaws, could delay or make a change in control more
difficult to accomplish.

In April 2002, our Board of Directors adopted a
stockholder rights plan pursuant to which we paid a dividend of
one right for each share of common stock held by stockholders of
record on June 11, 2002. As

48



---



##### Table of Contents



a result of the plan, our acquisition by a party
not approved by our Board of Directors could be prohibitively
expensive. This plan is designed to protect stockholders from
attempts to acquire us while our stock price is inappropriately
low or on terms or through tactics that could deny all
stockholders the opportunity to realize the full value of their
investment. Under the plan, each right initially represents the
right, under certain circumstances, to purchase 1/1,000 of a
share of a new series of our preferred stock at an exercise
price of $20 per share. Initially the rights will not be
exercisable and will trade with our common stock. If a person or
group acquires beneficial ownership of 15% or more of the then
outstanding shares of our common stock or announces a tender or
exchange offer that would result in such person or group owning
15% or more of our then outstanding common stock, each right
would entitle its holder (other than the holder or group which
acquired 15% or more of our common stock) to purchase shares of
our common stock having a market value of two times the exercise
price of the right. Our Board of Directors may redeem the rights
at the redemption price of $.01 per right, subject to
adjustment, at any time prior to the earlier of June 11,
2012, the expiration date of the rights, or the date of
distribution of the rights, as determined under the plan.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

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

Interest Rate
Sensitivity.We maintain an investment
portfolio consisting partly of debt securities of various
issuers, types and maturities. The securities that we classify
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 we classify 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 100 basis point
increase in interest rates would result in an approximately
$0.3 million decrease in the fair market value of these
securities from their value at the December 29, 2001. We
are able to hold our fixed income investments until maturity,
and therefore we do not expect our operating results or cash
flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities
portfolio, unless we are required to liquidate these securities
earlier to satisfy immediate cash flow requirements.

Foreign Currency Exchange
Risk.Due to our global operating and
financial activities, we are exposed to changes in foreign
currency exchange rates. At December 29, 2001, we had net
asset exposures to the Australian Dollar, Eurodollar, Japanese
Yen and Brazilian Real and a net liability exposure to the
British Pound. We do not expect our operating results or cash
flows to be affected to any significant degree by foreign
currency exchange rate fluctuations.

To minimize the potential adverse impact of
changes in foreign currency exchange rates, we, at times, have
used foreign currency forward and option contracts to hedge the
currency risk inherent in our global operations. We do not use
financial instruments for trading or other speculative purposes,
nor do we use leveraged financial instruments. Gains and losses
on these contracts are largely offset by gains and losses on the
underlying assets and liabilities. We had no foreign exchange
forward or option contracts outstanding at December 29,
2001.

Equity Price Risk.We maintain a small amount of investments in marketable equity
securities of publicly-traded companies. As of December 29,
2001, these investments were considered available-for-sale with
any unrealized gains or losses deferred as a component of
stockholders equity. It is not customary for us to make
investments in equity securities of publicly traded companies as
part of our investment strategy. In the past, we have also made
strategic equity and convertible debt investments in
privately-held technology companies, many of which are in the
start-up or development stage. Investments in these

49



---



##### Table of Contents



companies are highly illiquid and inherently
risky as the technologies or products they have under
development, or the services they propose to provide, are
typically in early stages of development and may never
materialize. If these companies are not successful, we could
lose our entire investment. The concentration of our investments
in a small number of related industries, primarily
telecommunications, exposes our investments to increased risk,
particularly if these industries continue to be adversely
affected by the worldwide economic slowdown. At
December 29, 2001, these investments totaled approximately
$64.1 million. During the ten-month transition period ended
December 29, 2001, we recorded impairment losses of
$65.9 million relating to these investments. While our
operating results may be materially adversely affected by
fluctuations in the value of these investments, we do not expect
any material adverse impact in our cash flows.





Item 8.     Consolidated
Financial Statements and Supplementary Data

Our consolidated financial statements and related
notes and report of independent accountants are included
beginning on page F-1 of this transition report on
Form 10-K.




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

None.

50



---



##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Directors

Craig R. Benson, 47

Director since 1984


Member of the Audit Committee


Mr. Benson is Governor-Elect of the State of
New Hampshire. Mr. Benson was Director of Operations of
Cabletron from November 1984 until April 1989, when he became
Chairman, Chief Operating Officer and Treasurer. In September
1997, Mr. Benson resigned as Chief Operating Officer. In
May 1998, Mr. Benson was appointed President, Chief
Executive Officer, Chairman, and Treasurer of Cabletron. On
June 3, 1999, Mr. Benson resigned as President, Chief
Executive Officer, Chairman, and Treasurer.

James A. Davidson, 43

Director since September 2000


Mr. Davidson is a founder and principal of
Silver Lake Partners, a private equity firm. From June 1990 to
November 1998, Mr. Davidson was an investment banker with
Hambrecht & Quist LLC, most recently serving as a
Managing Director and Head of Technology Investment Banking. He
is also a member of the Board of Directors of Seagate Technology
Holdings.

Paul R. Duncan, 62

Director since 1989


Member of the Incentive Compensation Committee
and Audit Committee


Mr. Duncan was an Executive Vice President
of Reebok International Ltd., a manufacturer of athletic
footwear and apparel, from 1990 until his retirement in 2001,
except for the period of May 1, 1999 through
January 30, 2000 when Mr. Duncan temporarily retired.
Mr. Duncan also served as Chief Operating Officer of Reebok
from June 1995 to October 1995, Chief Financial Officer from May
1985 to June 1995 and has been a Director of Reebok since May
1989.

Edwin A. Huston, 64

Director since August 2001


Member of the Incentive Compensation Committee
and Audit Committee


Mr. Huston was Vice Chairman of Ryder
System, Inc., an international logistics and transportation
solutions company, from May 1999 to June 2001, when he retired.
Mr. Huston also served Ryder as Executive Vice President,
Finance from 1979 to 1986, Senior Executive Vice President,
Finance from 1986 to 1999 and Chief Financial Officer from 1979
to 1999. From 1991 to 1993, he served as Chairman of the Federal
Reserve Bank in Atlanta. Mr. Huston also serves as a
director of Unisys Corporation, Answerthink, Inc., and Kaman
Corporation.

William K. OBrien, 58

Chief Executive Officer and Director since April
2002


Mr. OBrien has served as a Director
and as our Chief Executive Officer since April 2002. Prior to
joining us, from July 2000 to March 2002, he was retired. From
July 1998 through June 2000, he was Global Managing Partner of
PricewaterhouseCoopers LLP, serving on the Global Leadership
Team as transition leader for the merger of Price Waterhouse LLP
and Coopers & Lybrand LLP and as Global Leader of Human
Capital. From October 1994 through June 1998, he was Chief
Operating Officer of Coopers & Lybrand LLP.

51



---



##### Table of Contents



Executive Officers

The following table sets forth information
regarding our executive officers as of November 1, 2002.
Tenure at Enterasys refers to both service to the
Enterasys Subsidiary prior to the merger of the Enterasys
Subsidiary into us and service to us following this merger.
Tenure at Cabletron refers to service to us prior to
the merger of the Enterasys Subsidiary into us.

|                     |  |     |    |          |  |                                                                                     
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|William K. OBrien   |  |     | 58 |          |  | Chief Executive Officer and Director                                                
|Yuda Doron           |  |     | 50 |          |  | President                                                                           
|Richard S. Haak, Jr. |  |     | 48 |          |  | Chief Financial Officer and Treasurer                                               
|Gerald M. Haines II  |  |     | 39 |          |  | Executive Vice President of Strategic Affairs,
    Chief Legal Officer and Secretary

William K. OBrienhas served as a Director and as our
Chief Executive Officer since April 2002. Prior to joining us,
from July 2000 to March 2002, he was retired. From July 1998
through June 2000, he was Global Managing Partner of
PricewaterhouseCoopers LLP, serving on the Global Leadership
Team as transition leader for the merger of Price Waterhouse LLP
and Coopers & Lybrand LLP worldwide and as Global
Leader of Human Capital. From October 1994 through June 1998, he
was Chief Operating Officer of Coopers & Lybrand LLP.

Yuda Doronhas
served as our President since April 2002. Prior to joining us,
from August 2001 to April 2002, Mr. Doron was retired. From
August 1999 until August 2001, Mr. Doron held various
executive-level positions at Sapiens International, a global
provider of information technology solutions, including
Executive Vice President of Marketing and Business Development
and Chief Executive Officer of Sapiens wholly-owned
subsidiary, eZoneX. From May 1998 to April 1999, he was Chief
Executive Officer of BreezeCOM Ltd., a provider of broadband
wireless access solutions used by service providers and
enterprises. From January 1992 to March 1998, he held a variety
of executive level positions at Cheyenne Software and, following
the acquisition of Cheyenne Software, Computer Associates
International, Inc., a developer of eBusiness management
software.

Richard S. Haak, Jr.has served as our Chief Financial
Officer and Treasurer since October 2002. From October 2001 to
October 2002, he was our Vice President of Finance. Prior to
joining us, from August 2000 to September 2001, Mr. Haak
was Chief Financial Officer of Advantage Schools, a for-profit
education management company. From June 1998 to July 2000, he
was Vice President and Corporate Controller of PictureTel
Corporation, a videoconferencing equipment manufacturer. From
1982 to May 1998, he held a variety of positions at Wheelabrator
Technologies Inc. (and its predecessors), an energy and
environmental services company, and was its Vice President and
Controller from 1993 to May 1998.

Gerald M. Haines IIhas served as Executive Vice President
of Strategic Affairs, Chief Legal Officer and Secretary of
Enterasys since May 2001. From September 2000 to May 2001, he
served as Senior Vice President and General Counsel of
Cabletron. Prior to joining Cabletron, from 1995 to 2000, he
served as General Counsel and Secretary of Applied Extrusion
Technologies, Inc., a specialty plastics company, and as a Vice
President of Applied Extrusion Technologies from 1998 to 2000.
From 1990 to 1995, he practiced corporate law at Choate,
Hall & Stewart, a Boston, Massachusetts law firm.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires our officers and directors, and
persons who own more than 10% of our outstanding Common Stock,
to file reports of ownership and changes in ownership with the
SEC and the New York Stock Exchange. Officers, directors and
greater than 10% stockholders are required by SEC regulations to
furnish us with all copies of Section 16(a) forms they file.

52



---



##### Table of Contents



Based solely on our review of the copies of such
forms received by us, or written representations from certain
reporting persons that no Form 5s were required for those
persons, we believe that during the ten-month transition period
ended December 29, 2001, all filing requirements were
timely satisfied.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Director Compensation

For their services to us, non-employee directors
other than Messrs. Benson and Davidson receive an annual
retainer of $20,000, plus $1,500 for each Board meeting attended
in person, $1,000 for each committee meeting attended in person,
$500 for each Board meeting attended via telephone and $500 for
each committee meeting attended via telephone. Members of the
Special Committee of the Board of Directors, which was formed to
oversee our internal review of certain contractual, accounting,
and other matters, received $1,500 for each committee meeting
attended in person or via telephone. Committee chairmen receive
an additional $500 per committee meeting. Directors who are
employed by us, as well as Messrs. Benson and Davidson, do
not receive compensation for attendance at Board of Directors or
committee meetings. Directors are reimbursed for expenses
attendant to Board membership.

Pursuant to the Deferral Plan for Directors,
adopted by our Board of Directors in October 2001, prior to the
first day of the calendar year, or within 30 days of
becoming a non-employee director, non-employee directors may
elect to defer all or a portion of their fees for that calendar
year, and any deferred fees earn interest at a rate equal to the
rate payable on ten-year United States Treasury securities as of
the first day of the calendar year. Deferred fees are payable to
the director upon the earliest to occur of the conclusion of the
directors service on the Board of Directors, the approval
of a hardship request by the plan administrator, or the
termination of the plan.

During fiscal years 1989 to 1998, each
non-employee director was automatically granted an option to
purchase 25,000 shares of common stock on the day after the date
of each annual meeting of stockholders pursuant to the terms of
our 1989 Directors Option Plan. As of March 1, 1999,
the 1989 Directors Option Plan was terminated.
Non-employee directors other than Messrs. Benson and
Davidson now participate in our 1998 Equity Incentive Plan.

Pursuant to the 1989 Directors Option Plan,
Mr. Duncan was granted an option to purchase 100,000 shares
of common stock upon the consummation of our initial public
offering in 1989. During Board of Directors meetings on
April 5, 2000 and on December 1, 2000, our Board of
Directors voted unanimously to grant to Mr. Duncan options
to purchase a total of 50,000 additional shares of common stock
at the then fair market value of our common stock under the
terms of the 1998 Equity Incentive Plan. On May 15, 2000,
Mr. Duncan was granted options to purchase 7,500 shares in
each of our four operating subsidiaries, Aprisma, Enterasys
Subsidiary, GNTS and Riverstone. These options were fully vested
in November 2000 but were not exercisable until the earliest to
occur of (a) a distribution of the stock of the applicable
subsidiary to our stockholders, (b) a change in control of
the applicable subsidiary or (c) April 1, 2004.

The distribution of our Riverstone shares to our
stockholders and the merger of the Enterasys Subsidiary into us
on August 6, 2001 had several effects on these and other
options held by Mr. Duncan. Effective August 5, 2001,
the Board of Directors accelerated the vesting of
Mr. Duncans options to purchase shares of our common
stock and resolved that they would remain exercisable until the
earlier of August 5, 2003 or their original expiration
date. Upon the distribution of Riverstone, Mr. Duncan
received a fully vested option to purchase 0.5131 shares of
Riverstone common stock for each share of our common stock
subject to his original options. Upon the merger of the
Enterasys Subsidiary into us, as a replacement for his original,
pre- merger option to purchase shares of the Enterasys
Subsidiary, Mr. Duncan received a vested, exercisable
option to purchase 1.39105 shares of our common stock for each
share of Enterasys Subsidiary common stock covered by his
original, pre-merger option.

During the transition year ended
December 29, 2001, GNTS ceased operations and it is
anticipated that all options to purchase the common stock of
GNTS, including those held by Mr. Duncan, will expire

53



---



##### Table of Contents



unexercised. On August 9, 2002, we completed
the sale of our Aprisma subsidiary. In connection with this
sale, all options to purchase the common stock of Aprisma,
including those held by Mr. Duncan, were cancelled.


On August 21, 2001, the Board of Directors
granted an option to Mr. Huston to purchase 25,000 shares
of our common stock. The option will vest in three equal annual
installments commencing on August 6, 2002, the first
anniversary of the date of Mr. Hustons appointment to
the Board of Directors.

Compensation Committee Interlocks and Insider
Participation

No member of the Incentive Compensation Committee
of our Board of Directors has ever served as an officer or
employee of us. None of our executive officers serves as a
member of the Board of Directors or compensation committee of
any entity that has one or more executive officers serving on
our Board of Directors or Incentive Compensation Committee.

Summary Compensation Table

In October 2001, we changed our fiscal year end
from the Saturday closest to the last day in February of each
year to the Saturday closest to the last day in December of each
year. Accordingly, the following table contains information
regarding the compensation received for the transition period
beginning March 4, 2001 and ended December 29, 2001
and the fiscal years ended March 3, 2001, February 29,
2000, and February 28, 1999 by our Chief Executive Officer,
our other four most highly compensated executive officers who
were serving as executive officers on December 29, 2001,
Mr. Patel, our former Chairman, President and Chief
Executive Officer, Mr. Jaeger, our former Executive Vice
President, and Mr. Kirkpatrick, our former Chief Financial
Officer and Chief Operating Officer. In the table, the
transition period is identified as 2001T.

In August 2001, in connection with the merger of
the Enterasys Subsidiary into us, Messrs. Patel, Jaeger and
Kirkpatrick resigned their positions as executive officers. In
September 2001, Messrs. Patel and Jaeger terminated their
employment with us and entered into consulting arrangements to
provide strategic advice and assistance to us, Aprisma and
Riverstone, as more fully described in this transition report on
Form 10-K on page 55. Upon his resignation in August 2001,
Mr. Kirkpatrick became an employee of Aprisma and, in March
2002, terminated his employment with Aprisma. In April 2002,
Messrs. Fiallo and Riddle resigned their positions as executive
officers and terminated their employment with us. In May 2001,
Mr. Shanahan resigned his position as an executive officer
and terminated his employment with us. In August 2002, in
connection with our sale of Aprisma, Mr. Skubiszs
employment with us terminated.

Messrs. Shanahan and Riddle became executive
officers in August 2001 in connection with the merger of the
Enterasys Subsidiary into us and the Aprisma sale.
Mr. Haines became an executive officer in October 2001.
Accordingly, the compensation reported in the table below covers
the compensation received by Messrs. Shanahan, Riddle and
Haines only for the transition period ended December 29,
2001.

For the fiscal year ended March 3, 2001, the
Summary Compensation Table includes the grant of options to
purchase shares of stock of our former operating subsidiaries.
The merger of the Enterasys Subsidiary into us in August 2001
had certain effects on these options. During the transition year
ended December 29, 2001, GNTS ceased operations and it is
anticipated that any outstanding GNTS options will expire
unexercised. In addition, in August 2002, we sold our Aprisma
subsidiary and all outstanding options to purchase shares of
Aprisma were cancelled. The option grant information in the
Summary Compensation Table has not been adjusted to reflect the
effects of these events. For a more detailed description of the
effects of the merger on options granted to the executive
officers named in the Summary Compensation Table, please refer
to the section below titled Effects of Riverstone Spin,
Enterasys Merger and Aprisma Sale.

54



---



##### Table of Contents



Summary Compensation Table

|                            |                             |      |       |                     |  |              |         |            |  |                |         |         |  |  |       |     |  |  |         |           |  |  |           |        | 
|--------------------------- | --------------------------- | ---- | ----- | ------------------- |  | ------------ | ------- | ---------- |  | -------------- | ------- | ------- |  |  | ----- | --- |  |  | ------- | --------- |  |  | --------- | ------ | 
|                            |                             |      |       |                     |  | Long-term    |         |           
|                            |                             |      |       | Annual Compensation |  | Compensation |         |           
|                            |                             |      |       |                     |  |              |         |           
|                            |                             |      |       |                     |  | Other Annual |         | Securities |  | All Other     
|                            |                             |      |       |                     |  | Compensation |         | Underlying |  | Compensation  
|Name and Principal Position |                             | Year |       | Salary ($)          |  | Bonus ($)(1) |         | ($)(2)     |  | Options (#)(3) |         | ($)(4) 
|                            |                             |      |       |                     |  |              |         |            |  |                |         |        
|Piyush G. Patel             |                             |      | 2001T |                     |  |              | 467,077 |            |  |                | 600,000 |         |  |  |      |     |  |  |        |           |  |  | 1,879,742 |       
|                            | Former Chairman, President  |      |       | 2001                |  |              |         | 600,000    |  |                |         | 625,000 |  |  |       |    |  |  |         | 4,611,000 |  |  |           | 1,120  | 
|                            | and Chief Executive         |      |       | 2000                |  |              |         | 252,879    |  |                |         | 490,000 |  |  |       |    |  |  |         | 300,000   |  |  |           | 870    | 
|                            | Officer                     |      |       | 1999                |  |              |         | 184,608    |  |                |         |        |  |  |       |    |  |  |         | 120,000   |  |  |           | 120    | 
|Enrique P. Fiallo           |                             |      | 2001T |                     |  |              | 253,847 |            |  |                | 200,500 |         |  |  | 1,839 |     |  |  |        |           |  |  | 99,108    |       
|                            | Former Chairman, President  |      |       | 2001                |  |              |         | 313,943    |  |                |         | 138,375 |  |  |       |    |  |  |         | 1,500,000 |  |  |           | 43,313 | 
|                            | and Chief Executive         |      |       | 2000                |  |              |         | 250,000    |  |                |         | 123,500 |  |  |       |    |  |  |         | 75,000    |  |  |           | 51,875 | 
|                            | Officer                     |      |       | 1999                |  |              |         | 76,923     |  |                |         | 109,615 |  |  |       |    |  |  |         | 50,000    |  |  |           | 15,231 | 
|Eric Jaeger                 |                             |      | 2001T |                     |  |              | 145,077 |            |  |                | 244,000 |         |  |  | 1,839 |     |  |  |        |           |  |  | 612,583   |       
|                            | Former Executive Vice       |      |       | 2001                |  |              |         | 244,231    |  |                |         | 166,000 |  |  |       |    |  |  |         | 1,587,000 |  |  |           | 37,883 | 
|                            | President                   |      |       | 2000                |  |              |         | 204,904    |  |                |         | 67,500  |  |  |       |    |  |  |         | 70,000    |  |  |           | 1,845  | 
|                            |                             |      |       | 1999                |  |              |         | 65,384     |  |                |         |        |  |  |       |    |  |  |         | 30,000    |  |  |           | 120    | 
|David J. Kirkpatrick        |                             |      | 2001T |                     |  |              | 230,193 |            |  |                | 265,000 |         |  |  | 1,839 |     |  |  |        |           |  |  | 629,583   |       
|                            | Former Chief Financial      |      |       | 2001                |  |              |         | 299,000    |  |                |         | 192,125 |  |  |       |    |  |  |         | 1,587,000 |  |  |           | 36,706 | 
|                            | Officer and Chief           |      |       | 2000                |  |              |         | 289,000    |  |                |         | 126,150 |  |  |       |    |  |  |         | 30,000    |  |  |           | 870    | 
|                            | Operating Officer           |      |       | 1999                |  |              |         | 271,212    |  |                |         | 95,625  |  |  |       |    |  |  |         | 35,000    |  |  |           | 120    | 
|Jerry A. Shanahan           |                             |      | 2001T |                     |  |              | 184,223 |            |  |                | 85,300  |         |  |  |      |     |  |  | 50,000  |           |  |  | 282       |       
|                            | Former Chief Operating      |      |       | 2001                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            | Officer                     |      |       | 2000                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            |                             |      |       | 1999                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|Michael A. Skubisz          |                             |      | 2001T |                     |  |              | 194,616 |            |  |                |        |         |  |  |      |     |  |  | 66,666  |           |  |  | 50,758    |       
|                            | Former President of         |      |       | 2001                |  |              |         | 230,000    |  |                |         | 22,500  |  |  |       |    |  |  |         | 800,000   |  |  |           | 3,890  | 
|                            | Aprisma                     |      |       | 2000                |  |              |         | 230,000    |  |                |         | 58,000  |  |  |       |    |  |  |         |          |  |  |           | 2,024  | 
|                            |                             |      |       | 1999                |  |              |         | 210,768    |  |                |         | 12,500  |  |  |       |    |  |  |         | 55,000    |  |  |           | 120    | 
|James E. Riddle             |                             |      | 2001T |                     |  |              | 137,500 |            |  |                | 100,000 |         |  |  |      |     |  |  | 350,000 |           |  |  | 469,725   |       
|                            | Former Executive Vice       |      |       | 2001                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            | President Worldwide         |      |       | 2000                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            | Marketing                   |      |       | 1999                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|Gerald M. Haines II         |                             |      | 2001T |                     |  |              | 180,769 |            |  |                | 41,000  |         |  |  |      |     |  |  | 200,000 |           |  |  | 833       |       
|                            | Executive Vice President    |      |       | 2001                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            | of Strategic Affairs, Chief |      |       | 2000                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 
|                            | Legal Officer and Secretary |      |       | 1999                |  |              |         | N/A        |  |                |         | N/A     |  |  |       | N/A |  |  |         | N/A       |  |  |           | N/A    | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the transition period ended December 29,
    2001, these amounts include a special bonus of $300,000 for
    Mr. Patel and $100,000 each for Messrs. Jaeger and
    Kirkpatrick for their efforts in connection with the merger of
    the Enterasys Subsidiary into us and the Riverstone spin-off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | These amounts represent reimbursement for the
    payment of Medicaid taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | For the transition period ended December 29,
    2001, these amounts represent options to purchase shares of the
    Enterasys Subsidiary, except for Mr. Skubisz, for which the
    amount represents options to purchase shares of Aprisma. For the
    fiscal year ended March 3, 2001, these amounts include:
    (a) for Mr. Patel, options to purchase 800,000 shares
    of the common stock of Aprisma, 1,500,000 shares of the common
    stock of the Enterasys Subsidiary, 811,000 shares of the common
    stock of GNTS and 1,500,000 shares of the common stock of
    Riverstone; (b) for Mr. Fiallo, only options to
    purchase shares of the common stock of the Enterasys Subsidiary;
    (c) for Mr. Jaeger, options to purchase 50,000 shares
    of our common stock, 266,667 shares of the common stock of
    Aprisma, 500,000 shares of the common stock of the Enterasys
    Subsidiary, 270,333 shares of the common stock of GNTS and
    500,000 shares of the common stock of Riverstone; (d) for
    Mr. Kirkpatrick, options to

55



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | purchase 50,000 shares of our common stock,
    266,667 shares of the common stock of Aprisma, 500,000 shares of
    the common stock of the Enterasys Subsidiary, 270,333 shares of
    the common stock of GNTS and 500,000 shares of the common stock
    of Riverstone; and (e) for Mr. Skubisz, only options
    to purchase shares of the common stock of Aprisma. For fiscal
    years prior to the fiscal year ended March 3, 2001, these
    amounts represent options to purchase our common stock.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | These amounts include matching 401(k)
    contributions for each fiscal year. In the transition period
    ended December 29, 2001, these amounts also include:
    (a) for Mr. Patel, severance payments of $1,350,000,
    consulting fees of $102,000 paid pursuant to a consulting
    arrangement more fully described on page F-55 and
    forgiveness of indebtedness of $427,742; (b) for
    Mr. Fiallo, forgiveness of indebtedness, including imputed
    interest, of $98,275; (c) for Mr. Jaeger, severance
    payments of $467,000, consulting fees of $51,000 paid pursuant
    to a consulting arrangement more fully described on
    page F-55 and forgiveness of indebtedness of $93,750;
    (d) for Mr. Kirkpatrick, severance payments of
    $535,000 and forgiveness of indebtedness of $93,500;
    (e) for Mr. Shanahan, relocation expenses of $282;
    (f) for Mr. Skubisz, forgiveness of indebtedness of
    50,000; and (g) for Mr. Riddle, consulting fees of
    $392,250 received prior to becoming an employee of us and
    relocation expenses of $76,278. In the fiscal year ended
    March 3, 2001, these amounts also include: (a) for
    Mr. Fiallo, imputed interest of $10,943; (b) for
    Mr. Jaeger, imputed interest of $5,513; (c) for
    Mr. Kirkpatrick, imputed interest of $4,336; and
    (d) for Mr. Skubisz, imputed interest of $2,770. In
    the fiscal year ended February 29, 2000, these amounts also
    include:

(a) for Mr. Fiallo, relocation expenses
of $48,044 and imputed interest of $2,961; (b) for
Mr. Jaeger, imputed interest of $1,225; and (c) for
Mr. Skubisz, imputed interest of $1,154.

Option Grants in the Last Fiscal
Year

The following table sets forth grants of stock
options during the transition period ended December 29,
2001 to those executive officers listed in the Summary
Compensation Table. The table reflects grants of options to
purchase common stock of the Enterasys Subsidiary (referred to
in the table as Enterasys) and our former operating
subsidiary, Aprisma. The numbers included in the table do not
reflect the effect of the merger of the Enterasys Subsidiary
into us or the sale of Aprisma. As described in more detail
under the section titled Effects of Riverstone Spin,
Enterasys Merger and Aprisma Sale, following the
merger of the Enterasys Subsidiary into us on August 6,
2001, all options to purchase shares of the Enterasys Subsidiary
were relinquished and, in replacement, we issued options to
purchase 1.39105 shares of our common stock for each share of
Enterasys Subsidiary common stock covered by the original option
at an exercise price equal to the exercise price of the option
to purchase Enterasys Subsidiary common stock divided by
1.39105. In connection with the sale of Aprisma on
August 9, 2002, the Aprisma options were cancelled.

The potential realizable value of each option set
forth in the table below is calculated based upon the terms of
the option at its date of grant. It is calculated assuming that
the fair market value of the underlying common stock on the date
of grant, which is generally the exercise price for the option,
appreciates at the indicated annual rates compounded annually
for the entire term of the option and that the option is
exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on
the requirements of the Securities and Exchange Commission and
do not reflect our estimate of future stock price growth.

The percentage of total options to purchase
shares of the Enterasys Subsidiary granted to employees in the
last fiscal year is based on options to purchase an aggregate of
3,837,194 shares of common stock granted to employees of the
Enterasys Subsidiary during that fiscal year. The percentage of
total options to purchase shares of Aprisma granted to employees
of Aprisma in the last fiscal year is based on options to
purchase an aggregate of 3,455,643 shares of Aprisma common
stock granted to employees of Aprisma during that fiscal year,
as adjusted for a one-for-three reverse stock split effective in
January 2002. All options were granted at the fair market value
on the date of grant as determined by the respective board of
directors of the Enterasys Subsidiary and Aprisma.

56



---



##### Table of Contents



The options provisionally vest as to 25% of the
shares on the first anniversary of the date of grant, then pro
rata on a monthly basis thereafter. These options actually
vested to the extent provisionally vested, on August 6,
2001 in the case of the Enterasys Subsidiary options and on
August 9, 2002 in the case of the Aprisma options. Vesting
of all options in the following table accelerates by ten months
in the event of a change in control, as defined in the
applicable option plan and may also be subject to further
acceleration pursuant to our change-in-control severance benefit
plans for key employees.

Option Grants In The Last Fiscal
Year

|                      |  |         |           |            |  |            |         |             |  |            |      |                       |  |     |      |  |  |  |          |  |  |  |           |  |  |  |           | 
|--------------------- |  | ------- | --------- | ---------- |  | ---------- | ------- | ----------- |  | ---------- | ---- | --------------------- |  | --- | ---- |  |  |  | -------- |  |  |  | --------- |  |  |  | --------- | 
|                      |  |         |           |            |  |            |         |             |  |            |      |                      
|                      |  |         |           |            |  |            |         |             |  |            |      | Potential Realizable 
|                      |  |         |           |            |  |            |         |             |  |            |      | Value at Assumed     
|                      |  |         |           | Number of  |  | % of Total |         |             |  |            |      | Annual Rates of Stock
|                      |  |         |           | Shares     |  | Options    |         |             |  |            |      | Price Appreciation   
|                      |  |         |           | Underlying |  | Granted    |         |             |  |            |      | for Option Term($)   
|                      |  |         |           | Options    |  | In Fiscal  |         | Per Share   |  | Expiration |      |                      
|Name                  |  | Company |           | Granted(#) |  | Year(%)    |         | Price($/sh) |  | Date       |      | 5%                    |  | 10%
|                      |  |         |           |            |  |            |         |             |  |            |      |                       |  |    
|Jerry A. Shanahan(1)  |  |         | Enterasys |            |  |            | 50,000  |             |  |            | 1.30 |                       |  |     | 5.00 |  |  |  | 03/29/11 |  |  |  | 157,224   |  |  |  | 398,436   | 
|Michael A. Skubisz(2) |  |         | Aprisma   |            |  |            | 66,666  |             |  |            | 1.93 |                       |  |     | 9.75 |  |  |  | 11/19/11 |  |  |  | 408,774   |  |  |  | 1,035,922 | 
|James E. Riddle(3)    |  |         | Enterasys |            |  |            | 350,000 |             |  |            | 9.12 |                       |  |     | 9.00 |  |  |  | 06/25/11 |  |  |  | 1,981,018 |  |  |  | 5,020,289 | 
|Gerald M. Haines II   |  |         | Enterasys |            |  |            | 200,000 |             |  |            | 5.21 |                       |  |     | 8.50 |  |  |  | 05/29/11 |  |  |  | 1,069,121 |  |  |  | 2,709,362 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Upon Mr. Shanahans termination of
    employment on May 31, 2002, the unvested portion of this
    option terminated unexercised and the vested portion terminated
    unexercised on August 29, 2002.                                                                                                                                                                                                   
|   
|(2) | In January 2002, Aprisma effected a one-for-three
    reverse split of its common stock. The number of shares
    presented in the table above reflects the effect of this reverse
    split. On August 9, 2002, we completed the sale of Aprisma,
    and in connection with this sale, all options to purchase the
    common stock of Aprisma, including those held by
    Mr. Skubisz, were cancelled.
|   
|(3) | Upon Mr. Riddles termination of
    employment on April 5, 2002, the unvested portion of this
    option terminated unexercised and the vested portion terminated
    unexercised on July 4, 2002.                                                                                                                                                                                                       

Option Exercises and Fiscal Year-end
Values

The table below sets forth information for those
executive officers listed in the Summary Compensation Table with
respect to options exercised during the transition period ended
December 29, 2001 and options held as of December 29,
2001. The numbers included in the table reflect the effect of
the merger of the Enterasys Subsidiary into us on options held
by the executive officers included therein. For a description of
the effects of the merger on options held by the executive
officers, refer to the section below titled Effects of
Riverstone Spin, Enterasys Merger and Aprisma
Sale.

The value of in-the-money options represents the
positive spread between the exercise price of the stock options
and the closing price of our common stock as of
December 28, 2001, which was $8.72 per share. There was no
public trading market for the common stock of Aprisma as of
December 29, 2001. Accordingly, the value of the
in-the-money options to purchase common stock of Aprisma,
represents the positive spread between the exercise price of the
stock options and $9.75, which represents the fair market value
of the common stock of Aprisma as determined by the board of
directors of Aprisma. On August 9, 2002, we completed the
sale of Aprisma. In connection with this sale, all options to
purchase the common stock of Aprisma were cancelled. GNTS ceased
operations during the transition period ended December 29,
2001. Accordingly, none of the options to purchase the common
stock of GNTS were in-the-money as of December 29, 2001. It
is anticipated that the options to purchase shares of GNTS will
expire unexercised.

57



---



##### Table of Contents



Option Exercises And Fiscal Year End
Values

|                      |  |         |         |             |  |          |         |                        |  |                      |           |               |  |             |           |  |  |  |           |  |  |  |           |  |  |  |            | 
|--------------------- |  | ------- | ------- | ----------- |  | -------- | ------- | ---------------------- |  | -------------------- | --------- | ------------- |  | ----------- | --------- |  |  |  | --------- |  |  |  | --------- |  |  |  | ---------- | 
|                      |  |         |         |             |  |          |         |                        |  |                      |           |              
|                      |  |         |         |             |  |          |         | Number of Shares       |  |                     
|                      |  |         |         |             |  |          |         | of Common Stock        |  | Value of Unexercised
|                      |  |         |         |             |  |          |         | Underlying Unexercised |  | In-the-Money        
|                      |  |         |         |             |  |          |         | Options at Fiscal      |  | Options at Fiscal   
|                      |  |         |         | Shares      |  |          |         | Year End(#)            |  | Year End($)         
|                      |  |         |         | Acquired on |  | Value    |         |                        |  |                     
|Name                  |  | Company |         | Exercise    |  | Realized |         | Unexercisable          |  | Exercisable          |           | Unexercisable |  | Exercisable
|                      |  |         |         |             |  |          |         |                        |  |                      |           |               |  |            
|Piyush G. Patel(1)    |  |         | Company |             |  |          | 303,000 |                        |  |                      | 1,624,448 |               |  |             |          |  |  |  | 1,873,574 |  |  |  |          |  |  |  | 11,867,030 | 
|                      |  |         | Aprisma |             |  |          |        |                        |  |                      |          |               |  |             | 266,666   |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|                      |  |         | GNTS    |             |  |          |        |                        |  |                      |          |               |  |             | 811,000   |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|Enrique P. Fiallo(2)  |  |         | Company |             |  |          | 113,364 |                        |  |                      | 457,517   |               |  |             | 1,061,119 |  |  |  | 973,291   |  |  |  | 6,721,022 |  |  |  | 6,164,728  | 
|Eric Jaeger(1)        |  |         | Company |             |  |          | 492,545 |                        |  |                      | 2,566,800 |               |  |             |          |  |  |  | 239,219   |  |  |  |          |  |  |  | 1,515,189  | 
|                      |  |         | Aprisma |             |  |          |        |                        |  |                      |          |               |  |             | 88,888    |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|                      |  |         | GNTS    |             |  |          |        |                        |  |                      |          |               |  |             | 270,333   |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|David J. Kirkpatrick  |  |         | Company |             |  |          | 778,207 |                        |  |                      | 3,033,127 |               |  |             |          |  |  |  |          |  |  |  |          |  |  |  |           | 
|                      |  |         | Aprisma |             |  |          |        |                        |  |                      |          |               |  |             | 88,888    |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|                      |  |         | GNTS    |             |  |          |        |                        |  |                      |          |               |  |             | 270,333   |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|Jerry A. Shanahan(3)  |  |         | Company |             |  |          | 13,469  |                        |  |                      | 66,939    |               |  |             | 247,491   |  |  |  | 91,575    |  |  |  | 1,425,074 |  |  |  | 546,275    | 
|                      |  |         | Aprisma |             |  |          |        |                        |  |                      |          |               |  |             | 1,000     |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|                      |  |         | GNTS    |             |  |          |        |                        |  |                      |          |               |  |             | 1,000     |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|Michael A. Skubisz(4) |  |         | Company |             |  |          | 8,968   |                        |  |                      | 66,932    |               |  |             | 27,000    |  |  |  | 73,194    |  |  |  | 91,222    |  |  |  | 245,774    | 
|                      |  |         | Aprisma |             |  |          |        |                        |  |                      |          |               |  |             | 333,332   |  |  |  |          |  |  |  | 0         |  |  |  |           | 
|James E. Riddle(5)    |  |         | Company |             |  |          |        |                        |  |                      |          |               |  |             | 486,866   |  |  |  |          |  |  |  | 1,158,741 |  |  |  |           | 
|Gerald M. Haines II   |  |         | Company |             |  |          | 7,091   |                        |  |                      | 33,299    |               |  |             | 278,209   |  |  |  | 29,560    |  |  |  | 762,154   |  |  |  | 163,854    | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to their terms, all exercisable options
    to purchase shares of our common stock held by
    Messrs. Patel and Jaeger remain exercisable for the period
    ending ten years from the date of the options grant.                                                                                                                                                                                                                                                           
|   
|(2) | In connection with Mr. Fiallos
    termination of employment on April 5, 2002 and pursuant to
    their terms, 933,316 unexercisable options to purchase shares of
    our common stock held by Mr. Fiallo terminated effective on
    April 5, 2002 and 1,081,971 exercisable options terminated
    unexercised on July 4, 2002.                                                                                                                                                    
|   
|(3) | In connection with Mr. Shanahans
    termination of employment on May 31, 2002 and pursuant to
    their terms, 216,623 unexercisable options to purchase shares of
    our common stock held by Mr. Shanahan terminated effective
    on May 31, 2002 and 131,422 exercisable options terminated
    unexercised on August 29, 2002. Pursuant to their terms,
    options to purchase 1,000 shares of GNTS held by
    Mr. Shanahan terminated unexercised on August 29, 2002.       
|   
|(4) | In connection with the sale of Aprisma on
    August 9, 2002 and pursuant to their terms, 27,000
    unexercisable options to purchase shares of our common stock
    held by Mr. Skubisz terminated effective on August 9,
    2002 and 64,410 exercisable options terminated unexercised on
    November 8, 2002. Pursuant to their terms, all options to
    purchase shares of Aprisma held by Mr. Skubisz terminated
    in connection with the sale of Aprisma on August 9, 2002.
|   
|(5) | In connection with Mr. Riddles
    termination of employment on April 5, 2002 and pursuant to
    their terms, 355,007 unexercisable options to purchase shares of
    our common stock held by Mr. Riddle terminated effective on
    April 5, 2002 and 131,859 exercisable options terminated
    unexercised on July 4, 2002.                                                                                                                                                      

Effects of Riverstone Spin, Enterasys Merger
and Aprisma Sale

On August 6, 2001, we distributed our shares
of Riverstone common stock to our stockholders and established
the Enterasys Subsidiary as an independent public company by
merging the Enterasys Subsidiary into us and changing our name
to Enterasys Networks, Inc. As described below,
these transactions affected the stock options to purchase shares
of our common stock and shares of the

58



---



##### Table of Contents



Enterasys Subsidiary held by our employees,
including those held by those executive officers listed in the
Summary Compensation Table.


In connection with these events, options to
purchase shares of our common stock held by all employees (other
than the employees of Aprisma), including the executives (other
than Mr. Skubisz) that would have vested after
February 28, 2002 were cancelled, and options that were
scheduled to vest prior to that date (assuming a quarterly
vesting schedule for some options) were accelerated. The
accelerated options expired on November 6, 2001.

Each employee who held options to purchase shares
of our common stock, including the executive officers listed in
the Summary Compensation Table, received an option to purchase
0.5131 shares of Riverstone common stock for each share of our
common stock subject to his or her original options, excluding
the original options that were cancelled. These Riverstone
options were fully vested when issued and the unexercised
portion of these options terminated on November 6, 2001.

Most employees who held options to purchase
common stock of the Enterasys Subsidiary, including the
executive officers listed in the Summary Compensation Table,
received options to purchase shares of our common stock as
replacement for the Enterasys Subsidiary stock options, in
exchange for relinquishing their Enterasys Subsidiary options.
Each of these replacement options gave the holder the right to
purchase 1.39105 shares of our common stock for each share of
the Enterasys Subsidiary common stock covered by his or her
original, pre-merger option. The exercise prices of these
replacement options are equal to the exercise prices of the
original Enterasys Subsidiary options, divided by 1.39105 to
reflect the effect of the merger.

Upon grant, the replacement options to purchase
shares of our common stock granted to Messrs. Fiallo,
Haines, Riddle and Shanahan were vested to the same extent as
their respective original Enterasys Subsidiary options were
provisionally vested, measured as a percentage of the total
number of shares subject to each grant. The remainder of the
replacement options vest along the provisional vesting schedule
of the original Enterasys Subsidiary options, again measured as
a percentage of the total number of shares subject to each
option. The replacement options granted to Messrs. Patel,
Jaeger and Kirkpatrick were fully exercisable on the date of
grant and remain exercisable for a period of ten years from the
date of grant.

On August 9, 2002, we sold Aprisma and all
outstanding options to purchase shares of Aprisma were cancelled.

59



---



##### Table of Contents






Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table sets forth the number of
shares of our voting stock beneficially owned (as determined
under the rules of the SEC), directly or indirectly, as of
October 31, 2002, by (i) each of our current directors
and each nominee for director, (ii) each of our executive
officers and former executive officers named in the Summary
Compensation Table, (iii) all of our current directors,
director nominees and executive officers as a group, and
(iv) each person who is known to us to beneficially own
more than five percent (5%) of the outstanding shares of any
class of our voting stock, as well as the percentage of the
outstanding voting stock represented by each such amount. The
information in the table is based on information available to
us. The total number of shares of our common stock outstanding
on October 31, 2002 was 201,996,247. Consistent with the
rules of the Securities and Exchange Commission, the table below
lists the ownership of the executive officers named in the
Summary Compensation Table, although Messrs. Fiallo,
Jaeger, Kirkpatrick, Patel, Riddle, Shanahan and Skubisz are no
longer serving as executive officers. The information regarding
beneficial ownership of directors, director nominees and
executive officers as a group represents beneficial ownership of
our current directors, director nominees and executive officers.
Except as otherwise indicated, each person has sole investment
and voting powers with respect to the shares shown as
beneficially owned. The address of Elm Ridge Capital Management
is 747 Third Avenue, 3rd Floor, New York, NY 10017.

BENEFICIAL OWNERSHIP

|                                                                           |  |                    |            |            |  |  |       |  
|-------------------------------------------------------------------------- |  | ------------------ | ---------- | ---------- |  |  | ----- | -
|                                                                           |  | Common Stock       |            | Percent of
|Name                                                                       |  | Beneficially Owned |            | Class     
|                                                                           |  |                    |            |           
|5% Stockholders                                                            |  |                    |            |            |  |  |       |  
|Elm Ridge Capital Management                                               |  |                    | 16,060,000 |            |  |  | 7.95  |  
|Officers and Directors                                                     |  |                    |            |            |  |  |       |  
|Craig R. Benson(1)                                                         |  |                    | 15,342,397 |            |  |  | 7.60  |  
|James A. Davidson(2)                                                       |  |                    | 9,614,843  |            |  |  | 4.76  |  
|Paul R. Duncan(3)                                                          |  |                    | 113,776    |            |  |  | *     |  
|Enrique P. Fiallo                                                          |  |                    | 1,000      |            |  |  | *     |  
|Gerald M. Haines II(4)                                                     |  |                    | 126,427    |            |  |  | *     |  
|Edwin A. Huston(5)                                                         |  |                    | 9,333      |            |  |  | *     |  
|Eric Jaeger(6)                                                             |  |                    | 219,219    |            |  |  | *     |  
|David J. Kirkpatrick                                                       |  |                    | 5,608      |            |  |  | *     |  
|Piyush G. Patel(7)                                                         |  |                    | 1,873,574  |            |  |  | *     |  
|James E. Riddle                                                            |  |                    |           |            |  |  | *     |  
|Jerry A. Shanahan                                                          |  |                    | 1,743      |            |  |  | *     |  
|Michael A. Skubisz(8)                                                      |  |                    | 64,410     |            |  |  | *     |  
|All current directors and executive officers as a
    group (9 persons)(9) |  |                    | 25,841,776 |            |  |  | 12.79 | %



---



| |   |             
| | - | ------------
| | * | Less than 1%



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 175,000 shares held in trust for the
    benefit of Mr. Bensons children.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | Mr. Davidson is a managing member of Silver
    Lake Technology Associates, L.L.C., which is the sole general
    partner of Silver Lake Partners, L.P. and Silver Lake Investors,
    L.P. Consequently, pursuant to Rule 16a-1(a)(2) under the
    Securities Exchange Act of 1934, as amended (the
    Act), Mr. Davidson may be deemed to be the
    beneficial owner of our equity securities held by
    such limited partnerships. As of October 31, 2002,
    (i) Silver Lake Partners, L.P. held 56,474 shares of
    Series D Convertible Preferred Stock, which were
    convertible into 1,539,386 shares of common stock; 21,721 shares
    of Series E Convertible Preferred Stock, which were
    convertible into 789,437 shares of common stock; Warrants to
    purchase 6,429,394 shares of common stock; Class A Parent
    Warrants to purchase 217,209 shares of common stock; and
    Class B Parent Warrants to purchase 173,768 shares

60



---



##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | of common stock, and (ii) Silver Lake
    Investors, L.P. held 1,625 shares of Series D Convertible
    Preferred Stock, which were convertible into 44,295 shares of
    common stock; 625 shares of Series E Convertible Preferred
    Stock, which were convertible into 22,715 shares of common
    stock; Warrants to purchase 184,970 shares of common stock;
    Class A Parent Warrants to purchase 6,249 shares of common
    stock; and Class B Parent Warrants to purchase 4,999 shares
    of common stock. Mr. Davidson is also a managing member of
    Silver Lake Technology Management, L.L.C., which is the sole
    manager of Silver Lake Technology Investors, L.L.C. Pursuant to
    Rule 16a-1(a)(2) under the Act, Mr. Davidson may
    therefore also be deemed to be the beneficial owner
    of the following equity securities held by the latter limited
    liability company as of October 31, 2002: 1,249 shares of
    Series D Convertible Preferred Stock, which were
    convertible into 34,046 shares of common stock; 481 shares of
    Series E Convertible Preferred Stock, which were
    convertible into 17,482 shares of common stock; Warrants to
    purchase 142,243 shares of common stock; Class A Parent
    Warrants to purchase 4,806 shares of common stock; and
    Class B Parent Warrants to purchase 3,844 shares of common
    stock, As permitted by Rule 16a-1(a)(4) under the Act,
    Mr. Davidson disclaims that he is the beneficial owner of
    the foregoing securities and this filing shall not be deemed an
    admission that he is, for purposes of Section 16 of the Act
    or otherwise, the beneficial owner of any equity securities
    covered by this Statement.
|   
|(3) | Includes 110,432 shares of common stock subject
    to options exercisable within 60 days after
    October 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | Includes 125,627 shares of common stock subject
    to options outstanding and exercisable within 60 days after
    October 31, 2002. Includes 800 shares of common stock
    jointly held by Mr. Haines and his wife, with whom
    Mr. Haines shares voting and investment power with respect
    to these 800 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(5) | Includes 8,333 shares of common stock subject to
    options outstanding and exercisable within 60 days after
    October 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(6) | Consists of 219,219 shares of common stock
    subject to options outstanding and exercisable within
    60 days after October 31, 2002. Of the shares subject
    to these options, 20,000 shares have been transferred to an
    irrevocable trust for the benefit of Mr. Jaegers
    children. Mr. Jaegers sister is the sole trustee of
    this trust and has sole voting and investment power over these
    shares. Mr. Jaeger disclaims beneficial ownership of these
    shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | Consists of 1,873,574 shares of common stock
    subject to options outstanding and exercisable within
    60 days after October 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(8) | Consists of 64,410 of common stock subject to
    options outstanding and exercisable within 60 days after
    October 31, 2002. These options terminated unexercised on
    November 8, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(9) | Includes 879,392 shares of common stock subject
    to options outstanding and exercisable within 60 days after
    October 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              




Item 13.     Certain
Relationships and Related Transactions

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 us and our four separate operating subsidiaries, we and the
operating subsidiaries issued certain securities to the
Strategic Investors, as described below. Mr. Davidson, one
of our directors, is a Managing Member of Silver Lake.

On August 29, 2000, we issued to the
Strategic Investors (i) 65,000 shares of our 4%
Participating Convertible Series A Preferred Stock
(Series A Preferred Stock) at an initial
conversion rate of $40.00 per share and 25,000 shares of its 4%
Participating Convertible Series B Preferred Stock
(Series B Preferred Stock) at an initial
conversion value 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
our common stock for an initial exercise price of $45.00 per
share and Class B Warrants to purchase up to 200,000 shares
of our common stock for an initial exercise price of $35.00 per
share. The Strategic Investors also agreed to purchase, and
received certain rights to purchase, securities in each of our

61



---



##### Table of Contents



operating subsidiaries. In addition, we agreed to
(i) 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 and
(ii) cause each of the four operating subsidiaries to issue
to the Strategic Investors additional rights to purchase shares
of our common stock upon the occurrence of certain events
relating to the operating subsidiaries.


In connection with the original transaction, we
granted certain registration rights to the Strategic Investors.
Pursuant to these rights, at any time Strategic Investors that
hold 25% or more of our common stock issued upon exercise of the
common stock purchase rights or warrants described above may
request that we register such shares of common stock, subject to
the right, upon the advice of underwriters, to reduce the number
of shares proposed to be registered ratably among the demanding
holders. We are obligated to effect only two registrations
pursuant to such a request. In addition, the Strategic Investors
have unlimited rights to request that shares be included in any
registration by us of its preferred stock or common stock, other
than registrations of employee benefit plans and certain other
limited exceptions.

Mr. Davidson joined our Board of Directors
in September 2000 in connection with the original transaction.
The agreement entered into between us and the Strategic
Investors obligated us to appoint a representative of Silver
Lake Partners, L.P. to our Board of Directors upon the closing
of the transaction. Mr. Davidson currently serves as this
representative. Additionally, for so long as the strategic
investors continue to own at least 35% of our Series D and
Series E Preferred Stock, we are obligated to use our
reasonable best efforts to nominate a representative of Silver
Lake Partners, L.P. for election to the Board of Directors upon
the expiration of Mr. Davidsons term and to use our
reasonable best efforts to cause the election of this nominee,
including soliciting proxies for the election of this nominee as
a director.



| |                                               
| | ----------------------------------------------
| | Transactions Since the Original
    Investment

On February 16, 2001, Riverstone completed
an initial public offering in which 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 initial public offering, the Strategic Investors
exercised their Riverstone common stock purchase rights and
purchased 5,401,970 shares of Riverstone common stock for
aggregate cash consideration of approximately $46.6 million.
Certain of the stock purchase rights were exercised through the
conversion of a portion of the rights based upon the differences
between the market value and exercise price of the rights. The
Strategic Investors also received warrants to purchase 104,167
shares of Riverstone common stock for $12.00 per share, the
initial public offering price.

On July 12, 2001, we and the Strategic
Investors entered into a Securities Exchange Agreement pursuant
to which all 65,000 outstanding shares of Series A
Preferred Stock were exchanged for 65,000 shares of
Series D Preferred Stock and all 25,000 outstanding shares
of Series B Preferred Stock were exchanged for 25,000
shares of Series E Preferred Stock. The Series D
Preferred Stock and the Series E Preferred Stock are 4%
participating redeemable convertible preferred stock with
initial conversion values of $40 and $30 per share,
respectively. The shares of Series D and E Preferred Stock
have certain preferential rights and features which are
described in the Certificate of Designation, Preferences and
Rights of the Series D and Series E Participating
Convertible Preferred Stock. In addition, we and the Strategic
Investors entered into a First Amendment to Amended and Restated
Securities Purchase Agreement, Standstill Agreement and
Registration Rights Agreement, pursuant to which it was agreed,
among other things, to amend certain terms of the investment
agreements in contemplation of the distribution of our shares of
Riverstone common stock to our stockholders and the merger of
the Enterasys Subsidiary into us.

On August 6, 2001, we distributed our shares
of Riverstone common stock to our stockholders and merged the
Enterasys Subsidiary into us. In connection with the
distribution and merger, and pursuant to the July 12, 2001
amendment, (i) Riverstone issued to the Strategic Investors
additional warrants for the purchase of Riverstone common stock,
(ii) the exercise price per share of the Class A
warrants was reduced to $28.424 and the exercise price per share
of the Class B warrants was reduced to $22.108, and
(iii) the subsidiary stock purchase rights issued to the
Strategic Investors by the Enterasys Subsidiary were

62



---



##### Table of Contents



cancelled and, in replacement, the Strategic
Investors received warrants to purchase 7,400,000 shares of our
common stock at an aggregate exercise price of $45,880,000, or
$6.20 per share.


Change-in-Control Severance Benefit Plans for
Key Employees



| |                                                      
| | -----------------------------------------------------
| | The 2002 Change-in-Control Severance
    Benefit Plan

We adopted a 2002 Change-in-Control Severance
Benefit Plan for Key Employees which was amended and restated
effective as of April 26, 2002. The plan provides severance
benefits for various key employees designated by our Board of
Directors, including each of the executive officers named in the
Summary Compensation Table, in the event of specified
terminations of employment following a change in
control (as defined below).

Pursuant to the plan, if a participants
employment is terminated for reasons deemed to be without cause
or by the participant for reasons deemed to be valid under the
plan within the 18-month period following a change in control,
the participant will receive the following severance benefits:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an amount equal to the annual base salary of the
    participant in effect immediately before the date of termination
    or immediately before the change in control, whichever is higher;                                                                                                                                                                                                                                                                                                               
|
| |  | an amount equal to the highest aggregate amount
    of bonus paid to the participant in cash (or, if not paid in
    cash, deferred) in any one of the three most recent fiscal years
    ended before the termination or the participants target
    incentive bonus for the fiscal year in which the change in
    control occurs, whichever is higher;                                                                                                                                                
|
| |  | a pro-rated portion of the target incentive bonus
    of the participant for the fiscal year in which the termination
    occurs, adjusted for periods for which the participant has
    already been paid amounts under the incentive bonus arrangement;                                                                                                                                                                                                                                                 
|
| |  | acceleration of the vesting of participants
    options to purchase shares of our common stock, such that the
    number of options that would have become vested and exercisable
    during the seven months (and for those four participants,
    including Mr. Haines, who were also participants in our
    former change-in-control plan, the eighteen months) following
    the participants termination of employment will become
    immediately vested and exercisable for a period of 90 days;
|
| |  | the right to continue to participate in our
    medical, dental and life insurance plans or programs for a
    period of one year following termination; and                                                                                                                                                                                                                                                                                                                                              
|
| |  | a gross-up payment which will apply if amounts
    paid to a participant would be effectively reduced by a federal
    excise tax on excess parachute payments, in which case a
    participant will be entitled to receive additional cash so that
    the participant will have received the amount that the
    participant would have received in the absence of any parachute
    tax after the participant has paid the parachute taxes.                                                            

A change in control under the plan generally
includes the following events:



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a person or group becomes the beneficial owner of
    thirty percent (30%) or more of the then outstanding shares of
    our common stock or the combined voting power voting power of
    our then outstanding voting securities entitled to vote for the
    election of directors;
|
| |  | directors at the time of adoption of the plan, or
    later approved by the Board, cease to constitute a majority of
    our Board of Directors;                                                                                                                                     
|
| |  | a merger, consolidation or other reorganization
    involving us, or a sale or other disposition of all or
    substantially all of our assets, other than certain defined
    transactions; or                                                                                      
|
| |  | approval by the stockholders of our complete
    liquidation or dissolution.                                                                                                                                                                                                         

63



---



##### Table of Contents





| |                 
| | ----------------
| | The Aprisma Plan

Aprisma also adopted a change-in-control plan, in
which Mr. Skubisz participated. The plan was substantially
similar to our 2002 plan described above. The plan provided that
if a participant is eligible to receive cash severance benefits
under both the Aprisma change-in-control plan and any of our
change-in-control plans or programs, the participant shall only
receive cash severance benefits under the Aprisma
change-in-control plan. On August 9, 2002, we completed the
sale of Aprisma. Following this transaction, we have no further
obligation to Mr. Skubisz under its or Aprismas
change-in-control plans.

Consulting Arrangements

In connection with their resignations as
executive officers, in September 2001 we entered into consulting
arrangements with Messrs. Patel and Jaeger to provide
strategic advice and assistance to us, Riverstone and Aprisma
for a period of one year. Pursuant to Mr. Patels
consulting arrangement, Mr. Patel received weekly
compensation of $6,000 though December 31, 2001 and weekly
compensation of $3,000 from January 1, 2002 through
September 2, 2002. Pursuant to Mr. Jaegers
consulting arrangement, Mr. Jaeger received weekly
compensation of $3,000 through December 31, 2001 and weekly
compensation of $1,500 from January 1, 2002 through
September 2, 2002.

Separation Agreements

In connection with Mr. Patels
resignation and termination of employment, Mr. Patel
received lump sum severance payments totaling $1,350,000 and a
$385,000 promissory note delivered to us by Mr. Patel on
April 12, 2000, plus $38,939 of interest on this promissory
note, was forgiven. Pursuant to an agreement with us, half of
the severance amount was paid to Mr. Patel on August 3,
2001 and, in consideration of his compliance with the terms of
the agreement, half was paid to Mr. Patel on
January 2, 2002.

In connection with Mr. Jaegers
resignation and termination of employment, Mr. Jaeger
received a lump sum severance payment of $467,000 and the
remaining principal balance of $93,750 on a promissory note in
the original principal amount of $125,000, delivered to us by
Mr. Jaeger on January 1, 2000, was forgiven. Pursuant
to an agreement with us, half of the severance amount was paid
to Mr. Jaeger on August 3, 2001 and, in consideration
of his compliance with the terms of the agreement, half was paid
to Mr. Jaeger on January 2, 2002.

In connection with Mr. Kirkpatricks
resignation and termination of employment, Mr. Kirkpatrick
received a lump sum severance payment of $535,000 and the
remaining principal balance of $93,750 on a promissory note in
the original principal amount of $125,000, delivered to us by
Mr. Kirkpatrick on June 15, 2000, was forgiven.
Pursuant to an agreement with us, half of the severance amount
was paid to Mr. Kirkpatrick on August 3, 2001 and, in
consideration of his compliance with the terms of the agreement,
half was paid to Mr. Kirkpatrick on January 2, 2002.

In connection with Mr. Kirkpatricks
resignation and termination of employment with Aprisma,
effective as of March 29, 2002, Aprisma and Mr. Kirkpatrick
entered into a Separation Agreement and Release. Pursuant to the
agreement, Mr. Kirkpatrick received a lump sum severance
payment of $315,000 and a $200,000 promissory note delivered to
us by Mr. Kirkpatrick on June 1, 2000 was forgiven.

In connection with Mr. Fiallos
resignation and termination of employment effective as of
April 5, 2002, we entered into a Separation Agreement and
Release with Mr. Fiallo. Pursuant to the agreement,
Mr. Fiallo is entitled to receive $9,615 per week for a
period of twelve months from April 5, 2002, subject to his
compliance with the terms of the agreement. In addition, a
$100,000 promissory note delivered to us by Mr. Fiallo on
August 23, 1999 and a $125,000 promissory note delivered to
us by Mr. Fiallo on January 1, 2000 were forgiven.
Options granted to Mr. Fiallo for the purchase of 1,081,971
shares of our common stock were vested on April 5, 2002 and
were thereafter exercisable in accordance with their terms. All
933,316 unvested options held by Mr. Fiallo terminated on
April 5, 2002. All 1,081,971 vested options held by
Mr. Fiallo terminated unexercised on July 4, 2002.

64



---



##### Table of Contents



In connection with Mr. Riddles
resignation and termination of employment effective as of
April 5, 2002, we entered into a Separation Agreement and
Release with Mr. Riddle. Pursuant to the agreement,
Mr. Riddle is entitled to receive $8,779 per week for the
period of twelve months from April 5, 2002, subject to his
compliance with the terms of the agreement. In addition, a
$100,000 promissory note delivered to us by Mr. Riddle on
September 6, 2001 was forgiven. Options granted to
Mr. Riddle for the purchase of 131,859 shares of our common
stock were vested on April 5, 2002 and were thereafter
exercisable in accordance with their terms. All 355,007 unvested
options held by Mr. Riddle terminated on April 5,
2002. All 131,859 vested options held by Mr. Riddle
terminated unexercised on July 4, 2002.

In connection with Mr. Shanahans
resignation and termination of employment effective as of
May 31, 2002, we entered into a Separation Agreement and
Release with Mr. Shanahan. Pursuant to the agreement,
Mr. Shanahan received $4,231 per week for the period from
May 31, 2002 through August 31, 2002 plus a lump sum
payment of $220,000 within ten days of August 31, 2002.
Options granted to Mr. Shanahan for the purchase 131,422
shares of our common stock, 1,000 shares of common stock of GNTS
and 1,000 shares of common stock of Aprisma were vested on
May 31, 2002 and were thereafter exercisable in accordance
with their terms. All 1,000 vested options to purchase shares of
the common stock of Aprisma held by Mr. Shanahan were
cancelled on August 9, 2002 in connection with the sale of
Aprisma. All 216,623 unvested options held by Mr. Shanahan
terminated on May 31, 2002. All 131,422 vested options to
purchase shares of our common stock and shares of GNTS common
stock held by Mr. Shanahan terminated unexercised on
August 29, 2002.

Indebtedness of Management

On August 23, 1999, we entered into an
interest-free promissory note with Mr. Fiallo in the amount
of $100,000. The outstanding principal balance on the note of
$100,000 was forgiven in connection with Mr. Fiallos
resignation and termination of employment in April 2002.

On January 1, 2000, we entered into
interest-free promissory notes with each of Messrs. Fiallo
and Jaeger, each for the principal amount of $125,000. We
entered into a similar promissory note with Mr. Kirkpatrick
on June 15, 2000. Pursuant to the terms of the notes, we
forgave 25% of the original principal balance of the notes on
January 1, 2001 for Messrs. Fiallo and Jaeger and on
February 28, 2001 for Mr. Kirkpatrick. In connection
with the merger of the Enterasys Subsidiary into us, on
August 6, 2001, we forgave the remaining original principal
balance of the notes issued by Messrs. Fiallo, Jaeger and
Kirkpatrick of $93,500.

On April 12, 2000, we entered into a
promissory note with Mr. Patel in the principal amount of
$385,000 bearing interest at a rate of 6.46% per year. The
proceeds of the note were to be applied to the payment of taxes
owed by Mr. Patel relating to the shares of our common stock he
received in connection with our acquisition of Yago Systems in
1998. On August 6, 2001, we forgave the outstanding
principal and all accrued interest on the note of $427,742.

On June 1, 2000, we entered into a
promissory note with Mr. Kirkpatrick for the principal
amount of $200,000 bearing interest at a rate of 8% per year.
The outstanding principal balance and all accrued interest on
the note of $229,246 was forgiven in connection with
Mr. Kirkpatricks resignation and termination of
employment in April 2002.

On September 6, 2001, we entered into an
interest-free promissory note with Mr. Riddle for the
principal amount of $100,000. The outstanding principal balance
on the note of $100,000 was forgiven in connection with Mr.
Riddles resignation and termination of employment in April
2002.




Item 14.     Controls
and Procedures

In January 2002, we discovered that a previously
recognized $4 million sale in our Asia Pacific region did
not qualify for revenue recognition during the period in which
we had originally reported the revenue. We also learned that the
SEC had opened a formal order of investigation relating to us
and our affiliates. In response to these developments, our Board
of Directors formed a Special Committee to oversee an

65



---



##### Table of Contents



internal review of our financial accounting and
reporting for the fiscal year ended March 3, 2001 and the
ten-month transition period ended December 29, 2001.


Our management has reassessed our internal
controls in each of the regions in which we operate in
connection with the audit of our financial statements for the
ten-month transition period ended December 29, 2001. The
Special Committee, management and KPMG have each advised the
Audit Committee that during the course of the audit and the
internal review, deficiencies in internal controls were
identified relating to:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | accounting policies and procedures;                            
|
| |  | inadequate systems integration and data
    reconciliation; and
|
| |  | personnel and their roles and responsibilities.                

KPMG has advised the Audit Committee that these
internal control deficiencies constitute reportable conditions
and, collectively, a material weakness as defined in Statement
of Auditing Standards No. 60 (SAS No. 60).
We have assigned the highest priority to the short-term and
long-term correction of these internal control deficiencies and
have implemented and continue to implement changes to our
accounting policies and procedures, systems and personnel to
address these issues.

We have also performed additional procedures
designed to ensure that these internal control deficiencies do
not lead to material misstatements in our consolidated financial
statements and to enable the completion of KPMGs audit of
our consolidated financial statements, notwithstanding the
presence of the internal control weaknesses noted above.

Specifically, we have implemented the following
corrective actions as well as additional procedures:



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Review and revision of revenue
    recognition policies and contracting management policies and
    procedures, including more formalized training of finance, sales
    and other staffs;                                       
|
| | 2. Retention of new management in senior
    finance and operations positions, and in many staff positions;                                                                                                                         
|
| | 3. Creation of an internal audit department
    and retention of an internal audit director;                                                                                                                                        
|
| | 4. Review and revision of our code of
    conduct;                                                                                                                                                                                  
|
| | 5. Communication of a zero tolerance policy
    for employees who engage in violations of our accounting
    policies and procedures;                                                                                               
|
| | 6. Establishment of an anonymous hotline for
    employees to report potential violations of our policies and
    procedures or of applicable laws or regulations;                                                                  
|
| | 7. Additional management oversight and
    detailed reviews of personnel, disclosures and reporting; and                                                                                                                            
|
| | 8. Use of significant outside resources to
    supplement our employees in the preparation of the consolidated
    financial statements, as well as in evaluating and implementing
    the various internal control recommendations.

Additionally, feedback from KPMGs
significantly expanded audit process was considered by
management in its evaluation of controls and procedures and to
help determine and implement appropriate corrective actions and
additional policies and procedures.

Longer term corrective actions, some of which we
have already begun to implement, will include:



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 1. Retention of additional personnel in key
    areas throughout our organization;       
|
| | 2. Improved financial and management
    reporting systems;                              
|
| | 3. Development of additional financial,
    accounting and other policies and procedures;

66



---



##### Table of Contents





| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 4. Additional training of our personnel;                                                                                   
|
| | 5. Certification by employees of their
    familiarity, and obligation to comply, with our policies and
    procedures; and
|
| | 6. Periodic re-certification by employees of
    their continued compliance with our policies and procedures.              

We continue to evaluate the effectiveness of our
internal controls and procedures on an ongoing basis and will
take further action as appropriate.

67



---



##### Table of Contents



PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) Documents filed as part of this report:



| |                                                      
| | -----------------------------------------------------
| | 1. Consolidated Financial Statements (See
    Item 8)

|                                                                                                                                                                                                          |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|Statement                                                                                                                                                                                                 |  | Page
|                                                                                                                                                                                                          |  |     
|Independent Auditors Report                                                                                                                                                                              |  |      | F-1 | 
|Consolidated Balance Sheets at December 29,
    2001 and March 3, 2001                                                                                                                                    |  |      | F-2 | 
|Consolidated Statements of Operations for the ten
    months ended December 29, 2001, and the years ended
    March 3, 2001 and February 29, 2000                                                         |  |      | F-3 | 
|Consolidated Statements of Redeemable Convertible
    Preferred Stock and Stockholders Equity for the ten months
    ended December 29, 2001 and the years ended March 3,
    2001 and February 29, 2000 |  |      | F-4 | 
|Consolidated Statements of Cash Flows for the ten
    months ended December 29, 2001, and the years ended
    March 3, 2001 and February 29, 2000                                                         |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                                                                                                |  |      | F-8 | 



| |                                                  
| | -------------------------------------------------
| | 2. Consolidated Financial Statement
    Schedules

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|Schedule                                            |  | Page
|                                                    |  |     
|Schedule II  Valuation and
    Qualifying Accounts |  |      | S-1 | 
|Independent Auditors Report                        |  |      | S-2 | 

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

| |     |  |  |   |  |                                                                                                                                                                                                                                                                                                                                                    
| | --- |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1 |  |  |  |  | Restated Certificate of Incorporation of the
    Registrant, a Delaware corporation, incorporated by reference to
    Exhibit 3.1 to the Registrants Registration Statement
    on Form S-1, No. 33-28055.                                                                                                                                        
| | 3.2 |  |  |  |  | Certificate of Correction of the
    Registrants Restated Certificate of Incorporation,
    incorporated by reference to Exhibit 3.1.2 to the
    Registrants Registration Statement on Form S-1,
    No. 33-42534.                                                                                                                              
| | 3.3 |  |  |  |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Registrant, incorporated by
    reference to Exhibit 4.3 to the Registrants
    Registration Statement on Form S-3, No. 33-544666.                                                                                                                               
| | 3.4 |  |  |  |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Registrant, incorporated by
    reference to Exhibit 3.5 to the Registrants annual
    report on Form 10-K filed on May 30, 2000.                                                                                                                                
| | 3.5 |  |  |  |  | Certificate of Designations, Preferences and
    Rights for Series A and Series B Convertible Preferred
    Stock of the Registrant, incorporated by reference to
    Exhibit 2.4 to the Registrants current report on
    Form 8-K filed on September 11, 2000 (the Silver
    Lake 8-K).                                                      
| | 3.6 |  |  |  |  | Certificate of Designations, Preferences and
    Rights for Series C Convertible Preferred Stock of the
    Registrant, incorporated by reference to Exhibit 3.3 to the
    Registrants annual report on Form 10-K filed on
    June 4, 2001 (the 2001 10-K).                                                                                   
| | 3.7 |  |  |  |  | Certificate of Designations, Preferences and
    Rights for Series D and Series E Participating
    Convertible Preferred Stock of the Registrant, incorporated by
    reference to Exhibit 4.1 to the Registrants quarterly
    report on Form 10-Q for the period ended September 1,
    2001, filed October 16, 2001 (the October 2001 10-Q).
| | 3.8 |  |  |  |  | Amended and Restated By-laws of the Registrant.                                                                                                                                                                                                                                                                                                    
| | 4.1 |  |  |  |  | Specimen stock certificate of the
    Registrants Common Stock.                                                                                                                                                                                                                                                                                   
| | 4.2 |  |  |  |  | Specimen stock certificate of the
    Registrants Series A Convertible Preferred Stock,
    incorporated by reference to Exhibit 4.2 to the 2001 10-K.                                                                                                                                                                                            

68



---



##### Table of Contents



| |       |  |  |   |  |                                                                                                                                                                                                                                                                                                                                                
| | ----- |  |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.3   |  |  |  |  | Specimen stock certificate of the
    Registrants Series B Convertible Preferred Stock,
    incorporated by reference to Exhibit 4.3 to the 2001 10-K.                                                                                                                                                                                        
| | 4.4   |  |  |  |  | Specimen stock certificate of the
    Registrants Series C Convertible Preferred Stock,
    incorporated by reference to Exhibit 4 to the
    Registrants Registration Statement on Form S-4,
    No. 333-47854.                                                                                                                             
| | 4.5   |  |  |  |  | Specimen stock certificate of the
    Registrants Series D Convertible Preferred Stock.                                                                                                                                                                                                                                                       
| | 4.6   |  |  |  |  | Specimen stock certificate of the
    Registrants Series E Convertible Preferred Stock.                                                                                                                                                                                                                                                       
| | 4.7   |  |  |  |  | Amended and Restated Securities Purchase
    Agreement, dated August 29, 2000, between Silver Lake
    Partners, L.P. (Silver Lake) and the Registrant,
    incorporated by reference to Exhibit 2.1 of the Silver
    Lake 8-K.                                                                                                             
| | 4.8   |  |  |  |  | Standstill Agreement, dated August 29, 2000,
    between the Registrant and the Investors named therein,
    incorporated by reference to Exhibit 2.3 to the Silver
    Lake 8-K.                                                                                                                                                              
| | 4.9   |  |  |  |  | Form of Class A Warrant of the Registrant,
    incorporated by reference to Exhibit 2.5 to the Silver
    Lake 8-K.                                                                                                                                                                                                                            
| | 4.10  |  |  |  |  | Form of Class B Warrant of the Registrant,
    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 to the February
    2001 10-Q/A.                                                                                                                                                                                                                         
| | 4.12  |  |  |  |  | Form of Subsidiary Warrant, incorporated by
    reference to Exhibit 4.7 to the February 2001 10-Q/A.                                                                                                                                                                                                                                          
| | 4.13  |  |  |  |  | First Amendment to Amended and Restated
    Securities Purchase Agreement, Standstill Agreement and
    Registration Rights Agreement, dated July 12, 2001, by and
    between the Registrant, Silver Lake Partners, L.P. and the
    Investors named therein, incorporated by reference to
    Exhibit 10.l to the October 2001 10-Q.         
| | 4.14  |  |  |  |  | Form of Common Stock Purchase Warrant issued
    pursuant to the Amended and Restated Securities Purchase
    Agreement, as amended, incorporated by reference to
    Exhibit 4.2 to the October 2001 10-Q.                                                                                                                                    
| | 10.1  |  |  |  |  | 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 to the Registrants quarterly report on
    Form 10-Q filed on January 16, 2001 (the January
    2001 10-Q).                                     
| | 10.2  |  |  |  |  | Amended and Restated Asset Contribution
    Agreement, effective as of June 3, 2000, between Cabletron
    and Aprisma, incorporated by reference to Exhibit 2.2 to
    the January 2001 10-Q.                                                                                                                                                 
| | 10.3  |  |  |  |  | Amended and Restated Asset Contribution
    Agreement, effective as of June 3, 2000, between Cabletron
    and Enterasys, incorporated by reference to Exhibit 2.3 to
    the January 2001 10-Q.                                                                                                                                               
| | 10.4  |  |  |  |  | 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 January 2001 10-Q.                                                                                                                                              
| | 10.5  |  |  |  |  | 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 October 2000 10-Q).                                                                          
| | 10.6  |  |  |  |  | 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 Registrant and Flextronics
    International USA, Inc., incorporated by reference to
    Exhibit 2.8 of the October 2000 10-Q.
| | 10.7  |  |  |  |  | Services Agreement, dated as of August 28,
    2000, between Cabletron and Aprisma, incorporated by reference
    to Exhibit 2.19 of the October 2000 10-Q.                                                                                                                                                                                    
| | 10.8  |  |  |  |  | Agency Agreement between the Registrant and
    International Cable Networks Inc., incorporated by reference to
    Exhibit 10.6 to the Registrants Registration
    Statement on Form S-1, No. 33-28055.                                                                                                                                     
| | 10.9  |  |  |  |  | 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 to the Registrants Registration
    Statement on Form S-3, No. 33-54466.                                                                         
| | 10.10 |  |  |  |  | Letter Sublease Agreement, dated June 4,
    1998, between the Registrant and Picturetel Corporation,
    together with related documents, incorporated by reference to
    Exhibit 10.8 to the 2001 10-K.                                                                                                                                     

69



---



##### Table of Contents



| |       |  |  |   |  |                                                                                                                                                                                                                               
| | ----- |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.11 |  |  |  |  | Sublease, dated as of December 4, 2000,
    between 273 Corporate Drive, LLC and Aprisma, together with
    related documents, incorporated by reference to
    Exhibit 10.9 to the 2001 10-K.                                
| | 10.12 |  |  |  |  | Lease, dated as of October 31, 2001, between
    Thomas J. Flatley d/b/a The Flatley Company, and Enterasys
    Networks, Inc., relating to a leased premises in Portsmouth, New
    Hampshire.                               
| | 10.13 |  |  |  |  | Registration Rights Agreement, dated as of
    August 29, 2000, among the Registrant and the Investors,
    incorporated by reference to Exhibit 2.7 to the Silver
    Lake 8-K.                                              
| | 10.14 |  |  |  |  | Registration Rights Agreement, dated as of
    August 29, 2000, among Aprisma and the Investors,
    incorporated by reference to Exhibit 2.8 to the Silver
    Lake 8-K.                                                     
| | 10.15 |  |  |  |  | Manufacturing Services Agreement, dated as of
    March 1, 2000, between the Registrant and Flextronics
    International USA, Inc., incorporated by reference to
    Exhibit 10.6 to the February 2001 10-Q/A.               
| | 10.16 |  |  |  |  | 1998 Equity Incentive Plan, incorporated by
    reference to Exhibit 4.1 to the Registrants
    registration statement on Form S-8, No. 333-83991.                                                                           
| | 10.17 |  |  |  |  | 2001 Equity Incentive Plan, incorporated by
    reference to Exhibit 4.1 to the Registrants
    registration statement on Form S-8, No. 333-66774.                                                                           
| | 10.18 |  |  |  |  | 1989 Employee Stock Purchase Plan, as restated.                                                                                                                                                                               
| | 10.19 |  |  |  |  | 1995 Employee Stock Purchase Plan, as restated.                                                                                                                                                                               
| | 10.20 |  |  |  |  | Amended and Restated Aprisma 2000 Equity
    Incentive Plan, incorporated by reference to Exhibit 10.7
    to the February 2001 10-Q/A.                                                                                       
| | 10.21 |  |  |  |  | Amended and Restated Change-in-Control Severance
    Benefit Plan for Key Employees, incorporated by reference to
    Exhibit 10.19 to the 2001 10-K.                                                                         
| | 10.22 |  |  |  |  | Enterasys Change-in-Control Severance Benefit
    Plan for Key Employees, incorporated by reference to
    Exhibit 10.2 to the January 2001 10-Q.                                                                             
| | 10.23 |  |  |  |  | Aprisma Change-In-Control Severance Benefit Plan
    for Key Employees, incorporated by reference to
    Exhibit 10.2 to the October 2001 10-Q.                                                                               
| | 10.24 |  |  |  |  | Deferral Plan for Directors.                                                                                                                                                                                                  
| | 10.25 |  |  |  |  | Form of Subsidiary Option Grant for
    Messrs. Patel, Kirkpatrick and Jaeger for options granted
    from the 2000 Equity Incentive Plans of Aprisma, incorporated by
    reference to Exhibit 10.5 to the October 2001 10-Q.
| | 10.26 |  |  |  |  | Promissory Note, dated April 12, 2000 of
    Piyush Patel, incorporated by reference to Exhibit 10.25 to
    Registrants annual report on Form 10-K filed on
    May 30, 2000 (the 2000 10-K).                             
| | 10.27 |  |  |  |  | Promissory Note, dated August 23, 1999 of
    Enrique P. (Henry) Fiallo, incorporated by reference to
    Exhibit 10.28 to the 2000 10-K.                                                                                     
| | 10.28 |  |  |  |  | Promissory Note, dated January 1, 2000 of
    Enrique P. (Henry) Fiallo, incorporated by reference to
    Exhibit 10.27 to the 2000 10-K.                                                                                     
| | 10.29 |  |  |  |  | Promissory Note, dated June 1, 2000, of
    David Kirkpatrick, incorporated by reference to
    Exhibit 10.37 to the 2001 10-K.                                                                                               
| | 10.30 |  |  |  |  | Promissory Note, dated June 15, 2000, of
    David Kirkpatrick, incorporated by reference to
    Exhibit 10.38 to the 2001 10-K.                                                                                              
| | 10.31 |  |  |  |  | Promissory Note, dated January 1, 2000, of
    Eric Jaeger, incorporated by reference to Exhibit 10.39 to
    the 2001 10-K.                                                                                                  
| | 10.32 |  |  |  |  | Promissory Note, dated September 6, 2001, of
    James E. Riddle.                                                                                                                                                             
| | 10.33 |  |  |  |  | Letter agreement between the Registrant and
    Piyush Patel, dated August 2, 2001, for the provision of
    certain consulting services.                                                                                     
| | 10.34 |  |  |  |  | Letter agreement between the Registrant and Eric
    Jaeger, dated August 2, 2001, for the provision of certain
    consulting services.                                                                                      
| | 10.35 |  |  |  |  | Letter agreement between the Registrant and
    Piyush Patel, dated August 3, 2001, regarding severance
    arrangements.                                                                                                     
| | 10.36 |  |  |  |  | Letter agreement between the Registrant and Eric
    Jaeger, dated August 3, 2001, regarding severance
    arrangements.                                                                                                      

70



---



##### Table of Contents



| |       |  |  |   |  |                                                                                                                               
| | ----- |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------
| | 10.37 |  |  |  |  | Letter agreement between the Registrant and David
    Kirkpatrick, dated August 3, 2001, regarding severance
    arrangements.
| | 22.1  |  |  |  |  | Subsidiaries of the Registrant.                                                                                               
| | 23.1  |  |  |  |  | Consent of Independent Auditors.                                                                                              
| | 99.1  |  |  |  |  | Certification of William K. OBrien
    under Section 906 of the Sarbanes-Oxley Act.                                          
| | 99.2  |  |  |  |  | Certification of Richard S. Haak, Jr. under
    Section 906 of the Sarbanes-Oxley Act.                                        

(b) Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the quarter ended December 29, 2001, we
    filed the following reports on Form 8-K:                                                                                                                                                                                                                                                                                                        
|
| | 1. October 4, 2001: On
    October 4, 2001, we filed a current report on
    Form 8-K, dated September 28, 2001, reporting under
    Item 8 that our Board of Directors of unanimously voted to
    amend our By-laws to change our fiscal year end from the
    Saturday closest to the last day in February of each year to the
    Saturday closest to the last day in December of each year.
|
| | 2. October 31, 2001: On
    October 31, 2001, we filed a current report on
    Form 8-K, dated October 29, 2001, reporting under
    Item 5 that we had implemented a new sales recognition
    model and the results of our third quarter ended
    September 29, 2001.                                                                                                                        

71



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated
balance sheets of Enterasys Networks, Inc. and subsidiaries as
of December 29, 2001 and March 3, 2001, and the
related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity, and
cash flows for the ten-month period ended December 29, 2001
and each of the years in the two-year period ended March 3,
2001. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

As discussed in Note 2 to the consolidated
financial statements, the accompanying consolidated balance
sheet as of March 3, 2001, and the related consolidated
statements of operations, redeemable convertible preferred stock
and stockholders equity, and cash flows for the year ended
March 3, 2001 have been restated.

As discussed in Note 3 to the consolidated
financial statements, effective March 4, 2001, the Company
changed its method of accounting for derivative financial
instruments and hedging activities.



| |             
| | ------------
| | /S/ KPMG LLP

Boston, Massachusetts

November 21, 2002


F-1



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------ | ---------- | ------- |  | ------- | ------- | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | December 29,                                                                           |        | March 3,  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | 2001                                                                                   |        | 2001      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |           
|(In thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                                                                                        |        | (Restated)
|ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                                                             |                                                                                        | $      | 114,800    |         |  | $       | 64,378  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Marketable securities                                                                                                                                                 |                                                                                        |        | 47,532     |         |  |         | 400,172 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Accounts receivable, net                                                                                                                                              |                                                                                        |        | 67,698     |         |  |         | 137,715 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Inventories, net                                                                                                                                                      |                                                                                        |        | 118,214    |         |  |         | 97,806  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Deferred income taxes                                                                                                                                                 |                                                                                        |        |           |         |  |         | 141,478 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Prepaid expenses and other current assets                                                                                                                             |                                                                                        |        | 25,368     |         |  |         | 60,933  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Current portion of notes receivable                                                                                                                                   |                                                                                        |        | 15,000     |         |  |         | 2,125   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Net assets of discontinued operations                                                                                                                                 |                                                                                        |        | 70,099     |         |  |         | 293,975 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total current assets                                                                   |        |            | 458,711 |  |         |         | 1,198,582 | 
|Restricted cash, cash equivalents and marketable
    securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                       |                                                                                        | 27,882 |            |         |  | 24,023  |        
|Long-term portion of notes receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                       |                                                                                        |       |            |         |  | 7,875   |        
|Long-term marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                       |                                                                                        | 63,920 |            |         |  | 140,862 |        
|Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                       |                                                                                        | 63,684 |            |         |  | 110,838 |        
|Property, plant and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                                                                                        | 56,924 |            |         |  | 69,220  |        
|Intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                       |                                                                                        | 45,601 |            |         |  | 182,114 |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total assets                                                                           |        | $          | 716,722 |  |         | $       | 1,733,514 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
    STOCK AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                      |                                                                                        | $      | 68,110     |         |  | $       | 55,915  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Accrued expenses                                                                                                                                                      |                                                                                        |        | 84,816     |         |  |         | 154,652 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Deferred revenue                                                                                                                                                      |                                                                                        |        | 77,376     |         |  |         | 88,442  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Customer advances and billings in excess of
    revenues                                                                                                              |                                                                                        |        | 56,115     |         |  |         |        |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Income taxes payable                                                                                                                                                  |                                                                                        |        | 37,970     |         |  |         | 51,394  |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total current liabilities                                                              |        |            | 324,387 |  |         |         | 350,403   | 
|Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                       |                                                                                        |       |            |         |  | 59,203  |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total liabilities                                                                      |        |            | 324,387 |  |         |         | 409,606   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|Commitments and contingencies (Notes 15 and 21)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|Contingent redemption value of common stock put
    options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                       |                                                                                        | 842    |            |         |  |        |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|Redeemable convertible preferred stock, $1.00 par
    value, 65,000 shares of Series D and 25,000 shares of
    Series E were designated, issued and outstanding at
    December 29, 2001 (aggregate liquidation preference of
    Series D and E, $68,542 and $26,356, respectively) and 65,000
    shares of Series A, 25,000 shares of Series B and
    45,471 shares of Series C were designated, issued and
    outstanding at March 3, 2001 (aggregate liquidation
    preference of Series A and B, $66,306 and $25,505,
    respectively) |                                                                                                                                                                       |                                                                                        | 61,789 |            |         |  | 109,589 |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|Stockholders equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Undesignated preferred stock, $1.00 par value.
    Authorized 1,859,000 shares                                                                                        |                                                                                        |        |           |         |  |         |        |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Common stock, $0.01 par value. Authorized
    450,000,000 shares; issued 202,941,544 and 190,611,576 shares,
    at December 29, 2001 and March 3, 2001, respectively |                                                                                        |        | 2,029      |         |  |         | 1,906   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Additional paid-in capital                                                                                                                                            |                                                                                        |        | 1,141,089  |         |  |         | 990,157 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Retained earnings (accumulated deficit)                                                                                                                               |                                                                                        |        | (748,199   | )       |  |         | 296,032 |          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Unearned stock-based compensation                                                                                                                                     |                                                                                        |        | (2,802     | )       |  |         | (16,673 | )        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Treasury stock, at cost (3,053,201 and 2,100,000
    common shares at December 29, 2001 and March 3, 2001,
    respectively)                                          |                                                                                        |        | (64,890    | )       |  |         | (56,479 | )        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Accumulated other comprehensive income (loss)                                                                                                                         |                                                                                        |        | 2,477      |         |  |         | (624    | )        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total stockholders equity                                                             |        |            | 329,704 |  |         |         | 1,214,319 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       | Total liabilities, redeemable convertible
    preferred stock and stockholders equity |        | $          | 716,722 |  |         | $       | 1,733,514 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                       |                                                                                        |        |            |         |  |         |        

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |           |           |         |   | 
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------ | ----------------------------------- | ---------- | -------- | ------------ | -------- | -------- | -------- | ------- | ------- | --------- | --------- | ------- | - | 
|                                                                                     |                                                                                                                                |                                                        |                                     |           
|                                                                                     |                                                                                                                                | Ten Months                                             |                                     | Year Ended
|                                                                                     |                                                                                                                                | Ended                                                  |                                     |           
|                                                                                     |                                                                                                                                | December 29,                                           |                                     | March 3,   |          | February 29,
|                                                                                     |                                                                                                                                | 2001                                                   |                                     | 2001       |          | 2000        
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |             
|                                                                                     |                                                                                                                                |                                                       
|(In thousands, except per share amounts)                                             |                                                                                                                                | (Restated)                                            
|Net revenue:                                                                         |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Product                                                                                                                        |                                                        | $                                   | 278,665    |          |              | $        | 608,830  |          |         | $       | 1,167,395 |          
|                                                                                     | Services                                                                                                                       |                                                        |                                     | 136,598    |          |              |          | 174,875  |          |         |         | 187,607   |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                | Total revenue                                          |                                     |            | 415,263  |              |          |          | 783,705  |         |         |           | 1,355,002 |        
|Cost of revenue(a):                                                                  |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Product                                                                                                                        |                                                        |                                     | 330,943    |          |              |          | 390,523  |          |         |         | 704,545   |          
|                                                                                     | Services                                                                                                                       |                                                        |                                     | 47,556     |          |              |          | 55,979   |          |         |         | 55,482    |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                | Total cost of revenue                                  |                                     |            | 378,499  |              |          |          | 446,502  |         |         |           | 760,027   |        
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                |                                                        | Gross margin                        |            |          | 36,764       |          |          |          | 337,203 |         |           |           | 594,975 |  
|Operating expenses:                                                                  |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Research and development(a)                                                                                                    |                                                        |                                     | 76,471     |          |              |          | 81,723   |          |         |         | 131,852   |          
|                                                                                     | Selling, general and administrative(a)                                                                                         |                                                        |                                     | 277,330    |          |              |          | 329,906  |          |         |         | 346,199   |          
|                                                                                     | Amortization of intangible assets                                                                                              |                                                        |                                     | 32,366     |          |              |          | 23,176   |          |         |         | 28,952    |          
|                                                                                     | Stock-based compensation                                                                                                       |                                                        |                                     | 30,572     |          |              |          | 1,442    |          |         |         |          |          
|                                                                                     | Special charges                                                                                                                |                                                        |                                     | 47,168     |          |              |          | 63,187   |          |         |         | 21,096    |          
|                                                                                     | Impairment of intangible assets                                                                                                |                                                        |                                     | 104,147    |          |              |          | 14,104   |          |         |         | 12,318    |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                | Income (loss) from operations                          |                                     |            | (531,290 | )            |          |          | (176,335 | )       |         |           | 54,558    |        
|Interest income, net                                                                 |                                                                                                                                |                                                        | 17,672                              |            |          |              | 29,981   |          |          |         | 18,614  |          
|Other income (expense), net                                                          |                                                                                                                                |                                                        | (41,209                             | )          |          |              | (557,355 | )        |          |         | 746,282 |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Income (loss) from continuing operations
    before income taxes and cumulative effect of a change in
    accounting principle |                                                        |                                     | (554,827   | )        |              |          | (703,709 | )        |         |         | 819,454   |          
|Income tax expense (benefit)                                                         |                                                                                                                                |                                                        | 60,242                              |            |          |              | (98,187  | )        |          |         | 317,185 |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Income (loss) from continuing operations
    before cumulative effect of a change in accounting principle                      |                                                        |                                     | (615,069   | )        |              |          | (605,522 | )        |         |         | 502,269   |          
|Discontinued operations:                                                             |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Operating loss (net of tax expense
    (benefit) of $346, $224 and ($22,435), respectively)                                    |                                                        |                                     | (59,124    | )        |              |          | (76,306  | )        |         |         | (37,998   | )        
|                                                                                     | Loss on disposal (net of tax of $0)                                                                                            |                                                        |                                     | (42,782    | )        |              |          |         |          |         |         |          |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Loss from discontinued operations                                                                                              |                                                        |                                     | (101,906   | )        |              |          | (76,306  | )        |         |         | (37,998   | )        
|Cumulative effect of a change in accounting
    principle (net of tax expense of $0) |                                                                                                                                |                                                        | 12,691                              |            |          |              |         |          |          |         |        |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Net income (loss)                                                                                                              |                                                        |                                     | (704,284   | )        |              |          | (681,828 | )        |         |         | 464,271   |          
|Dividend effect of beneficial conversion feature
    to preferred stockholders       |                                                                                                                                |                                                        |                                    |            |          |              | (16,854  | )        |          |         |        |          
|Accretive dividend and accretion of discount on
    preferred shares                 |                                                                                                                                |                                                        | (10,347                             | )          |          |              | (6,044   | )        |          |         |        |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                | Net income (loss) available to common
    shareholders |                                     | $          | (714,631 | )            |          | $        | (704,726 | )       |         | $         | 464,271   |        
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|Basic income (loss) per common share:                                                |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Income (loss) from continuing operations
    available to common shareholders                                                  |                                                        | $                                   | (3.24      | )        |              | $        | (3.40    | )        |         | $       | 2.83      |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Net income (loss) available to common
    shareholders                                                                         |                                                        | $                                   | (3.71      | )        |              | $        | (3.81    | )        |         | $       | 2.62      |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|Diluted income (loss) per common share:                                              |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Income (loss) from continuing operations
    available to common shareholders                                                  |                                                        | $                                   | (3.24      | )        |              | $        | (3.40    | )        |         | $       | 2.66      |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Net income (loss) available to common
    shareholders                                                                         |                                                        | $                                   | (3.71      | )        |              | $        | (3.81    | )        |         | $       | 2.46      |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|Weighted average number of common shares
    outstanding:                            |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Basic                                                                                                                          |                                                        |                                     | 192,743    |          |              |          | 184,770  |          |         |         | 177,541   |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     | Diluted                                                                                                                        |                                                        |                                     | 192,743    |          |              |          | 184,770  |          |         |         | 188,618   |          
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|(a) Excludes non-cash, stock-based
    compensation expense as follows:              |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                |                                                        | Cost of revenue                     |            |          |              |          |          |          |         |         |           |           |         |  
|                                                                                     |                                                                                                                                |                                                        |                                     | Product    |          | $            |         |          |          | $       |        |           |           | $       |  | 
|                                                                                     |                                                                                                                                |                                                        |                                     | Services   |          |              | 2,292    |          |          |         |        |           |           |         |  | 
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                |                                                        | Total cost of revenue               |            |          | 2,292        |          |          |          |        |         |           |           |        |  
|                                                                                     |                                                                                                                                |                                                        | Research and development            |            |          | 13,356       |          |          |          | 1,442   |         |           |           |        |  
|                                                                                     |                                                                                                                                |                                                        | Selling, general and administrative |            |          | 14,924       |          |          |          |        |         |           |           |        |  
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          
|                                                                                     |                                                                                                                                | Total stock-based compensation                         |                                     | $          | 30,572   |              |          | $        | 1,442    |         |         | $         |          |        
|                                                                                     |                                                                                                                                |                                                        |                                     |            |          |              |          |          |          |         |         |          

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS
EQUITY

|                                                          |                                                                                                               |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |               |         |               |   |        |           |         |   |   |   |   |   |  |   |   |   |   |   |   |   |   |         |         |   |   |           |         |         | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | -------------------- | - | ---------- | - | ----- | - | ----------- | ----------- | -------------- | - | ------------ | ----- | ------ | - | ------------- | ------- | ------------- | - | ------ | --------- | ------- | - | - | - | - | - |  | - | - | - | - | - | - | - | - | ------- | ------- | - | - | --------- | ------- | ------- | 
|                                                          |                                                                                                               |                                   |   |                      |   |           
|                                                          |                                                                                                               |                                   |   | Stockholders Equity
|                                                          |                                                                                                               | Redeemable                        |   |                     
|                                                          |                                                                                                               | Convertible                       |   |                      |   |           
|                                                          |                                                                                                               | Preferred Stock                   |   | Common Stock         |   |           
|                                                          |                                                                                                               |                                   |   |                      |   |            |   |       |   | Accumulated |             |               
|                                                          |                                                                                                               |                                   |   |                      |   | Additional |   |       |   | Unearned    |             | Treasury Stock |   | Other        |       | Total 
|                                                          |                                                                                                               |                                   |   | Carrying             |   |            |   | Par   |   | Paid-in     |             | Retained       |   | Stock-based  |       |        |   | Comprehensive |         | Stockholders
|                                                          |                                                                                                               | Shares                            |   | Value                |   | Shares     |   | Value |   | Capital     |             | Earnings       |   | Compensation |       | Shares |   | Cost          |         | Income (Loss) |   | Equity
|                                                          |                                                                                                               |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |               |         |               |   |       
|                                                          |                                                                                                               |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |              
|(In thousands, except number of shares)                   |                                                                                                               |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |              
|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 (loss):                                                                            |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |               |         |               |   |        |           |         |   |   |   |   |   |  |   |   |   |   |   |   |   |   |         |         |   |   |           |         |        
|                                                          | Unrealized gain on available-for-sale securities,
    net of tax                                              |                                   |   |                     |   |            |   |      |   |             |             |               |   |              |       |       |   |               |         |              |   |        |           |        |   |   |   |  |   |  |   |  |   |   |   |  |   |   |         | 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 (loss) |   |                      |  |            |   |       |  |             |             |                |  |              |       |        |  |               |         |               |  |        |           |         |  |   |   |   |  |  |   |   |  |   |   |   |  |   |         |         |  |   |           |         | 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 |        
|                                                          |                                                                                                               |                                   |   |                      |   |            |   |       |   |             |             |                |   |              |       |        |   |               |         |               |   |        |           |         |   |   |   |   |   |  |   |   |   |   |   |   |   |   |         |         |   |   |           |        

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS
EQUITY  (Continued)

|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |          |          |            |  
|------------------------------------------------------------------------------- | ---------------------------------- | -------------------------------------------------------------------------------------------------------------- | --------------------------------- | -------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----------- | -------------- | - | ------------ | ----- | ---------- | - | ------------- | ------- | ------------- | - | ------ | --------- | -------- | - | - | ------- | - | - | - | ---------- | - | - | - | ------- | - | - | - | ------- | - | -------- | - | --------- | -------- | -------- | ---------- | -
|                                                                                |                                    |                                                                                                                |                                   |                      |   |           
|                                                                                |                                    |                                                                                                                |                                   | Stockholders Equity
|                                                                                |                                    | Redeemable                                                                                                     |                                   |                     
|                                                                                |                                    | Convertible                                                                                                    |                                   |                      |   |           
|                                                                                |                                    | Preferred Stock                                                                                                |                                   | Common Stock         |   |           
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   | Accumulated |             |               
|                                                                                |                                    |                                                                                                                |                                   |                      |   | Additional |         |            |   | Unearned    |             | Treasury Stock |   | Other        |       | Total     
|                                                                                |                                    |                                                                                                                |                                   | Carrying             |   |            |         | Par        |   | Paid-in     |             | Retained       |   | Stock-based  |       |            |   | Comprehensive |         | Stockholders
|                                                                                |                                    | Shares                                                                                                         |                                   | Value                |   | Shares     |         | Value      |   | Capital     |             | Earnings       |   | Compensation |       | Shares     |   | Cost          |         | Income (Loss) |   | Equity
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |       
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         | (restated) |   |             |             |                |   |              |       | (restated) |   | (restated)   
|(In thousands, except                                                           |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |              
|number of shares)                                                               |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |              
|Balance at February 29, 2000                                                    |                                    |                                                                                                                |                                  |                      |   | $          |        |            |   |             | 183,585,437 |                |   | $            | 1,836 |            |   | $             | 630,155 |               |   | $      | 1,000,758 |          |   | $ |        |   |   |   |           |   |   | $ |        |   |   | $ | 514,690 |   |          | $ | 2,147,439 |         
|Comprehensive income (loss):                                                    |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |         
|                                                                                | Net loss                           |                                                                                                                |                                   |                     |   |            |         |           |   |             |             |               |   |              |       |           |   |               |         |              |   |        |           | (681,828 | ) |   |         |  |   |   |            |  |   |   |         |  |   |   |         |  |          |   |           | (681,828 | )       
|                                                                                | Other comprehensive income (loss): |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |          |         
|                                                                                |                                    | Unrealized loss on available-for-sale securities,
    net of tax                                               |                                   |                      |  |            |         |            |  |             |             |                |  |              |       |            |  |               |         |               |  |        |           |          |  |   |         |   |  |   |            |   |  |   |         |   |  |   |         |   | (752,232 | ) |           |          | (752,232 | )         
|                                                                                |                                    | Effect of foreign currency translation                                                                         |                                   |                      |  |            |         |            |  |             |             |                |  |              |       |            |  |               |         |               |  |        |           |          |  |   |         |   |  |   |            |   |  |   |         |   |  |   |         |   | 762      |   |           |          | 762      |           
|                                                                                |                                    | Reclassification adjustment for gains on
    available-for- sale securities included in net income, net of tax |                                   |                      |  |            |         |            |  |             |             |                |  |              |       |            |  |               |         |               |  |        |           |          |  |   |         |   |  |   |            |   |  |   |         |   |  |   |         |   | 236,156  |   |           |          | 236,156  |           
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |         
|                                                                                |                                    |                                                                                                                | Total comprehensive income (loss) |                      |   |           |         |            |   |            |             |                |   |             |       |            |   |              |         |               |   |       |           |          |   |  |         |   |   |  |            |   |   |  |         |   |   |  |         |   |          |  |           |          |          | (1,197,142 | )
|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 adjustment 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   | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |        |   |          |   |          |         
|Accretion of Series A and Series B
    preferred stock discount                 |                                    |                                                                                                                |                                  |                      |   |            | 4,233   |            |   |             |            |                |   |              |      |            |   |               |        |               |   |        | (4,233    | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |        |   |          |   | (4,233    | )       
|Accretive dividend of Series A and
    Series B preferred stock                 |                                    |                                                                                                                |                                  |                      |   |            | 1,811   |            |   |             |            |                |   |              |      |            |   |               |        |               |   |        | (1,811    | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |        |   |          |   | (1,811    | )       
|Issuance of Series C preferred stock                                            |                                    |                                                                                                                | 45,471                            |                      |   |            | 31,875  |            |   |             |            |                |   |              |      |            |   |               |        |               |   |        |          |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |        |   |          |   |          |         
|Issuance of options and warrants to purchase
    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     |         
|Issuance of Riverstone stock                                                    |                                    |                                                                                                                |                                  |                      |   |            |        |            |   |             |            |                |   |              |      |            |   |               | 128,258 |               |   |        |          |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |        |   |          |   | 128,258   |         
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |         
|Balance at March 3, 2001                                                        |                                    |                                                                                                                | 135,471                           |                      |   | $          | 109,589 |            |   |             | 190,611,576 |                |   | $            | 1,906 |            |   | $             | 990,157 |               |   | $      | 296,032   |          |   | $ | (16,673 | ) |   |   | (2,100,000 | ) |   | $ | (56,479 | ) |   | $ | (624    | ) |          | $ | 1,214,319 |         
|                                                                                |                                    |                                                                                                                |                                   |                      |   |            |         |            |   |             |             |                |   |              |       |            |   |               |         |               |   |        |           |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |         |   |          |   |           |         

See accompanying notes to consolidated financial
statements.

F-5



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS
EQUITY  (Continued)

|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |          |       |          |  
|------------------------------------------------------------------ | ---------------------------------- | ---------------------------------------------------------------- | --------------------------------- | -------------------- | - | ---------- | ------- | ----- | - | ----------- | ----------- | -------------- | - | ------------ | ----- | ------ | - | ------------- | --------- | ------------- | - | ------ | -------- | -------- | - | - | ------- | - | - | - | ---------- | - | - | - | ------- | - | - | - | ----- | - | ----- | - | --------- | -------- | ----- | -------- | -
|                                                                   |                                    |                                                                  |                                   |                      |   |           
|                                                                   |                                    |                                                                  |                                   | Stockholders Equity
|                                                                   |                                    | Redeemable                                                       |                                   |                     
|                                                                   |                                    | Convertible                                                      |                                   |                      |   |           
|                                                                   |                                    | Preferred Stock                                                  |                                   | Common Stock         |   |           
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   | Accumulated |             |               
|                                                                   |                                    |                                                                  |                                   |                      |   | Additional |         |       |   | Unearned    |             | Treasury Stock |   | Other        |       | Total 
|                                                                   |                                    |                                                                  |                                   | Carrying             |   |            |         | Par   |   | Paid-in     |             | Retained       |   | Stock-based  |       |        |   | Comprehensive |           | Stockholders
|                                                                   |                                    | Shares                                                           |                                   | Value                |   | Shares     |         | Value |   | Capital     |             | Earnings       |   | Compensation |       | Shares |   | Cost          |           | Income (Loss) |   | Equity
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |       
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |              
|(In thousands, except number of shares)                            |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |              
|Balance at March 3, 2001
    (restated)                            |                                    |                                                                  | 135,471                           |                      |   | $          | 109,589 |       |   |             | 190,611,576 |                |   | $            | 1,906 |        |   | $             | 990,157   |               |   | $      | 296,032  |          |   | $ | (16,673 | ) |   |   | (2,100,000 | ) |   | $ | (56,479 | ) |   | $ | (624  | ) |       | $ | 1,214,319 |         
|Comprehensive income (loss):                                       |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |         
|                                                                   | Net loss                           |                                                                  |                                   |                     |   |            |         |      |   |             |             |               |   |              |       |       |   |               |           |              |   |        |          | (704,284 | ) |   |         |  |   |   |            |  |   |   |         |  |   |   |       |  |       |   |           | (704,284 | )    
|                                                                   | Other comprehensive income (loss): |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |          |      
|                                                                   |                                    | Unrealized gain on available-for-sale securities,
    net of tax |                                   |                      |  |            |         |       |  |             |             |                |  |              |       |        |  |               |           |               |  |        |          |          |  |   |         |   |  |   |            |   |  |   |         |   |  |   |       |   | 2,235 |   |           |          | 2,235 |         
|                                                                   |                                    | Effect of foreign currency translation                           |                                   |                      |  |            |         |       |  |             |             |                |  |              |       |        |  |               |           |               |  |        |          |          |  |   |         |   |  |   |            |   |  |   |         |   |  |   |       |   | 866   |   |           |          | 866   |         
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |         
|                                                                   |                                    |                                                                  | Total comprehensive income (loss) |                      |   |           |         |       |   |            |             |                |   |             |       |        |   |              |           |               |   |       |          |          |   |  |         |   |   |  |            |   |   |  |         |   |   |  |       |   |       |  |           |          |       | (701,183 | )
|Riverstone spin- off                                               |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        | (329,600 | )        |   |   | 9,022   |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (320,578  | )       
|Exercise of options and warrants for shares of
    common stock    |                                    |                                                                  |                                  |                      |   |            |        |       |   |             | 10,477,337  |                |   |              | 105   |        |   |               | 48,296    |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 48,401    |         
|Acceleration of stock options                                      |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               | 42,274    |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 42,274    |         
|Proceeds from sale of put options                                  |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               | 135       |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 135       |         
|Issuance of shares under employee share purchase
    program       |                                    |                                                                  |                                  |                      |   |            |        |       |   |             | 778,752     |                |   |              | 7     |        |   |               | 7,561     |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 7,568     |         
|Issuance of Riverstone stock at spin-off                           |                                    |                                                                  |                                  |                      |   |            | (18,582 | )     |   |             |            |                |   |              |      |        |   |               | 18,582    |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 18,582    |         
|Adjustment to Riverstone stock derivative                          |                                    |                                                                  |                                  |                      |   |            | (4,020  | )     |   |             |            |                |   |              |      |        |   |               |          |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   |          |         
|Accretive dividend of Series A and B
    preferred stock           |                                    |                                                                  |                                  |                      |   |            | 1,443   |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        | (1,443   | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (1,443    | )       
|Accretion of Series D and E preferred stock
    discount(a)        |                                    |                                                                  |                                  |                      |   |            | 7,251   |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        | (7,251   | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (7,251    | )       
|Accretive dividend of Series D and E
    preferred stock(a)        |                                    |                                                                  |                                  |                      |   |            | 1,653   |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        | (1,653   | )        |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (1,653    | )       
|Conversion of Series C preferred stock                             |                                    |                                                                  | (45,471                           | )                    |   |            | (31,875 | )     |   |             | 955,253     |                |   |              | 9     |        |   |               | 31,866    |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 31,875    |         
|Conversion of options and warrants on
    Series C preferred stock |                                    |                                                                  |                                  |                      |   |            | (3,670  | )     |   |             |            |                |   |              |      |        |   |               | 3,670     |               |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 3,670     |         
|Contingent redemption value of common stock put
    options        |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               | (842      | )             |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (842      | )       
|Purchase of treasury stock                                         |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        |         |          |   |   |        |   |   |   | (953,201   | ) |   |   | (8,411  | ) |   |   |      |   |       |   | (8,411    | )       
|Exercise of warrants                                               |                                    |                                                                  |                                  |                      |   |            |        |       |   |             | 118,626     |                |   |              | 2     |        |   |               | (2        | )             |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   |          |         
|Amortization of unearned stock-based compensation                  |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               |          |               |   |        |         |          |   |   | 4,849   |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | 4,849     |         
|Effect of minority interests                                       |                                    |                                                                  |                                  |                      |   |            |        |       |   |             |            |                |   |              |      |        |   |               | (608      | )             |   |        |         |          |   |   |        |   |   |   |           |   |   |   |        |   |   |   |      |   |       |   | (608      | )       
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |         
|Balance at December 29, 2001                                       |                                    |                                                                  | 90,000                            |                      |   | $          | 61,789  |       |   |             | 202,941,544 |                |   | $            | 2,029 |        |   | $             | 1,141,089 |               |   | $      | (748,199 | )        |   | $ | (2,802  | ) |   |   | (3,053,201 | ) |   | $ | (64,890 | ) |   | $ | 2,477 |   |       | $ | 329,704   |         
|                                                                   |                                    |                                                                  |                                   |                      |   |            |         |       |   |             |             |                |   |              |       |        |   |               |           |               |   |        |          |          |   |   |         |   |   |   |            |   |   |   |         |   |   |   |       |   |       |   |           |         



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Series A and Series B redeemable
    preferred stock were exchanged for Series D and
    Series E redeemable preferred stock in July 2001 (see
    Note 23).

See accompanying notes to consolidated financial
statements.

F-6



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |          |          |         |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------- | ------------- | -------- | ----------------- | -------- | ---------- | -------- | -------- | ------- | -------- | -------- | ------- | -
|                                                                   |                                                                                                            |                                                                       |                                                         |              
|                                                                   |                                                                                                            | Ten Months                                                            |                                                         | Year Ended   
|                                                                   |                                                                                                            | Ended                                                                 |                                                         |              
|                                                                   |                                                                                                            | December 29, 2001                                                     |                                                         | March 3, 2001 |          | February 29, 2000
|(In thousands)                                                     |                                                                                                            |                                                                       |                                                         |               |          |                  
|                                                                   |                                                                                                            |                                                                      
|                                                                   |                                                                                                            | (Restated)                                                           
|Cash flows from operating activities:                              |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   | Net income (loss)                                                                                          |                                                                       | $                                                       | (704,284      | )        |                   | $        | (681,828   | )        |          | $       | 464,271  |         
|                                                                   | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                       |                                                         |               |          |                   |          |            |          |          |         |          |         
|                                                                   |                                                                                                            | Loss from discontinued operations                                     |                                                         |               | 101,906  |                   |          |            | 76,306   |          |         |          | 37,998   |        
|                                                                   |                                                                                                            | Depreciation and amortization                                         |                                                         |               | 57,512   |                   |          |            | 60,176   |          |         |          | 100,266  |        
|                                                                   |                                                                                                            | Provision for losses on accounts receivable                           |                                                         |               | 12,523   |                   |          |            | 17,788   |          |         |          | 14,386   |        
|                                                                   |                                                                                                            | Provision for excess and obsolete inventory                           |                                                         |               | 72,888   |                   |          |            | 44,686   |          |         |          | 10,158   |        
|                                                                   |                                                                                                            | Valuation allowance for notes receivable                              |                                                         |               | 6,125    |                   |          |            |         |          |         |          |         |        
|                                                                   |                                                                                                            | Deferred income taxes                                                 |                                                         |               | 82,275   |                   |          |            | (103,480 | )        |         |          | 249,916  |        
|                                                                   |                                                                                                            | Impairment of intangible assets                                       |                                                         |               | 104,147  |                   |          |            | 14,104   |          |         |          | 12,318   |        
|                                                                   |                                                                                                            | Loss on disposals and impairment of property,
    plant and equipment |                                                         |               | 6,148    |                   |          |            | 22,292   |          |         |          | 3,945    |        
|                                                                   |                                                                                                            | Stock-based compensation                                              |                                                         |               | 30,572   |                   |          |            | 1,442    |          |         |          |         |        
|                                                                   |                                                                                                            | Purchased research and development from
    acquisitions              |                                                         |               |         |                   |          |            | 25,600   |          |         |          |         |        
|                                                                   |                                                                                                            | Net realized (gain) loss on sale of
    securities                    |                                                         |               | (52,100  | )                 |          |            | 476,197  |          |         |          | 65,004   |        
|                                                                   |                                                                                                            | Loss (gain) on sale of division                                       |                                                         |               |         |                   |          |            | 143,108  |          |         |          | (705,090 | )      
|                                                                   |                                                                                                            | Loss on investment write-downs                                        |                                                         |               | 68,113   |                   |          |            | 15,590   |          |         |          |         |        
|                                                                   |                                                                                                            | Unrealized gain on Riverstone stock derivative                        |                                                         |               | (4,020   | )                 |          |            |         |          |         |          |         |        
|                                                                   | Changes in current assets and liabilities (net of
    effects of business acquisitions):                   |                                                                       |                                                         |               |          |                   |          |            |          |          |         |          |         
|                                                                   |                                                                                                            | Accounts receivable                                                   |                                                         |               | 57,494   |                   |          |            | 46,147   |          |         |          | (21,213  | )      
|                                                                   |                                                                                                            | Inventories                                                           |                                                         |               | (106,067 | )                 |          |            | (154,253 | )        |         |          | 77,733   |        
|                                                                   |                                                                                                            | Prepaid expenses and other assets                                     |                                                         |               | 35,565   |                   |          |            | (27,832  | )        |         |          | 22,848   |        
|                                                                   |                                                                                                            | Accounts payable and accrued expenses                                 |                                                         |               | 3,128    |                   |          |            | (69,754  | )        |         |          | (146,987 | )      
|                                                                   |                                                                                                            | Customer advances and billings in excess of
    revenues              |                                                         |               | 56,115   |                   |          |            |         |          |         |          |         |        
|                                                                   |                                                                                                            | Deferred revenue                                                      |                                                         |               | (11,066  | )                 |          |            | 7,113    |          |         |          | 288      |        
|                                                                   |                                                                                                            | Income taxes payable                                                  |                                                         |               | (13,424  | )                 |          |            | (2,272   | )        |         |          | 28,748   |        
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   |                                                                                                            |                                                                       | Net cash (used in) provided by operating
    activities |               |          | (196,450          | )        |            |          | (88,870  | )       |          |          | 214,589 |  
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|Cash flows from investing activities:                              |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   | Capital expenditures                                                                                       |                                                                       |                                                         | (20,998       | )        |                   |          | (16,897    | )        |          |         | (37,061  | )       
|                                                                   | Cash paid for business acquisitions, net                                                                   |                                                                       |                                                         |              |          |                   |          | (11,964    | )        |          |         |         |         
|                                                                   | Cash paid for minority investments                                                                         |                                                                       |                                                         | (22,750       | )        |                   |          | (91,494    | )        |          |         |         |         
|                                                                   | Proceeds from sale of fixed assets                                                                         |                                                                       |                                                         | 2,000         |          |                   |          |           |          |          |         | 6,680    |         
|                                                                   | Outsourcing of manufacturing                                                                               |                                                                       |                                                         |              |          |                   |          |           |          |          |         | 78,613   |         
|                                                                   | Purchase of available-for-sale securities                                                                  |                                                                       |                                                         | (259,193      | )        |                   |          | (1,015,051 | )        |          |         | (392,130 | )       
|                                                                   | Purchase of held-to-maturity securities                                                                    |                                                                       |                                                         |              |          |                   |          | (113,785   | )        |          |         | (302,168 | )       
|                                                                   | Sales/maturities of marketable securities                                                                  |                                                                       |                                                         | 693,044       |          |                   |          | 1,215,603  |          |          |         | 586,048  |         
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   |                                                                                                            |                                                                       | Net cash provided by (used in) investing
    activities |               |          | 392,103           |          |            |          | (33,588  | )       |          |          | (60,018 | )
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|Cash flows from financing activities:                              |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   | Cash flows related to discontinued operations                                                              |                                                                       |                                                         | (182,665      | )        |                   |          | (229,105   | )        |          |         | (14,849  | )       
|                                                                   | Common stock issued pursuant to employee stock
    purchase plans                                          |                                                                       |                                                         | 7,568         |          |                   |          | 13,448     |          |          |         | 7,823    |         
|                                                                   | Proceeds from sale of common stock put options                                                             |                                                                       |                                                         | 135           |          |                   |          | 4,934      |          |          |         |         |         
|                                                                   | Proceeds from issuance of preferred stock,
    warrants and stock purchase rights                          |                                                                       |                                                         |              |          |                   |          | 78,573     |          |          |         |         |         
|                                                                   | Proceeds from issuance of subsidiary shares and
    exercise of stock purchase rights                      |                                                                       |                                                         |              |          |                   |          | 13,720     |          |          |         |         |         
|                                                                   | Payments from notes receivable                                                                             |                                                                       |                                                         | 1,875         |          |                   |          |           |          |          |         |         |         
|                                                                   | Increase in notes receivable                                                                               |                                                                       |                                                         | (13,000       | )        |                   |          | (10,000    | )        |          |         |         |         
|                                                                   | Repurchase of common stock                                                                                 |                                                                       |                                                         | (8,411        | )        |                   |          | (56,479    | )        |          |         |         |         
|                                                                   | Proceeds from exercise of stock options                                                                    |                                                                       |                                                         | 48,401        |          |                   |          | 20,003     |          |          |         | 44,307   |         
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|                                                                   |                                                                                                            |                                                                       | Net cash (used in) provided by financing
    activities |               |          | (146,097          | )        |            |          | (164,906 | )       |          |          | 37,281  |  
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|Effect of exchange rate changes on cash                            |                                                                                                            |                                                                       | 866                                                     |               |          |                   | 762      |            |          |          | (294    | )       
|Net increase (decrease) in cash and cash
    equivalents           |                                                                                                            |                                                                       | 50,422                                                  |               |          |                   | (286,602 | )          |          |          | 191,558 |         
|Cash and cash equivalents at beginning of year                     |                                                                                                            |                                                                       | 64,378                                                  |               |          |                   | 350,980  |            |          |          | 159,422 |         
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|Cash and cash equivalents at end of year                           |                                                                                                            | $                                                                     | 114,800                                                 |               |          | $                 | 64,378   |            |          | $        | 350,980 |         
|                                                                   |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         
|Supplemental disclosures of cash flow information
    (see Note 7) |                                                                                                            |                                                                       |                                                         |               |          |                   |          |            |          |          |         |         

See accompanying notes to consolidated financial
statements.

F-7



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


1.     Business
Operations

Enterasys Networks, Inc. and its subsidiaries
(the Company) design, develop, market and support
comprehensive networking solutions focusing on the network
security, availability and mobility needs of enterprises. The
Companys solutions empower its customers to use their
internal networks and the Internet to facilitate the exchange of
information, increase productivity and reduce operating costs.
Using the Companys products, customers make information,
applications and services readily available and customized to
the needs of their employees, customers, suppliers, business
partners and other network users. The Companys significant
installed base of customers consists of commercial enterprises;
governmental entities; healthcare, educational and non-profit
institutions; and other organizations. The Company does not have
internal manufacturing capabilities. The Company outsources
substantially all of its manufacturing to two companies,
Flextronics International USA, Inc. (Flextronics)
and Accton Technology Corporation (Accton), which
procure material on the Companys behalf and provide
comprehensive manufacturing services, including assembly, test
and quality control. Flextronics, which accounted for
approximately three quarters of the Companys production
during the ten months ended December 29, 2001, manufactures
the Companys products in Portsmouth, New Hampshire, and
Limerick, Ireland.

In February 2000, Cabletron Systems, Inc.
(Cabletron), as part of an effort to improve
strategic focus and better capitalize on market opportunities,
transferred substantially all of its operating assets and
liabilities to four operating subsidiaries as part of a plan to
make each of the subsidiaries independent. These subsidiaries
were Enterasys Networks, Inc. (Enterasys
Subsidiary), Riverstone Networks, Inc.
(Riverstone), Aprisma Management Technologies, Inc.
(Aprisma), and GlobalNetworkTechnology
Services, Inc. (GNTS). Each of these subsidiaries
had its own management team and board of directors. In July
2001, the operations of GNTS were discontinued through the
acquisition of a portion of GNTS by a third party, the
assumption of certain contracts and employees of GNTS by
Enterasys Subsidiary and Aprisma, and the discontinuance of the
remaining business operations of GNTS. Following the initial
public offering of a portion of Riverstones common stock
in February 2001, Cabletron distributed its holdings of
Riverstones common stock to Cabletrons stockholders
in a spin-off transaction on August 6, 2001. Also on
August 6, 2001, Enterasys Subsidiary was merged with and
into Cabletron and the name of the surviving corporation was
changed to Enterasys Networks, Inc. On
August 9, 2002, the Company completed the sale of Aprisma
to a third party.

2.     Restatement

On January 31, 2002, the Company discovered
that a previously recognized $4.0 million sale in its Asia
Pacific region did not qualify for revenue recognition during
the period in which the Company had originally reported the
revenue. Also on January 31, 2002, the Company learned that
the SEC had opened a formal order of investigation into the
financial accounting and reporting practices of the Company and
its affiliates. In response to these developments, the
Companys Board of Directors formed a Special Committee to
conduct an internal review into the Companys financial
accounting and reporting for the fiscal year ended March 3,
2001 and the ten-month transition period ended December 29,
2001. The Special Committee appointed the law firm of Ropes
& Gray to conduct the internal review, and Ropes & Gray
hired the forensic accounting group of Deloitte & Touche LLP
to assist with the internal review. The Company has incurred
costs of approximately $16.2 million related to the
internal review through October 2002. The Special Committee has
completed the internal review, and the Company has restated its
financial statements for the fiscal year ended March 3,
2001, the fiscal quarters within that fiscal year, and the first
three fiscal quarters within the ten-month transition period
ended December 29, 2001. The principal adjustments to
restate the financial statements for the fiscal quarters within
the fiscal year ended March 3, 2001 and the first three
quarters within the ten-month transition period ended
December 29,

F-8



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


2001 are discussed in Note 30. The principal
adjustments to restate the financial statements for the seven
months ended September 29, 2001 and the fiscal year ended
March 3, 2001 are as follows:



| |                              
| | -----------------------------
| | Sales/Investment Transactions

The Company entered into a number of transactions
in which it made an investment in a customer in exchange for
cash and/or our products and services. The amounts originally
recorded by the Company relating to a number of these
transactions were in error. The Company reviewed all investment
transactions and corrected the amount recorded for each
transaction for which an error was noted. In making those
corrections, the investment value and the amount of revenue
recorded by the Company was determined based upon the nature of
the transaction and fair value of the investment instrument
received. When it was not appropriate to recognize revenue, the
Company recorded the difference between the cost of the
consideration given and the fair value of the investment
received as other expense. The fair value of the investment in
these instances was limited to the cost of the product given.
These corrections resulted in a reduction to reported
investments and revenue of $21.3 million (unaudited) and
$25.2 million (unaudited), respectively, for the seven
months ended September 29, 2001, and $29.2 million and
$22.2 million, respectively, for the fiscal year ended
March 3, 2001. The Company also increased other expense,
net by $17.1 million (unaudited) and $13.0 million,
respectively, for the seven months ended September 29, 2001
and the fiscal year ended March 3, 2001.



| |                                                
| | -----------------------------------------------
| | Asia Pacific and Latin America
    Distributors

As a result of the internal review, the Company
determined that beginning in the fiscal year ended March 3,
2001 practices related to several distributor relationships in
the Asia Pacific and Latin America regions were such that, with
respect to sales to these distributors, the Company should not
recognize revenue until the distributor has paid the Company. As
a result of these findings, and in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements,
the Company restated sales to such distributors in these two
regions to a cash basis methodology. This resulted in a
reduction to reported revenue of $27.9 million (unaudited)
for the seven months ended September 29, 2001 and
$22.0 million for the fiscal year ended March 3, 2001.



| |                   
| | ------------------
| | Pricing Allowances

In the course of the internal review, the Company
identified certain pricing allowances extended to customers that
had not been recorded by the Company in the appropriate period.
The impact of correcting these errors resulted in a reduction to
reported revenue of $7.9 million (unaudited) for the seven
months ended September 29, 2001 and $5.8 million for
the fiscal year ended March 3, 2001.



| |              
| | -------------
| | Return Rights

The Company determined that sales reserves
established to account for future product returns in certain
cases did not properly take into consideration all relevant
information available at the time the estimates were made, and
as a result, the Company has adjusted reserves for certain
periods. The impact of correcting for these errors resulted in
an increase to reported revenue of $4.9 million (unaudited)
for the seven months ended September 29, 2001 and a
reduction of $5.9 million for the fiscal year ended
March 3, 2001.



| |                          
| | -------------------------
| | Other Revenue Corrections

The Company determined that other reductions to
revenue for the seven months ended September 29, 2001 and
the fiscal year ended March 3, 2001 were required to
correct previously reported amounts

F-9



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


including premature recognition of revenue
associated with incomplete integration projects and software
arrangements aggregating $4.7 million (unaudited) and
$6.4 million, respectively, barter transactions of
$3.4 million (unaudited) and $0.8 million,
respectively, and other miscellaneous transactions aggregating
$14.5 million (unaudited) and $10.6 million,
respectively. In addition, as a result of premature recognition
of intermediary shipments as revenue, the Company recorded an
increase to revenue of $4.0 million (unaudited) for the
seven months ended September 29, 2001 and a decrease of
$4.0 million for the year ended March 3, 2001.



| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues were reduced by
$21.5 million (unaudited) in the seven months ended
September 29, 2001 and $26.0 million in the fiscal
year ended March 3, 2001, primarily as a result of the
foregoing adjustments reducing revenue.



| |                   
| | ------------------
| | Operating Expenses

Operating expenses were decreased by
$2.2 million in the seven months ended September 29,
2001, and increased $2.5 million in the fiscal year ended
March 3, 2001, primarily as a result of expenses not
properly recorded in Latin America as well as errors associated
with the recognition of cooperative marketing expenses.



| |                        
| | -----------------------
| | Discontinued Operations

The loss from discontinued operations was
increased by $16.4 million (unaudited) in the seven months
ended September 29, 2001, and $4.3 million in the
fiscal year ended March 3, 2001, primarily due to revenue
reductions of $6.8 million (unaudited) and
$5.8 million, respectively. These revenue reductions
related primarily to sales/investment transactions and return
rights as discussed above.



| |              
| | -------------
| | Balance Sheet

The balance sheet impact at March 3, 2001 of
correcting the revenue items discussed above decreased accounts
receivable by $13.3 million, increased inventory by
$11.1 million and decreased investments by
$33.5 million. Other balance sheet corrections included a
$30.5 million decrease in cash and cash equivalents and a
$4.1 million decrease in accounts payable to properly
record outstanding checks and to record deposits in transit, a
$4.1 million decrease in prepaid expenses to write-off
previously capitalized period costs, a $2.9 million
increase in intangible assets, a $5.6 million increase in
accrued expenses to correct product credits and other current
liabilities and a $4.3 million increase in deferred revenue.



| |          
| | ---------
| | Cash Flow

The restatements to the consolidated balance
sheet as of March 3, 2001 and to the consolidated statement
of operations for the year ended March 3, 2001 account for
substantially all of the changes to the consolidated statement
of cash flows for the year ended March 3, 2001.

F-10



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The following table outlines the effect of these
adjustments on the fiscal year ended March 3, 2001 as well
as the reclassification of discontinued operations as discussed
in Note 4:

|                                                                     |  |                                       |           |              |  |             |          |             |  |   |         |   |  |   |          |  
|-------------------------------------------------------------------- |  | ------------------------------------- | --------- | ------------ |  | ----------- | -------- | ----------- |  | - | ------- | - |  | - | -------- | -
|                                                                     |  |                                      
|                                                                     |  | Consolidated Statements of Operations
|                                                                     |  |                                      
|                                                                     |  |                                      
|                                                                     |  | Year ended March 3, 2001             
|                                                                     |  |                                      
|                                                                     |  | Per March 3,                          |           |             
|                                                                     |  | 2001 Form                             |           | Discontinued |  |            
|                                                                     |  | 10-K                                  |           | Operations   |  | Restatement |          | As Restated
|                                                                     |  |                                       |           |              |  |             |          |            
|                                                                     |  |                                      
|                                                                     |  | (In thousands)                       
|Net revenue                                                          |  | $                                     | 1,071,453 |              |  | $           | (210,053 | )           |  | $ | (77,695 | ) |  | $ | 783,705  |  
|Gross margin                                                         |  | $                                     | 513,103   |              |  | $           | (124,171 | )           |  | $ | (51,729 | ) |  | $ | 337,203  |  
|Loss from continuing operations available to
    common shareholders |  | $                                     | (628,901  | )            |  | $           | 72,040   |             |  | $ | (71,559 | ) |  | $ | (628,420 | )
|Loss from discontinued operations                                    |  | $                                     |          |              |  | $           | (72,040  | )           |  | $ | (4,266  | ) |  | $ | (76,306  | )
|Net loss available to common shareholders                            |  | $                                     | (628,901  | )            |  | $           |         |             |  | $ | (75,825 | ) |  | $ | (704,726 | )
|Basic and diluted loss per common share:                             |  |                                       |           |              |  |             |          |             |  |   |         |   |  |   |          |  
|Loss from continuing operations available to
    common shareholders |  | $                                     | (3.40     | )            |  | $           | 0.39     |             |  | $ | (0.39   | ) |  | $ | (3.40    | )
|Discontinued operations                                              |  |                                       |          |              |  |             | (0.39    | )           |  |   | (0.02   | ) |  |   | (0.41    | )
|                                                                     |  |                                       |           |              |  |             |          |             |  |   |         |   |  |   |          |  
|Net loss available to common shareholders                            |  | $                                     | (3.40     | )            |  | $           |         |             |  | $ | (0.41   | ) |  | $ | (3.81    | )
|                                                                     |  |                                       |           |              |  |             |          |             |  |   |         |   |  |   |          |  

|                                       |  |                            |           |              |  |             |          |             |  |   |         |   |  |   |           | 
|-------------------------------------- |  | -------------------------- | --------- | ------------ |  | ----------- | -------- | ----------- |  | - | ------- | - |  | - | --------- | 
|                                       |  |                           
|                                       |  | Consolidated Balance Sheet
|                                       |  |                           
|                                       |  |                           
|                                       |  | At March 3, 2001          
|                                       |  |                           
|                                       |  | Per March 3,               |           |             
|                                       |  | 2001 Form                  |           | Discontinued |  |            
|                                       |  | 10-K                       |           | Operations   |  | Restatement |          | As Restated
|                                       |  |                            |           |              |  |             |          |            
|                                       |  |                           
|                                       |  | (In thousands)            
|Assets from continuing operations      |  | $                          | 1,912,109 |              |  | $           | (405,136 | )           |  | $ | (67,434 | ) |  | $ | 1,439,539 | 
|Net assets of discontinued operations  |  |                            |          |              |  |             | 296,441  |             |  |   | (2,466  | ) |  |   | 293,975   | 
|                                       |  |                            |           |              |  |             |          |             |  |   |         |   |  |   |           | 
|Total assets                           |  | $                          | 1,912,109 |              |  | $           | (108,695 | )           |  | $ | (69,900 | ) |  | $ | 1,733,514 | 
|Total liabilities                      |  | $                          | 512,485   |              |  | $           | (108,695 | )           |  | $ | 5,816   |   |  | $ | 409,606   | 
|Redeemable convertible preferred stock |  | $                          | 109,589   |              |  | $           |         |             |  | $ |        |   |  | $ | 109,589   | 
|Total stockholders equity             |  | $                          | 1,290,035 |              |  | $           |         |             |  | $ | (75,716 | ) |  | $ | 1,214,319 | 

3.     Summary of
Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Enterasys Networks, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial
statements and related notes have been reclassified to reflect
the results of Aprisma, Riverstone and GNTS as discontinued
operations.



| |                
| | ---------------
| | Fiscal Year-End

On September 28, 2001, the Companys
Board of Directors amended the by-laws to change the
Companys fiscal year-end from the Saturday closest to the
last day in February of each year to the Saturday closest to the
last day in December of each year. The Company has filed this
Form 10-K for the

F-11



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


ten-month transition period ended on
December 29, 2001. References to fiscal years 2001 and 2000
represent the fiscal years ended March 3, 2001 and February
29, 2000, respectively. The ten-month transition period ended
December 29, 2001 is noted as such, or as transition year
2001.

The Company has not included comparable ten-month
unaudited financial information for the period March 1,
2000 to December 30, 2000 because it was impracticable to
do so due to certain inherent limitations in the Companys
interim monthly closing process and the complexity of the
restatement of the Companys fiscal 2001 financial
statements discussed in Note 2.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of all highly
liquid investments with an original or remaining maturity of
90 days or less. Cash and cash equivalents are carried at
cost, which approximates fair value.



| |                      
| | ---------------------
| | Marketable Securities

Held-to-maturity securities are those financial
instruments that 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
marketable securities 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.

Investments described below under the heading
Investments are not included in marketable
securities.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company estimates the collectibility of its
accounts receivable and the related amount of bad debts that may
be incurred in the future. The allowance for doubtful accounts
results from an analysis of specific customer accounts,
historical experience, customer concentrations, credit ratings
and current economic trends.



| |            
| | -----------
| | Investments

The Company has certain minority investments in
debt and equity securities of companies that were acquired for
cash and in non-monetary transactions whereby the Company
exchanged inventory or product credits for preferred or common
stock or convertible notes. The Company records cash investments
at cost and, for non-monetary transactions, generally at the
fair value of the instrument received, using the most
objectively determinable basis from among a variety of methods
and data sources. Methods and data sources used to value
non-monetary transactions include quoted market prices for
publicly traded securities, cash financing rounds with outside
investors completed near the date of the Companys
investment, and third party valuations or appraisals. These
investments are accounted for under the cost method and are
included in investments on the Companys balance sheet. The
carrying value of investments approximate fair value.

The Company also invests in venture capital funds
which are accounted for under the equity method of accounting.

F-12



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000




| |                    
| | -------------------
| | Revenue Recognition

The Companys revenue is comprised of:
(1) product revenue, which includes revenue from sales of
the Companys switches and routers, other network equipment
and software and (2) services revenue, which includes
revenue from maintenance, installation, and system integration
services. The Companys revenue recognition policy follows
SAB No. 101 and Statement of Position (SOP)
No. 97-2 Software Revenue Recognition,
as amended by SOP No. 98-9 Modification of SOP
No. 97-2, Software Recognition, With Respect to Certain
Transactions. The Company generally recognizes product
revenue from its end-user and reseller customers at the time of
shipment, provided that persuasive evidence of an arrangement
exists, the price is fixed or determinable and collectibility of
sales proceeds is reasonably assured. When significant
obligations remain after products are delivered, such as for
system integration or customer acceptance, revenue and related
costs are deferred until such obligations are fulfilled. Revenue
from service obligations under maintenance contracts is deferred
and recognized on a straight-line basis over the contractual
period, which is typically 12 months. Beginning in
September 2001, the Company determined that it could no longer
estimate the amount of future product returns from certain
stocking distributors located in the United States and Europe.
The Company now recognizes revenue from these distributors when
the distributors ship the Companys product to their
customers. The Company records payments from distributors as
billings in excess of revenues when distributors pay for product
in advance of shipment to the end-user. Beginning in fiscal year
2001, the Company began recording revenue from certain
distributors and resellers located in Asia Pacific and Latin
America when the distributor has paid the Company due to
existing practices related to the distributor/reseller
relationships.

The Company has periodically sold products and
services to customers in exchange for minority investments, in
the form of debt or equity securities in the customers. In some
instances, the Company issued product credits, or the right to
purchase the Companys product, which, when used, were
exchanged for debt or equity securities of the customer and in
other cases, the Company invested cash which was then used by
the investee company to purchase product. The amount of revenue
recorded by the Company was determined based upon the nature of
the transaction and fair value of the investment instrument
received. When it was not appropriate to recognize revenue, the
Company recorded the difference between the cost of the
consideration given and the fair value of the investment
received as other expense. The fair value of the investment in
these instances was limited to the cost of the product given.

The Company provides an allowance for sales
returns based on return policies and return rights granted to
its customers and historical returns. The Company also provides
for pricing allowances in the period when granted. These
allowances have been recorded as a reduction of net revenue in
the accompanying consolidated statements of operations.



| |                                                           
| | ----------------------------------------------------------
| | Financial Instruments and Concentration of
    Credit Risk

Financial instruments that potentially subject
the Company to a concentration of credit risk principally
consist of cash equivalents, short-term investments, long-term
investments, notes and accounts receivable. The Company seeks to
reduce credit risk on financial instruments by investing in high
credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer or fund. Exposure to customer
credit risk is controlled through credit approvals, credit
limits, continuous monitoring procedures and establishment of an
allowance for doubtful accounts when deemed necessary.

The carrying amounts of cash, cash equivalents,
trade receivables, accounts payable and accrued expenses
approximate the fair value because of the short maturity of
these financial instruments.

Several major international financial
institutions are counterparties to the Companys financial
instruments. It is Company practice to monitor the financial
standing of these counterparties and limit the

F-13



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


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 any such loss is unlikely and would not be material to
its financial position and results of operations.

The Company has utilized derivative financial
instruments, principally forward exchange contracts and options,
to reduce foreign currency exposures arising from its
international operations. The Company had no foreign exchange or
option contracts outstanding at December 29, 2001. At
March 3, 2001, the Company had forward exchange contracts
and purchased option contracts, all having maturities of 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). 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.

For the ten months ended December 29, 2001,
Azlan Group PLC, a European distributor, accounted for
approximately 13% of net revenue. For the fiscal year ended
March 3, 2001, no individual customer accounted for greater
than 10% of the Companys revenue. For the fiscal year
ended February 29, 2000, one customer, Compaq, accounted
for approximately 16% of net revenue.



| |            
| | -----------
| | Inventories

Inventories are reported at the lower of cost or
market. Costs are determined at standard that approximates
actual cost on a first-in, first-out (FIFO) method.
The Company provides for excess and obsolete inventory using a
reserve methodology based primarily on forecasts of future
demand.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are reported 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.



| |                  
| | -----------------
| | Intangible Assets

Intangible assets consist of goodwill and other
intangible assets acquired in business combinations and are
reported at cost less accumulated amortization. Amortization of
these intangible assets is provided on a straight-line basis
over the respective useful lives that range from three to ten
years. Goodwill is the excess of the purchase price over the
fair value of identifiable net assets acquired in business
combinations accounted for as purchases.



| |                           
| | --------------------------
| | Accounting for Impairments



| |                               
| | ------------------------------
| | Long-lived Assets and Goodwill

Long-lived assets are comprised of intangible
assets and property, plant and equipment. The Company assesses
the impairment of identifiable intangibles, fixed assets and
related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable through
projected undiscounted cash flows expected to be generated by
the asset or the business from which the goodwill was generated.

When the Company determines that the carrying
value of intangible assets, fixed assets and related goodwill
may not be recoverable, the Company measures impairment by the
amount by which the carrying value of the asset or goodwill
exceeds the related fair value. Estimated fair value is
generally based on a

F-14



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


projected discounted cash flow method using a
discount rate determined by management to be commensurate with
the risk inherent in the business underlying the asset in
question.

On December 30, 2001, Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets became
effective for the Company and as a result, the Company will
cease to amortize approximately $14.6 million of goodwill.
The Company had recorded approximately $24.9 million of
amortization on these amounts during 2001. In lieu of
amortization, the Company is required to perform a transitional
impairment review of goodwill as of December 30, 2001 and
an annual impairment review thereafter. The Company is presently
assessing the impact of the transitional impairment review.



| |            
| | -----------
| | Investments

The Company reviews investments for potential
impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Such events
include declines in the investees stock price in new
rounds of financing, market capitalization relative to book
value, bankruptcy or insolvency, and deterioration in the
financial position or results of operations. Appropriate
reductions in carrying value are recognized in the consolidated
statements of operations.



| |                                                      
| | -----------------------------------------------------
| | Research and Development Costs and Software
    Costs

Expenditures 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.

With respect to acquisitions, 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, the Company charges such amounts to expense if
technological feasibility had not been reached at the
acquisition date and the technology has no alternative future
use.



| |                                   
| | ----------------------------------
| | Stock-Based Compensation
    Plans

As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the
Company measures compensation cost in accordance with Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees,and
related interpretations. Accordingly, no accounting recognition
is given to stock options granted to employees of the Company at
fair market value until the options are exercised. Upon
exercise, the Company credits the net proceeds, including income
tax benefits realized (if any), 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 No. 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 (EITF) No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees
for Acquiring or in Conjunction with Selling Goods or
Services.

F-15



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000




| |             
| | ------------
| | 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
carry-forwards. 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. The Company
recognizes a valuation allowance if it anticipates that it may
not realize some or all of a deferred tax asset.

The Company has permanently reinvested earnings
of its foreign subsidiaries and, therefore has not provided for
United States (U.S.) income taxes that could result
from the remittance of such earnings. The unremitted earnings at
December 29, 2001 and March 3, 2001 amounted to
approximately $206.7 million and $201.8 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.



| |                            
| | ---------------------------
| | Net Income (Loss) Per Share

The Company computes basic net income
(loss) per common share by dividing net income
(loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. The
Company computes diluted net income (loss) per common share
by dividing net income (loss) to common shareholders by the
weighted average number of common shares and all potentially
dilutive securities. In periods where the Company reports a loss
and inclusion of dilutive securities would therefore be
anti-dilutive, the Company excludes dilutive securities from the
diluted net income (loss) per common share calculation.



| |                                                                  
| | -----------------------------------------------------------------
| | 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 that use their local currency
as their functional currency, assets and liabilities are
translated at exchange rates in effect at the balance sheet date
and income and expense accounts at average exchange rates during
the year. Resulting translation adjustments are 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 and any resulting
translation adjustments, which were not material, are recorded
in income.



| |            
| | -----------
| | Derivatives

In the first quarter of transition year 2001, the
Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133
requires that an entity recognize derivatives as either assets
or liabilities on the balance sheet and measure those
instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the
derivative and the resulting designation.

Upon adoption of SFAS No. 133, the Company
recorded a transition adjustment, which resulted in an after-tax
increase in net income of $12.7 million related to the
Companys written call options on

F-16



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


Efficient Networks, Inc. (Efficient)
common stock held as of March 4, 2001. The call options
expired in accordance with their terms during the quarter ended
June 2, 2001 as part of the acquisition of Efficient by
Siemens A.G.. This transition adjustment is reflected in the
Companys results of operations for the ten months ended
December 29, 2001 as the cumulative effect of a change in
accounting principle.

During July 2001, the Company amended its
securities purchase agreement with the Strategic Investors as
discussed in Note 23. As a result, the Riverstone shares
received by the Strategic Investors in a spin-off distribution
in August 2001 due to their ownership of Series D and E
preferred stock are subject to certain restrictions on transfer,
and the proceeds from any permitted sale of such shares reduce
the liquidation preference and redemption price of the
Series D and E preferred stock. As the Companys
potential redemption liability is indexed to the value of
securities of an unrelated entity, Riverstone, a financial
derivative instrument was established.



| |                             
| | ----------------------------
| | Issuance of Subsidiary Stock

During the fourth quarter of the fiscal year
ended March 3, 2001, Riverstone sold stock to unrelated
parties at a price in excess of its book value and the
Companys net investment in Riverstone increased. The
increase was recorded to additional paid-in capital. The Company
did not recognize gains on issuance of Riverstone stock because
the planned spin-off was not expected to result in the
realization of a gain by the Company.



| |                 
| | ----------------
| | 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. These estimates
include assessing the fair value of acquired assets, the amount
and timing of revenue recognition, the collectibility of
accounts and notes receivable, the valuation of fair value
investments, the use and recoverability of inventory and
tangible and intangible assets, and the amounts of incentive
compensation liabilities, accrued restructuring charges,
litigation liabilities and contingencies, among others. The
Company bases its estimates on historical experience, current
conditions and various other assumptions that are believed to be
reasonable under the circumstances. The markets for the
Companys products are characterized by rapid technological
development, intense competition and frequent new product
introductions, all of which could affect the future
realizability of the Companys assets. Estimates and
assumptions are reviewed on an on-going basis and the effects of
revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary. Actual
results could differ from those estimates under different
assumptions or conditions.



| |                  
| | -----------------
| | Reclassifications

In addition to the reclassification due to
discontinued operations, certain prior year balances have been
reclassified to conform to the current period presentation.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations which addresses the
financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business
Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 requires that
all business combinations be accounted for by the purchase
method, modifies the criteria for recognizing intangible

F-17



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


assets, and expands disclosure requirements. The
provisions of SFAS No. 141 apply to all business
combinations initiated after June 30, 2001. The adoption of
SFAS No. 141 has not had a material impact on the
consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets which
addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion
No. 17, Intangible Assets. SFAS No. 142
addresses how intangible assets that are acquired individually
or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have
been initially recognized in the financial statements. SFAS
No. 142 requires that goodwill and intangible assets that
have indefinite useful lives not be amortized but rather tested
at least annually for impairment, and intangible assets that
have finite useful lives be amortized over their useful lives.
SFAS No. 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for
impairment. In addition, SFAS No. 142 expands the
disclosure requirements about goodwill and other intangible
assets in the years subsequent to their acquisition. SFAS
No. 142 is effective for the Companys fiscal year
ending December 28, 2002. Goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to
the provisions of SFAS No. 142. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due
to the initial application of SFAS No. 142 are to be
reported as resulting from a change in accounting principle.
Subsequent impairment losses are to be included in income from
operations. The Companys annual impairment reviews may
result in future periodic write-downs; however, the application
of the non-amortization provisions of SFAS No. 142 for
goodwill and indefinite life intangibles is expected to result
in a reduction in amortization expense of approximately
$0.8 million per quarter in fiscal year 2002. The Company
is presently assessing the impact of the new impairment rules.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS No. 143 requires recognition of asset retirement
obligations as a liability rather than a contra-asset. SFAS
No. 143 is effective for the Companys fiscal year
ending January 3, 2004. Any impact that adoption will have
on the consolidated financial statements will be based on future
transactions.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which excludes from the
definition of long-lived assets goodwill and other intangibles
that are not amortized in accordance with SFAS No. 142.
SFAS No. 144 requires long-lived assets disposed of by sale
to be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or
in discontinued operations. SFAS No. 144 also expands the
reporting of discontinued operations to include components of an
entity that have been or will be disposed of rather than
limiting such discontinuance to a segment of a business. SFAS
No. 144 is effective for the Companys 2002 fiscal
year, and early adoption is encouraged. The Company does not
anticipate any adjustment to the book value of its long-lived
assets as a result of adopting the provisions of SFAS
No. 144.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145, among other things,
rescinds SFAS No. 4, which required all gains and losses
from the extinguishment of debt to be classified as an
extraordinary item and amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Company does not
expect this statement will have an impact on its consolidated
financial statements.

F-18



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The Emerging Issues Task Force of the FASB issued
EITF No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products. This EITF is effective for annual
and interim financial statements beginning after
December 15, 2001. EITF No. 00-25, as further defined
by EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products), requires among other things,
that payments made to resellers by the Company for cooperative
advertising, buy-downs and similar arrangements should be
classified as reductions to net sales or an increase in selling
expenses, depending upon the application of the funds by the
customer. The Company adopted this consensus in the first
quarter of fiscal year 2002. If this standard had been adopted
at December 29, 2001, including required retroactive
application to prior periods, net revenue would have been
reduced by $23.1 million for the ten month period ended
December 29, 2001, $8.7 million for the fiscal years
ended March 3, 2001 and $4.2 million for the fiscal
year ended February 29, 2000. Cost of revenues would have
been reduced by $34.1 million for the ten-month period
ended December 29, 2001, $14.7 million for the fiscal
year ended March 3, 2001 and $7.0 million for the
fiscal year ended February 29, 2000. Selling, general and
administrative expenses would have been increased by
$11.1 million for the ten-month period ended
December 29, 2001, $6.0 million and $2.8 million
for the fiscal years ended March 3, 2001 and
February 29, 2000, respectively. The above reclassification
would have had no impact on net loss or loss per share.

In July 2002 the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires companies to recognize
costs associated with exit or disposal activities when a
liability is incurred rather than at the date of a commitment to
an exit or disposal plan.

4.     Discontinued
Operations

On July 17, 2001, the Companys Board
of Directors declared a special dividend of the Companys
shares of Riverstone common stock to the Companys
shareholders of record on July 27, 2001, payable on
August 6, 2001. On August 6, 2001, the Company
distributed its shares of Riverstone common stock to the
Companys shareholders. The distribution ratio was 0.5131
shares of Riverstone common stock for each outstanding share of
the Companys common stock. The Company did not recognize
any gain or loss as a result of this transaction. As a result of
the distribution of the Companys Riverstone shares, the
Company recorded a non-cash charge to retained earnings of
approximately $329.6 million, which reflected the
distribution of the net assets and liabilities of Riverstone to
stockholders.

The Company and Riverstone are party to a tax
sharing agreement, whereby each entity, for the period of their
parent-subsidiary ownership, will reimburse or seek
reimbursement from the other for the tax consequences for
incremental income or expenses resulting from the filing of
amended tax returns. Additionally, the Company and Riverstone
are parties to an Asset Contribution Agreement pursuant to which
Riverstone is obligated to assume and satisfy liabilities of the
Company relating primarily to the business or assets of
Riverstone, to the extent that such obligations were not
previously assumed by Riverstone.

The historical results of operations and cash
flows of Riverstone and the related balance sheet prior to
August 6, 2001 are included in the accompanying
consolidated statements of operations, cash flows and balance
sheets as discontinued operations. As of August 6, 2001,
Riverstone discontinued the use of corporate and other
infrastructure services that the Company had previously provided
in accordance with a transitional services agreement.

During July 2001, the Companys Board of
Directors determined to sell a portion of GNTS to a third party,
absorb a portion of GNTS, and discontinue the remainder of the
GNTS business. The Company and Aprisma assumed certain contracts
and employees of GNTS related to customers with whom each of

F-19



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


the Company and Aprisma had ongoing
relationships. The Company finalized the sale of a portion of
GNTS to the third party during September 2001. As a result, the
consolidated financial statements present GNTS as a discontinued
operation for all periods presented. During the ten months ended
December 29, 2001, the Company recognized as a loss on
disposal of GNTS, approximately $41.5 million of expenses,
related primarily to severance, office closings and asset
write-offs associated with the discontinuation and sale of GNTS.
Approximately $23.1 million of these expenses were non-cash
charges.

In August 2001, the Companys Board of
Directors made a determination to distribute Aprismas
shares to the Companys stockholders or to otherwise
dispose of Aprisma. Accordingly, the consolidated financial
statements reflect Aprisma as a discontinued operation for all
periods presented. In March 2002, the Company received
$70.0 million of cash from Aprisma. On August 9, 2002,
the Company completed the sale of Aprisma to a third party for
proceeds, net of expenses, of approximately $7.4 million.
The Company has recorded in discontinued operations a provision
for the loss on sale of Aprisma of $1.3 million for the ten
months ended December 29, 2001. This includes
Aprismas estimated loss from operations of
$14.8 million from December 29, 2001 to the disposal
date.

The Companys discontinued operations
included sales to customers in which the Company had investments
in debt and equity securities accounted for under the cost
method of accounting. These revenues are disclosed separately in
the following table as Revenue from related
parties  minority investees. See Note 28
for further discussion of these transactions.

The following revenue is recorded in the
consolidated statements of operations in loss from discontinued
operations.

|                                                                   |                                       |                   |         |               |  |                   |         |         |  |   |         |         | 
|------------------------------------------------------------------ | ------------------------------------- | ----------------- | ------- | ------------- |  | ----------------- | ------- | ------- |  | - | ------- | ------- | 
|                                                                   |                                       |                   |         |              
|                                                                   |                                       |                   |         | Year Ended   
|                                                                   |                                       | Ten Months Ended  |         |              
|                                                                   |                                       | December 29, 2001 |         | March 3, 2001 |  | February 29, 2000
|                                                                   |                                       |                   |         |               |  |                  
|(In thousands)                                                     |                                       |                   |         | (Restated)    |  |                  
|Revenue (trade) from discontinued operations                       |                                       | $                 | 91,888  |               |  | $                 | 188,705 |         |  | $ | 104,591 |        
|Intercompany revenue  Enterasys,
    Aprisma, GNTS and Riverstone |                                       |                   | 11,836  |               |  |                   | 11,119  |         |  |   |        |        
|Revenue from related parties  minority
    investees              |                                       |                   | 22,940  |               |  |                   | 15,590  |         |  |   |        |        
|                                                                   |                                       |                   |         |               |  |                   |         |         |  |   |         |        
|                                                                   | Subtotal                              |                   |         | 126,664       |  |                   |         | 215,414 |  |   |         | 104,591 | 
|Eliminations                                                       |                                       |                   | (11,836 | )             |  |                   | (11,119 | )       |  |   |        |        
|                                                                   |                                       |                   |         |               |  |                   |         |         |  |   |         |        
|                                                                   | Total discontinued operations revenue |                   | $       | 114,828       |  |                   | $       | 204,295 |  |   | $       | 104,591 | 
|                                                                   |                                       |                   |         |               |  |                   |         |         |  |   |         |        

The assets and liabilities of discontinued
operations, which consist primarily of cash, receivables and
accounts payable are presented in the accompanying consolidated
balance sheets, as follows:

|                                      |  |                   |         |               |  |   |         | 
|------------------------------------- |  | ----------------- | ------- | ------------- |  | - | ------- | 
|                                      |  | December 29, 2001 |         | March 3, 2001
|                                      |  |                   |         |              
|(In thousands)                        |  |                   |         | (Restated)   
|Current assets                        |  | $                 | 63,658  |               |  | $ | 365,445 | 
|Total assets                          |  | $                 | 106,789 |               |  | $ | 404,621 | 
|Current liabilities                   |  | $                 | 33,316  |               |  | $ | 76,079  | 
|Net assets of discontinued operations |  | $                 | 70,099  |               |  | $ | 293,975 | 

F-20



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


5.     Segment and
Geographical Information

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information,
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 No. 131 also establishes
standards and 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 its Chief Executive Officer.

As a result of the Companys decision to
discontinue or dispose of the operations of Riverstone, GNTS and
Aprisma, the Company now operates its business as two segments.
The Companys Enterasys segment is in the business of
developing, selling and servicing standards-based networking
solutions using a switched Ethernet platform. The Company also
includes maintenance services relating to non-standards-based
products, described below, in the Enterasys segment. The Company
currently derives substantially all of its revenues from the
sale of these products and related services. In prior years, the
Company also developed and sold non-standards-based solutions.
Over time, these solutions proved unsuitable for the evolving
networking requirements of enterprise customers. As a result,
the focus of the Companys business shifted to its switched
Ethernet platform products. Beginning in fiscal 2000, the
Company started reducing its marketing and research and
development efforts relating to the Companys
non-standards-based products and sold the remaining assets
related to these products in September 2000. The Other segment
includes the revenue and cost of goods sold relating to
non-standards-based products. The Company does not anticipate
that its Other segment will generate any future revenue or
expense.

As described in Note 4, the Company has
reclassified the results of Aprisma, Riverstone and GNTS as
discontinued operations for all periods presented. Previously,
the results of Aprisma, Riverstone and GNTS were classified as
operating segments. Segment income (loss) from continuing
operations before income taxes and cumulative effect of a change
in accounting principle excludes corporate expenses,
amortization of intangible assets, stock-based compensation,
special charges, impairment of intangible assets, interest
income and other income (expense). These items are included in
the consolidated statements of operations of the Company, and
are reflected in the reconciliation of income (loss) from
continuing operations before income taxes and cumulative effect
of a change in accounting principle.

The financial information disclosed herein
represents all of the material financial information related to
the Companys principal operating segments. One foreign
country accounted for approximately 18.4% and 10.4% of total
revenue for the ten months ended December 29, 2001 and the
fiscal year ended March 3, 2001, respectively. For the
fiscal year ended February 29, 2000 no one foreign country
accounted for greater than 10% of total revenue. Long-lived
assets consist of the net book value of property, plant and
equipment, and intangible assets.

|                                     |           |                      |   |               |         |                   |   |         |         |  |   |         |           | 
|------------------------------------ | --------- | -------------------- | - | ------------- | ------- | ----------------- | - | ------- | ------- |  | - | ------- | --------- | 
|                                     |           |                      |   |              
|                                     |           |                      |   | Year Ended   
|                                     |           | Ten Months Ended     |   |              
|                                     |           | December 29, 2001    |   | March 3, 2001 |         | February 29, 2000
|                                     |           |                      |   |               |         |                  
|(In thousands)                       |           |                      |   | (Restated)    |         |                  
|Revenue from unaffiliated customers: |           |                      |   |               |         |                   |   |         |         |  |   |        
|                                     | Enterasys |                      | $ | 368,079       |         |                   | $ | 673,949 |         |  | $ | 621,212 |          
|                                     | Other     |                      |   |              |         |                   |   | 69,702  |         |  |   | 712,462 |          
|                                     |           |                      |   |               |         |                   |   |         |         |  |   |        
|                                     |           | Total trade revenues |   | $             | 368,079 |                   |   | $       | 743,651 |  |   | $       | 1,333,674 | 
|                                     |           |                      |   |               |         |                   |   |         |         |  |   |        

F-21



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |         |           | 
|-------------------------------------- | --------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | -------- | ----------------- | - | -------- | -------- | - | - | ------- | --------- | 
|                                       |                                   |                                                                                                                                |   |              
|                                       |                                   |                                                                                                                                |   | Year Ended   
|                                       |                                   | Ten Months Ended                                                                                                               |   |              
|                                       |                                   | December 29, 2001                                                                                                              |   | March 3, 2001 |          | February 29, 2000
|                                       |                                   |                                                                                                                                |   |               |          |                  
|(In thousands)                         |                                   |                                                                                                                                |   | (Restated)    |          |                  
|Revenue from minority investees:       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       | Enterasys                         |                                                                                                                                | $ | 47,184        |          |                   | $ | 40,054   |          |   | $ | 21,328  |          
|                                       | Other                             |                                                                                                                                |   |              |          |                   |   |         |          |   |   |        |          
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       |                                   | Total revenue from minority investees                                                                                          |   | $             | 47,184   |                   |   | $        | 40,054   |   |   | $       | 21,328    | 
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|Total segment revenue:                 |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       | Enterasys                         |                                                                                                                                | $ | 415,263       |          |                   | $ | 714,003  |          |   | $ | 642,540 |          
|                                       | Other                             |                                                                                                                                |   |              |          |                   |   | 69,702   |          |   |   | 712,462 |          
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       |                                   | Total revenue                                                                                                                  |   | $             | 415,263  |                   |   | $        | 783,705  |   |   | $       | 1,355,002 | 
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|Segment income (loss) from operations: |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       | Enterasys                         |                                                                                                                                | $ | (294,344      | )        |                   | $ | 14,184   |          |   | $ | (37,772 | )        
|                                       | Other                             |                                                                                                                                |   |              |          |                   |   | (62,229  | )        |   |   | 182,185 |          
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       |                                   | Total segment income (loss) from continuing
    operations                                                                     |   |               | (294,344 | )                 |   |          | (48,045  | ) |   |         | 144,413   | 
|Reconciliation:                        |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       | Corporate expenses                |                                                                                                                                |   | (22,693       | )        |                   |   | (26,381  | )        |   |   | (27,489 | )        
|                                       | Amortization of intangible assets |                                                                                                                                |   | (32,366       | )        |                   |   | (23,176  | )        |   |   | (28,952 | )        
|                                       | Stock-based compensation          |                                                                                                                                |   | (30,572       | )        |                   |   | (1,442   | )        |   |   |        |          
|                                       | Special charges                   |                                                                                                                                |   | (47,168       | )        |                   |   | (63,187  | )        |   |   | (21,096 | )        
|                                       | Impairment of intangible assets   |                                                                                                                                |   | (104,147      | )        |                   |   | (14,104  | )        |   |   | (12,318 | )        
|                                       | Interest income, net              |                                                                                                                                |   | 17,672        |          |                   |   | 29,981   |          |   |   | 18,614  |          
|                                       | Other income (expense), net       |                                                                                                                                |   | (41,209       | )        |                   |   | (557,355 | )        |   |   | 746,282 |          
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        
|                                       |                                   | Income (loss) from continuing operations
    before income taxes and cumulative effect of a change in
    accounting principle |   | $             | (554,827 | )                 |   | $        | (703,709 | ) |   | $       | 819,454   | 
|                                       |                                   |                                                                                                                                |   |               |          |                   |   |          |          |   |   |        



| |                                   
| | ----------------------------------
| | Total Net Revenue by
    Geography

|                               |                   |                   |         |               |  |                   |         |         |  |   |         |           | 
|------------------------------ | ----------------- | ----------------- | ------- | ------------- |  | ----------------- | ------- | ------- |  | - | ------- | --------- | 
|                               |                   |                   |         |              
|                               |                   |                   |         | Year Ended   
|                               |                   | Ten Months Ended  |         |              
|                               |                   | December 29, 2001 |         | March 3, 2001 |  | February 29, 2000
|                               |                   |                   |         |               |  |                  
|(In thousands)                 |                   |                  
|                               |                   | (Restated)       
|North America                  |                   | $                 | 208,961 |               |  | $                 | 415,148 |         |  | $ | 865,718 |          
|Europe, Middle East and Africa |                   |                   | 139,476 |               |  |                   | 214,575 |         |  |   | 328,709 |          
|Asia Pacific                   |                   |                   | 44,945  |               |  |                   | 87,388  |         |  |   | 113,109 |          
|Latin America                  |                   |                   | 21,881  |               |  |                   | 66,594  |         |  |   | 47,466  |          
|                               |                   |                   |         |               |  |                   |         |         |  |   |         |          
|                               | Total net revenue |                   | $       | 415,263       |  |                   | $       | 783,705 |  |   | $       | 1,355,002 | 
|                               |                   |                   |         |               |  |                   |         |         |  |   |         |          

F-22



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000




| |                  
| | -----------------
| | Assets by Segment

|               |              |                   |         |               |  |   |           |           | 
|-------------- | ------------ | ----------------- | ------- | ------------- |  | - | --------- | --------- | 
|               |              | December 29, 2001 |         | March 3, 2001
|               |              |                   |         |              
|(In thousands) |              |                   |         | (Restated)   
|Enterasys      |              | $                 | 716,722 |               |  | $ | 1,000,194 |          
|Other          |              |                   |        |               |  |   | 733,320   |          
|               |              |                   |         |               |  |   |           |          
|               | Total assets |                   | $       | 716,722       |  |   | $         | 1,733,514 | 
|               |              |                   |         |               |  |   |           |          



| |                                   
| | ----------------------------------
| | Long-lived Assets by
    Geography

|                               |                         |                   |        |               |  |   |         |         | 
|------------------------------ | ----------------------- | ----------------- | ------ | ------------- |  | - | ------- | ------- | 
|                               |                         | December 29, 2001 |        | March 3, 2001
|                               |                         |                   |        |              
|(In thousands)                 |                         |                   |        | (Restated)   
|North America                  |                         | $                 | 93,963 |               |  | $ | 238,664 |        
|Europe, Middle East and Africa |                         |                   | 4,521  |               |  |   | 7,077   |        
|Asia Pacific                   |                         |                   | 2,070  |               |  |   | 2,680   |        
|Latin America                  |                         |                   | 1,971  |               |  |   | 2,913   |        
|                               |                         |                   |        |               |  |   |         |        
|                               | Total long-lived assets |                   | $      | 102,525       |  |   | $       | 251,334 | 
|                               |                         |                   |        |               |  |   |         |        

6.     Business
Combinations



| |             
| | ------------
| | Acquisitions

All business acquisitions during the 34-month
period ending December 29, 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 values at
the acquisition date and the aggregate purchase price plus costs
directly attributable to the completion of acquisitions has been
allocated to the assets and liabilities acquired.

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

In connection with the acquisition of Indus
River, the Company issued stock options to employees in respect
of unvested stock options. See Note 24 for further
information regarding stock-based compensation.

The Company recorded the cost of the acquisition
at approximately $187.3 million, including direct costs of
$3.2 million. Approximately $25.6 million of the
purchase price was allocated to in-process research development
and recorded in special charges for the fiscal year ended
March 3, 2001. The excess of cost over the estimated fair
value of net assets acquired of $156.4 million was
allocated to goodwill and other intangible assets and has been
amortized on a straight-line basis over periods of three to ten
years. The Companys consolidated results of operations
include the operating results of Indus River from the
acquisition date.

F-23



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The Company recorded a charge of
$104.1 million in the fourth quarter of transition 2001
relating to the impairment of goodwill recorded in connection
with our acquisition of Indus River Networks. This impairment
was primarily due to the complex, proprietary nature of the
Indus River VPN architecture, which had to be substantially
redesigned in order to conform with emerging industry standards;
the introduction of new, low cost VPN products and technologies
by a leading provider of network security products who captured
a market leadership position in 2001; and abandonment of our
development efforts in conjunction with a significant reduction
in the acquired workforce in the fourth quarter of transition
year 2001. These factors led to significantly lower projections
for future sales of products using the Indus River VPN
architecture.

On September 7, 2000, the Company acquired
Network Security Wizards, Inc. (NSW), a privately
held company that develops intrusion detection system
technology. Under the terms of the agreement, 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
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 connection with the Companys acquisition
of NSW, the Company agreed to issue 157,714 additional shares of
common stock contingent upon future services to be rendered to
the Company by certain employees of NSW. These shares of common
stock were held in escrow at December 29, 2001. See
Note 24 for further information regarding stock-based
compensation.

The Company recorded the cost of the acquisition
at approximately $8.3 million, including direct costs of
$0.3 million. 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
$8.1 million was allocated to goodwill and has been
amortized on a straight-line basis over a period of four years.

There were no acquisitions completed during the
ten-month transition period ended December 29, 2001.

The following table represents the unaudited pro
forma results of operations of the Company for the fiscal years
ended March 3, 2001 and February 29, 2000 as if
acquisitions completed during those years had occurred at the
beginning of the applicable 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.

|                                         |  |               |          |                   |  |   |           | 
|---------------------------------------- |  | ------------- | -------- | ----------------- |  | - | --------- | 
|                                         |  |              
|                                         |  | Year Ended   
|                                         |  |              
|                                         |  | March 3, 2001 |          | February 29, 2000
|                                         |  |               |          |                  
|(In thousands, except per share amounts) |  | (Restated)    |          |                  
|                                         |  |              
|                                         |  | (Unaudited)  
|Net revenue                              |  | $             | 789,136  |                   |  | $ | 1,356,546 | 
|Income (loss) from operations            |  | $             | (246,900 | )                 |  | $ | 44,792    | 
|Net income (loss)                        |  | $             | (710,736 | )                 |  | $ | 454,635   | 
|Net income (loss) per share basic        |  | $             | (3.85    | )                 |  | $ | 2.56      | 
|Net income (loss) per share diluted      |  | $             | (3.85    | )                 |  | $ | 2.41      | 

F-24



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The purchase price for the acquisitions completed
during the fiscal year ended March 3, 2001 was allocated to
assets acquired and liabilities assumed based on fair value at
the date of the acquisition. The following table summarizes the
cash paid, value of equity instruments issued and acquisition
costs.

|                                            |                |               |         |         | 
|------------------------------------------- | -------------- | ------------- | ------- | ------- | 
|                                            |                | March 3, 2001
|(In thousands)                              |                |              
|Cash paid for acquisitions                  |                | $             | 11,964  |        
|Common stock issued                         |                |               | 133,694 |        
|Preferred stock issued                      |                |               | 31,875  |        
|Preferred stock options and warrants issued |                |               | 3,670   |        
|Common stock options issued                 |                |               | 10,889  |        
|Acquisition costs                           |                |               | 3,516   |        
|                                            |                |               |         |        
|                                            | Purchase price |               | $       | 195,608 | 
|                                            |                |               |         |        

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

|                                    |                |               |         |         | 
|----------------------------------- | -------------- | ------------- | ------- | ------- | 
|                                    |                | March 3, 2001
|(In thousands)                      |                |              
|Goodwill                            |                | $             | 146,583 |        
|Assembled work force                |                |               | 700     |        
|Patents and developed technology    |                |               | 17,200  |        
|In-process research and development |                |               | 25,600  |        
|Other assets, net                   |                |               | 5,525   |        
|                                    |                |               |         |        
|                                    | Purchase price |               | $       | 195,608 | 
|                                    |                |               |         |        



| |             
| | ------------
| | Dispositions

During the fiscal year ended March 3, 2001,
the Company completed the sale of its Digital Network Products
Group (DNPG) division and certain legacy product
lines. In exchange for certain inventory, accounts receivable,
net fixed assets and related intangible assets, the Company
received a $30.0 million note from the buyer. Based on
significant uncertainty about the ability to collect the note,
the Company recorded a full valuation allowance at the sale
date. In addition, as part of the sale, the Company entered into
a credit agreement for up to $10.0 million with the buyer.
The Company recorded a loss on the sale of DNPG of
$143.1 million.

In December 1999, the Company sold its FlowPoint,
Inc. subsidiary to 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 that 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.

The FlowPoint transaction was valued at
approximately $946.2 million based upon an independent
valuation of the Efficient stock, reflecting a 10% discount from
the closing price of the Efficient stock on the NASDAQ as of the
sale date. This resulted in a pre-tax gain of approximately
$893.7 million.

On the transaction date, the Company held 26.4%
of the outstanding common stock of Efficient on an as-converted
basis. Accordingly, the Company deferred 26.4% of the pre-tax
gain, or $235.9 million, since through its ownership
percentage of Efficient; it effectively still had a 26.4%
interest in FlowPoint. Because

F-25



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


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 (See Note 11). As the Company sold the Efficient
shares, this deferred gain was recognized into income in
proportion to the Companys reduction in its percentage
ownership of Efficient. The Companys effective interest in
FlowPoint at the end of the ten-month period ended
December 29, 2001 and the years ended March 3, 2001
and February 29, 2000 was 0%, 17.7% and 21.1%, respectively.

During the years ended March 3, 2001 and
February 29, 2000, the Company sold 1.0 million and
2.0 million shares of Efficient common stock, respectively,
for net proceeds of approximately $46.6 million and
$135.3 million, respectively, and recognized approximately
$30.4 and $47.4 million, respectively, of deferred gain to
other income. Also during the fiscal year ended March 3,
2001, the Company wrote call options to sell 2.0 million
shares of Efficient at a weighted average price of $62.50 and
received premiums of approximately $14.0 million which were
recorded as a deferred gain. At March 3, 2001, the Company
determined that in accordance with SFAS No. 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 other expense of
$376.5 million during the year ended March 3, 2001.

During the ten months ended December 29,
2001, the Company sold 2.0 million shares of Efficient
common stock and tendered its remaining 8.5 million shares
for proceeds of $242.7 million in connection with a tender
offer to acquire the outstanding shares of Efficient common
stock made by Siemens A.G. In connection with these
transactions, the Company recognized the remaining deferred gain
of $46.8 million to other income. Additionally, the
outstanding call options discussed above expired between
March 30, 2001 and December 4, 2001 and the Company
recognized the previously recorded deferred gain of $14.0 net of
the related transaction costs of $1.3 million as a
cumulative effect of a change in accounting principle during the
first quarter of transition 2001.

On February 29, 2000, the Company sold its
manufacturing and repair services operations located in
Rochester, New Hampshire and Limerick, Ireland to Flextronics
for approximately $78.6 million. 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. The Companys original agreement with
Flextronics ended on March 1, 2002 and has been extended on
a month-to-month basis.

F-26



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


7.      Supplemental
Cash Flow Information

Non-cash transactions were as follows:

|                      |                                                                                  |              |        |            |   |              |         |         |  |   |   |        |  
|--------------------- | -------------------------------------------------------------------------------- | ------------ | ------ | ---------- | - | ------------ | ------- | ------- |  | - | - | ------ | -
|                      |                                                                                  |              |        |           
|                      |                                                                                  | Ten Months   |        | Year Ended
|                      |                                                                                  | Ended        |        |           
|                      |                                                                                  | December 29, |        | March 3,   |   | February 29,
|                      |                                                                                  | 2001         |        | 2001       |   | 2000        
|(In thousands)        |                                                                                  |              |        |            |   |             
|Financing activities: |                                                                                  |              |        |            |   |              |         |         |  |   |   |       
|                      | Dividend effect of beneficial conversion feature
    to preferred stockholders   |              | $      |           |   |              | $       | 16,854  |  |   | $ |       |  
|                      | Accretive dividend and accretion of discount on
    preferred shares             |              |        | 10,347     |   |              |         | 6,044   |  |   |   |       |  
|                      | Common stock issued for businesses acquired                                      |              |        |           |   |              |         | 133,694 |  |   |   |       |  
|                      | Preferred stock, options and warrants issued for
    businesses acquired         |              |        |           |   |              |         | 103,545 |  |   |   |       |  
|                      | Conversion of Series C preferred stock,
    options and warrants to common stock |              |        | 35,545     |   |              |         |        |  |   |   |       |  
|                      |                                                                                  |              |        |            |   |              |         |         |  |   |   |       
|Total                 |                                                                                  | $            | 45,892 |            |   | $            | 260,137 |         |  | $ |  |       
|                      |                                                                                  |              |        |            |   |              |         |         |  |   |   |       
|Operating activities: |                                                                                  |              |        |            |   |              |         |         |  |   |   |       
|                      | Cash paid (refunds received) for income taxes                                    |              | $      | (7,188     | ) |              | $       | 3,502   |  |   | $ | (5,349 | )
|                      |                                                                                  |              |        |            |   |              |         |         |  |   |   |       

8.     Accounts
Receivable

Accounts receivable are summarized as follows:

|                                                                 |                                 |              |         |            |   |   |         |         |  
|---------------------------------------------------------------- | ------------------------------- | ------------ | ------- | ---------- | - | - | ------- | ------- | -
|                                                                 |                                 | December 29, |         | March 3,  
|                                                                 |                                 | 2001         |         | 2001      
|                                                                 |                                 |              |         |           
|(In thousands)                                                   |                                 |              |         | (Restated)
|Gross accounts receivable                                        |                                 | $            | 125,617 |            |   | $ | 162,499 |        
|Less: Deferred revenue on shipments to
    stocking distributors |                                 |              | (25,350 | )          |   |   |        |        
|                                                                 | Allowance for doubtful accounts |              |         | (32,569    | ) |   |         | (24,784 | )
|                                                                 |                                 |              |         |            |   |   |         |        
|Accounts receivable, net                                         |                                 | $            | 67,698  |            |   | $ | 137,715 |        
|                                                                 |                                 |              |         |            |   |   |         |        

Beginning in September 2001, the Company deferred
revenue on product shipments to certain stocking distributors
until those distributors have sold the product to their
customer. At December 29, 2001, $68.9 million of
product shipments had been billed and deferred, of which
$25.4 million is reflected as a reduction to accounts
receivable and $43.5 million has been collected (or
credited) and is included in billings in excess of revenues and
customer advances.

F-27



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


9.     Notes
Receivable

Notes receivable consisted of the following:

|                                      |                           |              |        |          |   |   |        |         |  
|------------------------------------- | ------------------------- | ------------ | ------ | -------- | - | - | ------ | ------- | -
|                                      |                           | December 29, |        | March 3,
|                                      |                           | 2001         |        | 2001    
|(In thousands)                        |                           |              |        |         
|Note receivable from distributor      |                           | $            | 13,000 |          |   | $ |       |        
|Note receivable                       |                           |              | 30,000 |          |   |   | 30,000 |        
|Credit agreement                      |                           |              | 8,125  |          |   |   | 10,000 |        
|                                      | Less: valuation allowance |              |        | (36,125  | ) |   |        | (30,000 | )
|                                      |                           |              |        |          |   |   |        |        
|Notes receivable, net                 |                           |              | 15,000 |          |   |   | 10,000 |        
|                                      | Less: current portion     |              |        | (15,000  | ) |   |        | (2,125  | )
|                                      |                           |              |        |          |   |   |        |        
|Long-term portion of notes receivable |                           | $            |       |          |   | $ | 7,875  |        
|                                      |                           |              |        |          |   |   |        |        



| |                                     
| | ------------------------------------
| | Note receivable from
    distributor

During the ten months ended December 29,
2001, the Company entered into a promissory note with a customer
in which the Company loaned the customer $13.0 million.
Interest on this note accrues at a rate of 5.0% per annum
compounded daily. Principal and interest are due in full on
March 9, 2002. In the second quarter of fiscal year 2002,
the Company reached a settlement in which the note was
extinguished in exchange for product returns by the distributor.



| |                                         
| | ----------------------------------------
| | Note receivable and credit
    agreement

A note receivable and credit agreement were
issued in connection with the sale of the Companys DNPG
division. Principal amounts of the note receivable are due in
installments of $1.875 million on each May 31,
August 31, November 30 and February 28 commencing
on May 31, 2002 through February 28, 2006. The buyer
has the ability to defer each principal payment when due,
potentially extending the final maturity of the note to
February 28, 2010. The buyers first two scheduled
payments have been extended. Interest accrues and is due
quarterly at a rate of 4.0% per annum. At December 29, 2001
and March 3, 2001, the Company had a valuation allowance
for the total amount of the note receivable due to significant
uncertainty regarding the likelihood that the Company would
receive payments under the note.

In addition, as part of the sale, the Company
entered into a credit agreement for up to $10.0 million
with the buyer. Interest under the credit agreement accrues at a
rate of 6.50% per annum. Borrowings are subject to a borrowing
base, on any date equal to the sum of 80% of eligible accounts
receivable and 50% of eligible inventory. Principal payments on
the credit agreement are to be made as follows for the indicated
fiscal years:

|     |       |                |       |       | 
|---- | ----- | -------------- | ----- | ----- | 
|     |       | Amount Due    
|     |       |               
|     |       | (In thousands)
|2002 |       | $              | 2,000 |      
|2003 |       |                | 6,125 |      
|     |       |                |       |      
|     | Total |                | $     | 8,125 | 
|     |       |                |       |      

During the fourth quarter of transition 2001, the
Company recorded a valuation allowance of $6.1 million on
the credit agreement balance due in 2003 based on significant
uncertainty about the Companys ability to collect the
related amounts.

F-28



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


10.     Inventories,
net

Inventories, net consisted of the following:

|               |                  |              |         |            |  |   |        |        | 
|-------------- | ---------------- | ------------ | ------- | ---------- |  | - | ------ | ------ | 
|               |                  | December 29, |         | March 3,  
|               |                  | 2001         |         | 2001      
|               |                  |              |         |           
|(In thousands) |                  |              |         | (Restated)
|Raw materials  |                  | $            | 8,130   |            |  | $ | 3,517  |       
|Finished goods |                  |              | 110,084 |            |  |   | 94,289 |       
|               |                  |              |         |            |  |   |        |       
|               | Inventories, net |              | $       | 118,214    |  |   | $      | 97,806 | 
|               |                  |              |         |            |  |   |        |       

The Company has recorded a provision for excess
and obsolete inventory of $72.9 million and
$44.7 million for the periods ended December 29, 2001
and March 3, 2001, respectively.

Finished goods at December 29, 2001 include
$43.8 million of inventory held by certain distributors as
a result of the Companys decision in September of 2001 to
recognize revenue from certain distributors when the distributor
ships the Companys product to their customers.

11.     Marketable
Securities

Marketable securities are summarized as follows
at December 29, 2001 and March 3, 2001:

|                                                                                    |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |         | 
|----------------------------------------------------------------------------------- | --------------------------- | -------------- | ------- | ---------- |  | ---------- | ----- | ----- |  | - | --- | ---- | - | - | ------- | ------- | 
|                                                                                    |                             |                |         | Gross      |  | Gross      |       |      
|                                                                                    |                             | Amortized      |         | Unrealized |  | Unrealized |       | Fair 
|                                                                                    |                             | Cost           |         | Gains      |  | Losses     |       | Value
|                                                                                    |                             |                |         |            |  |            |       |      
|                                                                                    |                             |               
|                                                                                    |                             | (In thousands)
|December 29, 2001                                                                   |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |        
|U.S. government and agency obligations                                              |                             | $              | 113,139 |            |  | $          | 1,205 |       |  | $ | (63 | )    |   | $ | 114,281 |        
|U.S. corporate obligations                                                          |                             |                | 25,724  |            |  |            | 891   |       |  |   | (4  | )    |   |   | 26,611  |        
|Asset-backed securities                                                             |                             |                | 9,642   |            |  |            | 190   |       |  |   | (6  | )    |   |   | 9,826   |        
|State, municipal and county government notes and
    bonds                          |                             |                | 16,268  |            |  |            | 382   |       |  |   |    |      |   |   | 16,650  |        
|Corporate equity securities                                                         |                             |                | 403     |            |  |            |      |       |  |   | (29 | )    |   |   | 374     |        
|Foreign deposits                                                                    |                             |                | 35      |            |  |            |      |       |  |   |    |      |   |   | 35      |        
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |        
|                                                                                    | Total marketable securities |                | $       | 165,211    |  |            | $     | 2,668 |  |   | $   | (102 | ) |   | $       | 167,777 | 
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |        
|Amounts included in cash and cash equivalents                                       |                             | $              | 33,552  |            |  | $          |      |       |  | $ |    |      |   | $ | 33,552  |        
|Amounts included in short-term marketable
    securities                            |                             |                | 47,519  |            |  |            | 22    |       |  |   | (9  | )    |   |   | 47,532  |        
|Amounts included in long-term marketable
    securities                             |                             |                | 62,094  |            |  |            | 1,918 |       |  |   | (92 | )    |   |   | 63,920  |        
|Amounts included in restricted cash, cash
    equivalents and marketable securities |                             |                | 22,046  |            |  |            | 728   |       |  |   | (1  | )    |   |   | 22,773  |        
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |        
|                                                                                    | Total marketable securities |                | $       | 165,211    |  |            | $     | 2,668 |  |   | $   | (102 | ) |   | $       | 167,777 | 
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |     |      |   |   |         |        

F-29



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


|                                                                                    |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |         | 
|----------------------------------------------------------------------------------- | --------------------------- | -------------- | ------- | ---------- |  | ---------- | ----- | ----- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                                                                    |                             |                |         | Gross      |  | Gross      |       |      
|                                                                                    |                             | Amortized      |         | Unrealized |  | Unrealized |       | Fair 
|                                                                                    |                             | Cost           |         | Gains      |  | Losses     |       | Value
|                                                                                    |                             |                |         |            |  |            |       |      
|                                                                                    |                             |               
|                                                                                    |                             | (In thousands)
|March 3, 2001 (restated)                                                            |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |        
|U.S. government and agency obligations                                              |                             | $              | 182,123 |            |  | $          | 1,780 |       |  | $ |       |        |   | $ | 183,903 |        
|U.S. corporate obligations                                                          |                             |                | 62,091  |            |  |            | 1,042 |       |  |   | (43    | )      |   |   | 63,090  |        
|Asset-backed securities                                                             |                             |                | 15,481  |            |  |            | 313   |       |  |   |       |        |   |   | 15,794  |        
|State, municipal and county government notes and
    bonds                          |                             |                | 54,672  |            |  |            | 346   |       |  |   | (7     | )      |   |   | 55,011  |        
|Corporate equity securities                                                         |                             |                | 248,581 |            |  |            |      |       |  |   | (2,896 | )      |   |   | 245,685 |        
|Foreign deposits                                                                    |                             |                | 12,108  |            |  |            |      |       |  |   |       |        |   |   | 12,108  |        
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |        
|                                                                                    | Total marketable securities |                | $       | 575,056    |  |            | $     | 3,481 |  |   | $      | (2,946 | ) |   | $       | 575,591 | 
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |        
|Amounts included in cash and cash equivalents                                       |                             | $              | 11,096  |            |  | $          |      |       |  | $ |       |        |   | $ | 11,096  |        
|Amounts included in short-term marketable
    securities                            |                             |                | 399,700 |            |  |            | 479   |       |  |   | (7     | )      |   |   | 400,172 |        
|Amounts included in long-term marketable
    securities                             |                             |                | 141,220 |            |  |            | 2,581 |       |  |   | (2,939 | )      |   |   | 140,862 |        
|Amounts included in restricted cash, cash
    equivalents and marketable securities |                             |                | 23,040  |            |  |            | 421   |       |  |   |       |        |   |   | 23,461  |        
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |        
|                                                                                    | Total marketable securities |                | $       | 575,056    |  |            | $     | 3,481 |  |   | $      | (2,946 | ) |   | $       | 575,591 | 
|                                                                                    |                             |                |         |            |  |            |       |       |  |   |        |        |   |   |         |        

The contractual maturities of debt securities at
December 29, 2001 are as follows:

|                   |       |                |        |            |  |   |        |         | 
|------------------ | ----- | -------------- | ------ | ---------- |  | - | ------ | ------- | 
|                   |       | Amortized      |        |           
|                   |       | Cost           |        | Fair Value
|                   |       |                |        |           
|                   |       |               
|                   |       | (In thousands)
|Less than one year |       | $              | 88,919 |            |  | $ | 89,659 |        
|Due in 1-2 years   |       |                | 55,471 |            |  |   | 57,049 |        
|Due in 2-3 years   |       |                | 20,383 |            |  |   | 20,660 |        
|                   |       |                |        |            |  |   |        |        
|                   | Total |                | $      | 164,773    |  |   | $      | 167,368 | 
|                   |       |                |        |            |  |   |        |        

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

F-30



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The fair value of marketable securities
categorized by purpose of investment is as follows:

|                         |                             |                |         |           |  |       |         |         |  |   |         |         | 
|------------------------ | --------------------------- | -------------- | ------- | --------- |  | ----- | ------- | ------- |  | - | ------- | ------- | 
|                         |                             | Current        |         | Long-Term |  | Total
|                         |                             |                |         |           |  |      
|                         |                             |               
|                         |                             | (In thousands)
|December 29, 2001        |                             |                |         |           |  |       |         |         |  |   |         |        
|Held-to-maturity         |                             | $              | 9,999   |           |  | $     |        |         |  | $ | 9,999   |        
|Available-for-sale       |                             |                | 71,085  |           |  |       | 86,693  |         |  |   | 157,778 |        
|                         |                             |                |         |           |  |       |         |         |  |   |         |        
|                         | Total marketable securities |                | $       | 81,084    |  |       | $       | 86,693  |  |   | $       | 167,777 | 
|                         |                             |                |         |           |  |       |         |         |  |   |         |        
|March 3, 2001 (restated) |                             |                |         |           |  |       |         |         |  |   |         |        
|Held-to-maturity         |                             | $              | 131,891 |           |  | $     |        |         |  | $ | 131,891 |        
|Available-for-sale       |                             |                | 279,377 |           |  |       | 164,323 |         |  |   | 443,700 |        
|                         |                             |                |         |           |  |       |         |         |  |   |         |        
|                         | Total marketable securities |                | $       | 411,268   |  |       | $       | 164,323 |  |   | $       | 575,591 | 
|                         |                             |                |         |           |  |       |         |         |  |   |         |        

The fair value of the corporate equity securities
held at March 3, 2001 relates primarily to the
Companys investment in the common stock of Efficient.
Shortly after March 3, 2001, the Company disposed of all of
its Efficient shares in the Siemens tender offer described in
Note 6.

At December 29, 2001, and March 3,
2001, $22.8 million and $23.5 million, respectively,
of marketable securities were pledged primarily to secure
letters of credit.

12.     Property,
Plant and Equipment, net

Property, plant and equipment, net consisted of
the following:

|                                               |                                          |                   |          |               |  |             |          |         |  |  |             |  | 
|---------------------------------------------- | ---------------------------------------- | ----------------- | -------- | ------------- |  | ----------- | -------- | ------- |  |  | ----------- |  | 
|                                               |                                          |                   |          |               |  | Estimated  
|                                               |                                          | December 29, 2001 |          | March 3, 2001 |  | Useful Life
|(In thousands)                                 |                                          |                   |          |               |  |            
|Land and land improvements                     |                                          | $                 | 1,704    |               |  | $           | 1,704    |         |  |  | 15 years    | 
|Buildings and building improvements            |                                          |                   | 17,551   |               |  |             | 25,071   |         |  |  | 15-40 years | 
|Construction in progress                       |                                          |                   |         |               |  |             | 857      |         |  |  |            | 
|Equipment                                      |                                          |                   | 215,516  |               |  |             | 201,186  |         |  |  | 1.5-7 years | 
|Furniture and fixtures                         |                                          |                   | 11,395   |               |  |             | 12,159   |         |  |  | 5 years     | 
|Leasehold improvements                         |                                          |                   | 15,475   |               |  |             | 16,633   |         |  |  | 5 years     | 
|                                               |                                          |                   |          |               |  |             |          |         |  |  |             | 
|                                               | Total property, plant and equipment      |                   |          | 261,641       |  |             |          | 257,610 |  |  |             |  | 
|Less accumulated depreciation and amortization |                                          |                   | (204,717 | )             |  |             | (188,390 | )       |  |  |             | 
|                                               |                                          |                   |          |               |  |             |          |         |  |  |             | 
|                                               | Total property, plant and equipment, net |                   | $        | 56,924        |  |             | $        | 69,220  |  |  |             |  | 
|                                               |                                          |                   |          |               |  |             |          |         |  |  |             | 

For the ten month period ended December 29,
2001 and the fiscal years ended March 3, 2001 and
February 29, 2000, depreciation expense was
$25.1 million, $37.0 million and $72.4 million,
respectively.

Buildings and building improvements included
$1.5 million of assets held for sale at December 29,
2001.

F-31



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


13.     Intangible
Assets

Intangible assets consisted of the following at
December 29, 2001 and March 3, 2001:

|                                                               |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|-------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | ----------- | ------ | ---------- |  | ----------- | ------- |  |  | - | ------- |  |  |  | ---------- | 
|                                                               |  | Gross          |         | Accumulated  |  |             |        | Net        |  | Estimated  
|                                                               |  | Intangible     |         | Amortization |  | Impairments |        | Intangible |  | Useful Life
|                                                               |  |                |         |              |  |             |        |            |  |            
|                                                               |  |               
|                                                               |  | (In thousands)
|December 29, 2001                                              |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|Goodwill                                                       |  | $              | 146,786 |              |  | $           | 28,082 |            |  | $           | 104,147 |  |  | $ | 14,557  |  |  |  | 4-10 years | 
|Customer relations                                             |  |                | 28,600  |              |  |             | 16,207 |            |  |             |        |  |  |   | 12,393  |  |  |  | 8 years    | 
|Assembled work force                                           |  |                | 700     |              |  |             | 128    |            |  |             |        |  |  |   | 572     |  |  |  | 3-10 years | 
|Patents and technologies acquired in business
    acquisitions |  |                | 32,200  |              |  |             | 14,121 |            |  |             |        |  |  |   | 18,079  |  |  |  | 3-10 years | 
|                                                               |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|Total intangible assets                                        |  | $              | 208,286 |              |  | $           | 58,538 |            |  | $           | 104,147 |  |  | $ | 45,601  |  |  |  |            | 
|                                                               |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|March 3, 2001                                                  |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|Goodwill                                                       |  | $              | 164,013 |              |  | $           | 7,762  |            |  | $           | 12,799  |  |  | $ | 143,452 |  |  |  | 4-10 years | 
|Customer relations                                             |  |                | 29,480  |              |  |             | 14,252 |            |  |             | 318     |  |  |   | 14,910  |  |  |  | 8 years    | 
|Assembled work force                                           |  |                | 700     |              |  |             | 50     |            |  |             |        |  |  |   | 650     |  |  |  | 3-10 years | 
|Patents and technologies acquired in business
    acquisitions |  |                | 33,800  |              |  |             | 9,711  |            |  |             | 987     |  |  |   | 23,102  |  |  |  | 3-10 years | 
|                                                               |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 
|Total intangible assets                                        |  | $              | 227,993 |              |  | $           | 31,775 |            |  | $           | 14,104  |  |  | $ | 182,114 |  |  |  |            | 
|                                                               |  |                |         |              |  |             |        |            |  |             |         |  |  |   |         |  |  |  |            | 

14.     Accrued
Expenses

Accrued expenses consisted of the following at
December 29, 2001 and March 3, 2001:

|                                          |                        |                   |        |               |  |   |        |         | 
|----------------------------------------- | ---------------------- | ----------------- | ------ | ------------- |  | - | ------ | ------- | 
|                                          |                        | December 29, 2001 |        | March 3, 2001
|                                          |                        |                   |        |              
|(In thousands)                            |                        |                   |        | (Restated)   
|Salaries and benefits                     |                        | $                 | 31,525 |               |  | $ | 23,127 |        
|Deferred gain on Efficient investment     |                        |                   |       |               |  |   | 60,769 |        
|Accrued restructuring                     |                        |                   | 6,182  |               |  |   | 1,079  |        
|Accrued legal costs                       |                        |                   | 6,721  |               |  |   | 3,157  |        
|Accrued marketing development obligations |                        |                   | 15,073 |               |  |   | 10,140 |        
|Other                                     |                        |                   | 25,315 |               |  |   | 56,380 |        
|                                          |                        |                   |        |               |  |   |        |        
|                                          | Total accrued expenses |                   | $      | 84,816        |  |   | $      | 154,652 | 
|                                          |                        |                   |        |               |  |   |        |        

15.     Commitments
and Contingencies

The Company leases office facilities under
non-cancelable operating leases expiring through the year 2018.
The leases generally provide for increases based on the consumer
price index and increases in real estate taxes. Rent expense
associated with operating leases was $12.7 million,
$11.8 million and $16.2 million for the ten months
ended December 29, 2001 and the fiscal years ended
March 3, 2001 and February 29, 2000, respectively.

F-32



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


Total future minimum lease payments under all
non-cancelable operating leases as of December 29, 2001
were as follows for the indicated fiscal years:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Payments      
|           |  |               
|           |  | (In thousands)
|2002       |  | $              | 13,602 | 
|2003       |  |                | 10,146 | 
|2004       |  |                | 9,014  | 
|2005       |  |                | 7,738  | 
|2006       |  |                | 6,397  | 
|Thereafter |  |                | 13,051 | 
|           |  |                |        | 
|           |  | $              | 59,948 | 
|           |  |                |        | 

In addition, the Company has guaranteed a total
of approximately $4.0 million of Aprismas lease
obligations and related maintenance and management fees through
2012. This guarantee automatically reduces to $3.0 million
on February 1, 2009, to $2.0 million on
February 1, 2010 and to $1.0 million on
February 1, 2011 and terminates on February 1, 2012.
The Company is indemnified for any losses it may incur in
connection with this guarantee.

In some instances, customers of the Company
received financing for the purchase of equipment from third
party leasing organizations and the Company guaranteed the
payments of those customers. Most of these guarantees related to
the sale of Riverstone equipment. During the ten months ended
December 29, 2001 and the fiscal years ended March 3,
2001 and February 29, 2000, the Company made payments of
$28.8 million, $0.8 million and $0 million,
respectively, related to these guarantees. As of
December 29, 2001, the Company had guaranteed payments
associated with lease transactions of approximately
$13.7 million for which the Company has recorded a reserve
for $7.1 million in accrued expenses. In connection with
these guarantees, the Company has entered into a standby letter
of credit of $9.6 million related to certain third party
leasing organizations.

At December 29, 2001, the Company had
non-cancelable purchase commitments of approximately
$56.6 million with its contract manufacturers.

As discussed in Note 23, the Company may be
obligated beginning February 23, 2003 to redeem
Series D and E preferred stock for the aggregate
liquidation preference. At February 23, 2003, the
redemption obligation will be $99.4 million less the fair
market value of 1,300,000 shares of Riverstone common stock
received by the Strategic Investors in connection with the
Riverstone spin-off.

The Company has committed to make up to
$20 million of additional future capital contributions to a
venture capital fund in which it is already an investor. In the
event of future capital calls, the Company could be required to
fund some or all of this commitment. If the Company fails to
make a required contribution, then its existing investment would
be significantly diluted.

F-33



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


16.     Income taxes
payable

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

|                                         |                                         |                   |          |               |   |                   |          |          |   |   |         |         | 
|---------------------------------------- | --------------------------------------- | ----------------- | -------- | ------------- | - | ----------------- | -------- | -------- | - | - | ------- | ------- | 
|                                         |                                         |                   |          |              
|                                         |                                         |                   |          | Year Ended   
|                                         |                                         | Ten Months Ended  |          |              
|                                         |                                         | December 29, 2001 |          | March 3, 2001 |   | February 29, 2000
|(In thousands)                           |                                         |                   |          |               |   |                  
|Total US domestic income (loss)          |                                         | $                 | (508,217 | )             |   | $                 | (680,180 | )        |   | $ | 791,217 |        
|Total foreign subsidiaries income (loss) |                                         |                   | (46,610  | )             |   |                   | (23,529  | )        |   |   | 28,237  |        
|                                         |                                         |                   |          |               |   |                   |          |          |   |   |         |        
|                                         | Total income (loss) before income taxes |                   | $        | (554,827      | ) |                   | $        | (703,709 | ) |   | $       | 819,454 | 
|                                         |                                         |                   |          |               |   |                   |          |          |   |   |         |        

The provision (benefit) for income taxes
consists of the following items:

|                                   |         |                   |         |               |   |                   |          |         |   |   |         |         | 
|---------------------------------- | ------- | ----------------- | ------- | ------------- | - | ----------------- | -------- | ------- | - | - | ------- | ------- | 
|                                   |         |                   |         |              
|                                   |         |                   |         | Year Ended   
|                                   |         | Ten Months Ended  |         |              
|                                   |         | December 29, 2001 |         | March 3, 2001 |   | February 29, 2000
|(In thousands)                     |         |                   |         |               |   |                  
|                                   |         |                  
|                                   |         | (Restated)       
|Current:                           |         |                   |         |               |   |                   |          |         |   |   |         |        
|                                   | Federal |                   | $       | (30,251       | ) |                   | $        | 1,785   |   |   | $       | 54,550  | 
|                                   | State   |                   |         | 4,935         |   |                   |          | (641    | ) |   |         | 6,768   | 
|                                   | Foreign |                   |         | 3,283         |   |                   |          | 4,149   |   |   |         | 5,951   | 
|                                   |         |                   |         |               |   |                   |          |         |   |   |         |        
|Total current                      |         |                   | (22,033 | )             |   |                   | 5,293    |         |   |   | 67,269  |        
|                                   |         |                   |         |               |   |                   |          |         |   |   |         |        
|Deferred:                          |         |                   |         |               |   |                   |          |         |   |   |         |        
|                                   | Federal |                   |         | 82,227        |   |                   |          | (96,354 | ) |   |         | 199,020 | 
|                                   | State   |                   |         |              |   |                   |          | (6,565  | ) |   |         | 50,881  | 
|                                   | Foreign |                   |         | 48            |   |                   |          | (561    | ) |   |         | 15      | 
|                                   |         |                   |         |               |   |                   |          |         |   |   |         |        
|Total deferred                     |         |                   | 82,275  |               |   |                   | (103,480 | )       |   |   | 249,916 |        
|                                   |         |                   |         |               |   |                   |          |         |   |   |         |        
|Total income tax expense (benefit) |         | $                 | 60,242  |               |   | $                 | (98,187  | )       |   | $ | 317,185 |        
|                                   |         |                   |         |               |   |                   |          |         |   |   |         |        

The following reconciles the effective tax rates
to the statutory federal tax rate for continuing operations:

|                                            |                                              |                   |       |               |   |                   |       |      |   |  |      |      |  
|------------------------------------------- | -------------------------------------------- | ----------------- | ----- | ------------- | - | ----------------- | ----- | ---- | - |  | ---- | ---- | -
|                                            |                                              |                   |       |              
|                                            |                                              |                   |       | Year Ended   
|                                            |                                              | Ten Months Ended  |       |              
|                                            |                                              | December 29, 2001 |       | March 3, 2001 |   | February 29, 2000
|                                            |                                              |                   |       |               |   |                  
|                                            |                                              |                  
|                                            |                                              | (Restated)       
|Statutory federal income tax (benefit) rate |                                              |                   | (35.0 | )%            |   |                   | (35.0 | )%   |   |  | 35.0 | %   
|                                            | State income tax, net of federal tax benefit |                   |       | 0.6           |   |                   |       | (0.7 | ) |  |      | 4.6  |  
|                                            | Research and experimentation credit          |                   |       | (0.5          | ) |                   |       | (0.3 | ) |  |      | (0.1 | )
|                                            | Municipal income                             |                   |       |              |   |                   |       | (0.4 | ) |  |      | (0.4 | )
|                                            | Rate differential on foreign operations      |                   |       | 2.8           |   |                   |       | 1.1  |   |  |      | (0.4 | )
|                                            | Nondeductible goodwill and intangibles       |                   |       | 8.9           |   |                   |       | 1.4  |   |  |      | 0.4  |  
|                                            | Losses not benefited                         |                   |       | 39.6          |   |                   |       | 20.0 |   |  |      |     |  
|                                            | Change in estimate for tax contingencies     |                   |       | (5.5          | ) |                   |       |     |   |  |      |     |  
|                                            | Other                                        |                   |       |              |   |                   |       | (0.1 | ) |  |      | (0.4 | )
|                                            |                                              |                   |       |               |   |                   |       |      |   |  |      |     
|Effective tax (benefit) rate                |                                              |                   | 10.9  | %             |   |                   | (14.0 | )%   |   |  | 38.7 | %   
|                                            |                                              |                   |       |               |   |                   |       |      |   |  |      |     

F-34



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The Company has recorded a valuation allowance
against its remaining foreign, federal and state deferred tax
assets at December 29, 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 these assets will not be realized.

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.

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

|                               |                                           |                   |         |               |   |   |         |          |  
|------------------------------ | ----------------------------------------- | ----------------- | ------- | ------------- | - | - | ------- | -------- | -
|                               |                                           | December 29, 2001 |         | March 3, 2001
|(In thousands)                 |                                           |                   |         |              
|Deferred tax assets:           |                                           |                   |         |               |   |   |         |         
|                               | Accounts receivable                       |                   | $       | 10,162        |   |   | $       | 5,396    |  
|                               | Inventories                               |                   |         | 21,208        |   |   |         | 11,227   |  
|                               | Deferred revenue                          |                   |         | 22,555        |   |   |         |         |  
|                               | Property, plant and equipment             |                   |         | 6,261         |   |   |         | 5,628    |  
|                               | Other reserves and accruals               |                   |         | 35,424        |   |   |         | 50,653   |  
|                               | Acquired research and development         |                   |         | 170,447       |   |   |         | 132,561  |  
|                               | Domestic net operating loss carryforwards |                   |         | 152,552       |   |   |         | 138,838  |  
|                               | Foreign net operating loss carryforwards  |                   |         | 33,443        |   |   |         | 27,892   |  
|                               |                                           |                   |         |               |   |   |         |         
|Gross deferred tax assets      |                                           |                   | 452,052 |               |   |   | 372,195 |         
|                               | Valuation allowance                       |                   |         | (452,052      | ) |   |         | (230,717 | )
|                               |                                           |                   |         |               |   |   |         |         
|Total deferred tax assets      |                                           |                   |        |               |   |   | 141,478 |         
|                               |                                           |                   |         |               |   |   |         |         
|Deferred tax liabilities:      |                                           |                   |         |               |   |   |         |         
|                               | Deferred gain                             |                   |         |              |   |   |         | (59,203  | )
|                               |                                           |                   |         |               |   |   |         |         
|Total deferred tax liabilities |                                           |                   |        |               |   |   | (59,203 | )       
|                               |                                           |                   |         |               |   |   |         |         
|Net deferred tax assets        |                                           | $                 |        |               |   | $ | 82,275  |         
|                               |                                           |                   |         |               |   |   |         |         

On March 9, 2002 the President signed into
law the Job Creation and Worker Assistance Act of 2002 which
extends the net operating loss carryback from 2 to 5 years
for losses generated in tax years ending in 2001 and 2002. As a
result, during the fiscal year ending December 28, 2002,
the Company realized the benefit of $193.2 million and
$103.4 million in net operating losses from the ten months
ended December 29, 2001 and fiscal year ended March 3,
2001, respectively in the form of a refund of approximately
$101.7 million received during the fiscal year ending
December 28, 2002. In addition, the Company currently has
approximately $110.7 million of prior period taxable income
which is available for carryback of losses incurred during the
fiscal year ended December 28, 2002. The Company
anticipates a refund of approximately $32.5 million during the
fiscal year ended January 3, 2004 with respect to these
loss-carrybacks.

At December 29, 2001, the Company had
domestic net operating loss (NOL) carryforwards for
tax purposes of $365.7 million expiring in fiscal 2005
through fiscal 2021. Approximately $53.3 million of this
NOL is attributable to the pre-acquisition periods of acquired
subsidiaries. The utilization of these NOLs

F-35



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


may be limited pursuant to Internal Revenue Code
§ 382 as a result of these prior ownership changes. In
addition, the Company has $15.8 million of U.S. income tax
credit carryforwards as of December 29, 2001, which expire
in fiscal years 2019 through 2021.

The net change in the total valuation allowance
for the ten months ended December 29, 2001 and the fiscal
year ended March 3, 2001 was an increase of
$221.3 million and $204.0 million, respectively. The
increase in the valuation allowance for the ten months ended
December 29, 2001 relates primarily to federal and state
net operating losses and credit carryovers, which may not be
realized, as well as the uncertainty for the realization of the
remaining short-term deferred tax assets. The increase in the
valuation allowance for the fiscal year ended March 3, 2001
relates to the uncertainty for the realization of the long-term
deferred tax assets. Subsequently recognized tax benefits
relating to valuation allowances for deferred tax assets (if
any) will be allocated as follows: $45.4 million to
additional paid-in capital which is attributable to the exercise
of employee stock options, $5.2 million to goodwill, and
$401.5 million to the consolidated statement of operations.

17.     Special
Charges

The components of special charges are as follows:

|                                                                  |                     |                             |        |               |        |                   |        |        |        |   |        |       |        | 
|----------------------------------------------------------------- | ------------------- | --------------------------- | ------ | ------------- | ------ | ----------------- | ------ | ------ | ------ | - | ------ | ----- | ------ | 
|                                                                  |                     |                             |        |              
|                                                                  |                     |                             |        | Year Ended   
|                                                                  |                     | Ten Months Ended            |        |              
|                                                                  |                     | December 29, 2001           |        | March 3, 2001 |        | February 29, 2000
|(In thousands)                                                    |                     |                             |        |               |        |                  
|In-process research and development related to an
    acquisition |                     | $                           |       |               |        | $                 | 25,600 |        |        | $ |       |      
|Transformation charges                                            |                     |                             | 24,461 |               |        |                   | 13,258 |        |        |   |       |      
|Restructuring charges:                                            |                     |                             |        |               |        |                   |        |        |        |   |        |      
|                                                                  | Fixed assets        |                             |        | 2,170         |        |                   |        | 13,512 |        |   |        | 7,947 |       
|                                                                  | Severance benefits  |                             |        | 17,874        |        |                   |        | 10,650 |        |   |        | 8,718 |       
|                                                                  | Facility exit costs |                             |        | 2,663         |        |                   |        | 1,667  |        |   |        | 4,431 |       
|Reversal of prior year charge                                     |                     |                             |       |               |        |                   | (1,500 | )      |        |   |       |      
|                                                                  |                     |                             |        |               |        |                   |        |        |        |   |        |      
|                                                                  |                     | Total restructuring charges |        |               | 22,707 |                   |        |        | 24,329 |   |        |       | 21,096 | 
|                                                                  |                     |                             |        |               |        |                   |        |        |        |   |        |      
|Total special charges                                             |                     | $                           | 47,168 |               |        | $                 | 63,187 |        |        | $ | 21,096 |      
|                                                                  |                     |                             |        |               |        |                   |        |        |        |   |        |      

In the second quarter of the ten months ended
December 29, 2001, the Company recorded special charges of
$24.5 million related to the transformation of
Cabletrons business. The transformation-related charges
include investment banking, legal and accounting fees related to
the establishment of the Enterasys Subsidiary, Riverstone,
Aprisma and GNTS as stand-alone entities and the Riverstone
spin-off.

Also during the second quarter of the ten months
ended December 29, 2001, the Company recorded restructuring
charges of $10.3 million to reduce the expense structure of
the Company. These charges reflected the write-down of a vacant
office building in Rochester, NH to its estimated fair value of
$1.5 million, exit costs associated with the planned closure of
eight sales offices worldwide and executive severance costs. The
exit costs that the Company incurred related primarily to
long-term lease commitments which will be paid out over several
years.

In the fourth quarter of the ten months ended
December 29, 2001, the Company recorded a restructuring
charge of $12.4 million for employee severance costs
associated with the reduction of approximately 400 individuals
from the Companys global workforce. The reduction in the
global workforce

F-36



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


involved principally sales, engineering and
administrative personnel and has also included targeted
reductions impacting most functions within the Company.

The Company recorded special charges of
$13.3 million for the year ended March 3, 2001 for
professional fees associated with the transformation of
Cabletrons business.

In the first quarter of the fiscal year ended
March 3, 2001, the Company recorded restructuring charges
of $25.8 million. These charges reflected the expected sale
of an office building in Rochester, NH, exit costs associated
with the planned closure of 20 sales offices worldwide, 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 that the Company incurred
related primarily to long-term lease commitments.

On January 31, 2001, the Company acquired
Indus River Networks (Indus River), a designer and
marketer of virtual private networks for enterprise-class
customers. In connection with the acquisition, approximately
$25.6 million of the purchase price was allocated to
in-process research development and recorded in special charges
for the fiscal year ended March 3, 2001.

In the first quarter of the fiscal year ended
February 29, 2000, the Company recorded $21.1 million
of restructuring charges. These charges reflected the closure of
the Companys manufacturing facility in Ohio, the planned
closure of 40 sales offices worldwide, the consolidation and
outsourcing of manufacturing operations and the write-off of
certain assets that were not required subsequent to the
restructuring and the reduction of approximately 1,000
individuals from the Companys global workforce. The
reduction in the global workforce was principally manufacturing
and distribution personnel but also included targeted reductions
impacting most functions within the Company. The Company
incurred exit costs related primarily to long-term lease
commitments which were paid out over several years and
repayments of economic development grants. This initiative was
intended to reduce the expense structure of the Company. These
actions were completed during the first quarter of the fiscal
year ended March 3, 2001, at which time a favorable
adjustment of $1.5 million was recorded. 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 acquirer than
originally planned. This acquirer, Flextronics, hired more
personnel than originally estimated.

F-37



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The following table summarizes accrued
restructuring costs through December 29, 2001. Information
in the following table pertaining to fiscal year 2001 and the
first fiscal quarters of transition 2001 is restated.

|                            |                                             |                               |       |               |   |       |       |        |   |   |        |         |  
|--------------------------- | ------------------------------------------- | ----------------------------- | ----- | ------------- | - | ----- | ----- | ------ | - | - | ------ | ------- | -
|                            |                                             |                              
|                            |                                             | Accrued Restructuring Charges
|                            |                                             |                              
|                            |                                             | Severance                     |       | Facility Exit |   |      
|                            |                                             | Benefits                      |       | Costs         |   | Total
|                            |                                             |                               |       |               |   |      
|                            |                                             |                              
|                            |                                             | (In thousands)               
|Fiscal year 2000 charges    |                                             | $                             | 8,718 |               |   | $     | 4,431 |        |   | $ | 13,149 |        
|                            | Cash payments                               |                               |       | (6,634        | ) |       |       | (1,162 | ) |   |        | (7,796  | )
|                            | Disposals                                   |                               |       |              |   |       |       |       |   |   |        |        |  
|                            |                                             |                               |       |               |   |       |       |        |   |   |        |        
|Balance, February 29, 2000. |                                             |                               | 2,084 |               |   |       | 3,269 |        |   |   | 5,353  |        
|                            | Fiscal year 2001 charges                    |                               |       | 10,650        |   |       |       | 1,667  |   |   |        | 12,317  |  
|                            | Cash payments                               |                               |       | (10,294       | ) |       |       | (4,797 | ) |   |        | (15,091 | )
|                            | Disposals                                   |                               |       |              |   |       |       |       |   |   |        |        |  
|                            | Reversal of prior year charge               |                               |       | (1,500        | ) |       |       |       |   |   |        | (1,500  | )
|                            |                                             |                               |       |               |   |       |       |        |   |   |        |        
|Balance, March 3, 2001.     |                                             |                               | 940   |               |   |       | 139   |        |   |   | 1,079  |        
|                            | Second quarter transition year 2001 charges |                               |       | 5,471         |   |       |       | 2,663  |   |   |        | 8,134   |  
|                            | Fourth quarter transition year 2001 charges |                               |       | 12,403        |   |       |       |       |   |   |        | 12,403  |  
|                            | Cash payments                               |                               |       | (14,862       | ) |       |       | (572   | ) |   |        | (15,434 | )
|                            |                                             |                               |       |               |   |       |       |        |   |   |        |        
|Balance, December 29, 2001  |                                             | $                             | 3,952 |               |   | $     | 2,230 |        |   | $ | 6,182  |        
|                            |                                             |                               |       |               |   |       |       |        |   |   |        |        

F-38



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


18.     Other Income
(Expense), Net

The following schedule reflects the components of
other income (expense), net:

|                                                                                                  |                                                          |                   |         |               |   |                   |          |          |   |   |        |         | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------- | ------- | ------------- | - | ----------------- | -------- | -------- | - | - | ------ | ------- | 
|                                                                                                  |                                                          |                   |         |              
|                                                                                                  |                                                          |                   |         | Year Ended   
|                                                                                                  |                                                          | Ten Months Ended  |         |              
|                                                                                                  |                                                          | December 29, 2001 |         | March 3, 2001 |   | February 29, 2000
|                                                                                                  |                                                          |                   |         |               |   |                  
|(In thousands)                                                                                    |                                                          |                  
|                                                                                                  |                                                          | (Restated)       
|Impairment of investments                                                                         |                                                          | $                 | (65,901 | )             |   | $                 | (17,178  | )        |   | $ |       |        
|Loss on exchange of products for investments                                                      |                                                          |                   | (17,086 | )             |   |                   | (13,018  | )        |   |   |       |        
|Transactions related to Flowpoint and Efficient:                                                  |                                                          |                   |         |               |   |                   |          |          |   |   |        |        
|                                                                                                  | Gain on sale of Flowpoint                                |                   |         |              |   |                   |          |         |   |   |        | 657,727 | 
|                                                                                                  | Recognition of deferred gain on Efficient
    investment |                   |         | 46,778        |   |                   |          | 30,384   |   |   |        | 47,363  | 
|                                                                                                  | Other than temporary decline of Efficient
    investment |                   |         |              |   |                   |          | (376,456 | ) |   |        |        | 
|Other than temporary decline in available for
    sale securities, excluding Efficient investment |                                                          |                   | (1,712  | )             |   |                   | (18,100  | )        |   |   |       |        
|Loss on sale of DNPG division                                                                     |                                                          |                   |        |               |   |                   | (143,108 | )        |   |   |       |        
|Write-down of note receivable                                                                     |                                                          |                   | (6,125  | )             |   |                   |         |          |   |   |       |        
|Other income recognized from amended
    Digital/Compaq agreement                                 |                                                          |                   |        |               |   |                   |         |          |   |   | 37,200 |        
|Unrealized gain on Riverstone stock derivative                                                    |                                                          |                   | 4,020   |               |   |                   |         |          |   |   |       |        
|Net gain (loss) on sale of available for
    sale securities                                      |                                                          |                   | 4,062   |               |   |                   | (21,380  | )        |   |   | 4,621  |        
|Other                                                                                             |                                                          |                   | (5,245  | )             |   |                   | 1,501    |          |   |   | (629   | )      
|                                                                                                  |                                                          |                   |         |               |   |                   |          |          |   |   |        |        
|                                                                                                  | Total other income (expense)                             |                   | $       | (41,209       | ) |                   | $        | (557,355 | ) |   | $      | 746,282 | 
|                                                                                                  |                                                          |                   |         |               |   |                   |          |          |   |   |        |        

F-39



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


19.     Comprehensive
Income (Loss)

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

|                                   |                                                                                                                |                                   |          |               |          |                   |          |            |            |   |         |          |         | 
|---------------------------------- | -------------------------------------------------------------------------------------------------------------- | --------------------------------- | -------- | ------------- | -------- | ----------------- | -------- | ---------- | ---------- | - | ------- | -------- | ------- | 
|                                   |                                                                                                                |                                   |          |              
|                                   |                                                                                                                |                                   |          | Year Ended   
|                                   |                                                                                                                | Ten Months Ended                  |          |              
|                                   |                                                                                                                | December 29, 2001                 |          | March 3, 2001 |          | February 29, 2000
|                                   |                                                                                                                |                                   |          |               |          |                  
|(In thousands)                     |                                                                                                                |                                   |          | (Restated)    |          |                  
|Net income (loss)                  |                                                                                                                | $                                 | (704,284 | )             |          | $                 | (681,828 | )          |            | $ | 464,271 |         
|Other comprehensive income (loss): |                                                                                                                |                                   |          |               |          |                   |          |            |            |   |         |         
|                                   | Unrealized gain (loss) on available-for-sale
    securities                                                    |                                   |          | 3,725         |          |                   |          | (1,254,870 | )          |   |         | 899,284  |        
|                                   | Foreign currency translation adjustment                                                                        |                                   |          | 866           |          |                   |          | 762        |            |   |         | (1,041   | )      
|                                   | Reclassification adjustment for gains
    (losses) on available-for-sale securities included in net
    income |                                   |          |              |          |                   |          | 394,483    |            |   |         | (40,811  | )      
|                                   | Income tax benefit (expense)                                                                                   |                                   |          | (1,490        | )        |                   |          | 344,311    |            |   |         | (343,134 | )      
|                                   |                                                                                                                |                                   |          |               |          |                   |          |            |            |   |         |         
|                                   |                                                                                                                | Total comprehensive income (loss) |          | $             | (701,183 | )                 |          | $          | (1,197,142 | ) |         | $        | 978,569 | 
|                                   |                                                                                                                |                                   |          |               |          |                   |          |            |            |   |         |         

Income tax (expense) benefit in the years
ended December 29, 2001, March 3, 2001 and
February 29, 2000 is allocated as follows: $(1.5) million,
$502.6 million and $(359.7) million to unrealized gain
(loss) on available-for-sale securities and $(158.3)
million and $16.6 million to reclassification adjustments
for gains (losses) on available-for-sale securities, for
the years ended March 3, 2001 and February 29, 2000,
respectively.

The accumulated comprehensive income as of
December 29, 2001 and March 3, 2001 consists of the
following:

|                                                            |                                        |                   |       |        |  |        |        |        |   |   |       |       | 
|----------------------------------------------------------- | -------------------------------------- | ----------------- | ----- | ------ |  | ------ | ------ | ------ | - | - | ----- | ----- | 
|                                                            |                                        |                  
|                                                            |                                        | Ten Months Ended 
|                                                            |                                        | December 29, 2001
|                                                            |                                        |                  
|                                                            |                                        | Gross             |       | Tax    |  | Net of
|                                                            |                                        | Item              |       | Effect |  | Tax   
|                                                            |                                        |                   |       |        |  |       
|                                                            |                                        |                  
|                                                            |                                        | (In thousands)   
|Unrealized gain (loss) on available for sale
    securities |                                        | $                 | 4,082 |        |  | $      | (1,632 | )      |   | $ | 2,450 |      
|Foreign currency translation adjustment                     |                                        |                   | 27    |        |  |        |       |        |   |   | 27    |      
|                                                            |                                        |                   |       |        |  |        |        |        |   |   |       |      
|                                                            | Total accumulated comprehensive income |                   | $     | 4,109  |  |        | $      | (1,632 | ) |   | $     | 2,477 | 
|                                                            |                                        |                   |       |        |  |        |        |        |   |   |       |      

|                                                            |                                        |                          |      |        |   |        |      |      |   |  |      |      |  
|----------------------------------------------------------- | -------------------------------------- | ------------------------ | ---- | ------ | - | ------ | ---- | ---- | - |  | ---- | ---- | -
|                                                            |                                        |                         
|                                                            |                                        | Year Ended March 3, 2001
|                                                            |                                        |                         
|                                                            |                                        | Gross                    |      | Tax    |   | Net of
|                                                            |                                        | Item                     |      | Effect |   | Tax   
|                                                            |                                        |                          |      |        |   |       
|                                                            |                                        |                         
|                                                            |                                        | (In thousands)          
|Unrealized gain (loss) on available for sale
    securities |                                        | $                        | 357  |        |   | $      | (142 | )    |   |  | 215  |     
|Foreign currency translation adjustment                     |                                        |                          | (839 | )      |   |        |     |      |   |  | (839 | )   
|                                                            |                                        |                          |      |        |   |        |      |      |   |  |      |     
|                                                            | Total accumulated comprehensive income |                          | $    | (482   | ) |        | $    | (142 | ) |  | $    | (624 | )
|                                                            |                                        |                          |      |        |   |        |      |      |   |  |      |     

F-40



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


20.     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:

|                                                                              |                  |                                                                        |          |               |   |                   |          |         |   |   |         |         |       | 
|----------------------------------------------------------------------------- | ---------------- | ---------------------------------------------------------------------- | -------- | ------------- | - | ----------------- | -------- | ------- | - | - | ------- | ------- | ----- | 
|                                                                              |                  |                                                                        |          |              
|                                                                              |                  | Ten Months                                                             |          | Year Ended   
|                                                                              |                  | Ended                                                                  |          |              
|                                                                              |                  | December 29,2001                                                       |          | March 3, 2001 |   | February 29, 2000
|                                                                              |                  |                                                                        |          |               |   |                  
|(In thousands, except per share amounts)                                      |                  |                                                                       
|                                                                              |                  | (Restated)                                                            
|Income (loss) from continuing operations                                      |                  | $                                                                      | (615,069 | )             |   | $                 | (605,522 | )       |   | $ | 502,269 |        
|Effect of preferred shares                                                    |                  |                                                                        | (10,347  | )             |   |                   | (22,898  | )       |   |   |        |        
|                                                                              |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|Income (loss) from continuing operations
    available to common shareholders |                  |                                                                        | (625,416 | )             |   |                   | (628,420 | )       |   |   | 502,269 |        
|Discontinued operations:                                                      |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|                                                                              | Operating loss   |                                                                        |          | (59,124       | ) |                   |          | (76,306 | ) |   |         | (37,998 | )    
|                                                                              | Loss on disposal |                                                                        |          | (42,782       | ) |                   |          |        |   |   |         |        |      
|Cumulative effect of a change in accounting
    principle                     |                  |                                                                        | 12,691   |               |   |                   |         |         |   |   |        |        
|                                                                              |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|Net income (loss) available to common
    shareholders                        |                  | $                                                                      | (714,631 | )             |   | $                 | (704,726 | )       |   | $ | 464,271 |        
|                                                                              |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|Weighted average number of common shares
    outstanding  basic              |                  |                                                                        | 192,743  |               |   |                   | 184,770  |         |   |   | 177,541 |        
|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            |                  |                                                                        | 192,743  |               |   |                   | 184,770  |         |   |   | 188,618 |        
|                                                                              |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|Basic income (loss) per common
    share:                                     |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|Income (loss) from continuing operations
    available to common shareholders |                  | $                                                                      | (3.24    | )             |   | $                 | (3.40    | )       |   | $ | 2.83    |        
|Discontinued operations:                                                      |                  |                                                                        |          |               |   |                   |          |         |   |   |         |        
|                                                                              | Operating loss   |                                                                        | $        | (0.31         | ) |                   | $        | (0.41   | ) |   | $       | (0.21   | )    
|                                                                              | Loss on disposal |                                                                        | $        | (0.22         | ) |                   | $        |        |   |   | $       |        |      
|Cumulative effect of a change in accounting
    principle                     |                  | $                                                                      | 0.07     |               |   | $                 |         |         |   | $ |        |        
|Net income (loss) available to common
    shareholders                        |                  | $                                                                      | (3.71    | )             |   | $                 | (3.81    | )       |   | $ | 2.62    |        

F-41



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


|                                                                              |                  |                  |       |               |   |                   |       |       |   |   |      |       |  
|----------------------------------------------------------------------------- | ---------------- | ---------------- | ----- | ------------- | - | ----------------- | ----- | ----- | - | - | ---- | ----- | -
|                                                                              |                  |                  |       |              
|                                                                              |                  | Ten Months       |       | Year Ended   
|                                                                              |                  | Ended            |       |              
|                                                                              |                  | December 29,2001 |       | March 3, 2001 |   | February 29, 2000
|                                                                              |                  |                  |       |               |   |                  
|(In thousands, except per share amounts)                                      |                  |                 
|                                                                              |                  | (Restated)      
|Diluted income (loss) per common
    share:                                   |                  |                  |       |               |   |                   |       |       |   |   |      |      
|Income (loss) from continuing operations
    available to common shareholders |                  | $                | (3.24 | )             |   | $                 | (3.40 | )     |   | $ | 2.66 |      
|Discontinued operations:                                                      |                  |                  |       |               |   |                   |       |       |   |   |      |      
|                                                                              | Operating loss   |                  | $     | (0.31         | ) |                   | $     | (0.41 | ) |   | $    | (0.20 | )
|                                                                              | Loss on disposal |                  | $     | (0.22         | ) |                   | $     |      |   |   | $    |      |  
|Cumulative effect of a change in accounting
    principle                     |                  | $                | 0.07  |               |   | $                 |      |       |   | $ |     |      
|Net income (loss) available to common
    shareholders                        |                  | $                | (3.71 | )             |   | $                 | (3.81 | )     |   | $ | 2.46 |      

For the ten months ended December 29, 2001
and the fiscal year ended March 3, 2001, options to purchase
35,727,588 and 11,767,580 shares of common stock were
outstanding but were not included in the calculation of diluted
earnings per share since the effect was anti-dilutive. Also
excluded for the ten months ended December 29, 2001 were
7.4 million warrants held by the Strategic Investor.

21.     Legal
Proceedings

Described below are material legal proceedings in
which the Company is involved.

Securities Class Action in the District
of Rhode Island.Between
October 24, 1997 and March 2, 1998, nine shareholder
class action lawsuits were filed against the Company and certain
of its officers and directors 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 the
Company and several of its officers and directors disseminated
materially false and misleading information about the
Company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
Companys common stock during this period. The complaint
does not specify the amount of damages sought on behalf of the
class. In a ruling dated May 23, 2001, the District Court
dismissed this complaint with prejudice. The plaintiffs appealed
that ruling to the First Circuit Court of Appeals, and, in a
ruling issued on November 12, 2002, the Court of Appeals
reversed and remanded the case to the District Court for further
proceedings. If the plaintiffs prevail on the merits of this
case, we could be required to pay substantial damages.

Securities Class Action in the District
of New Hampshire.Between
February 7 and April 9, 2002, six class action
lawsuits were filed in the United States District Court for the
District of New Hampshire. Defendants are the Company, former
chairman and chief executive officer Enrique Fiallo and former
chief financial officer Robert Gagalis. By orders dated
August 2, 2002 and September 25, 2002, these lawsuits,
which are similar in material respects were consolidated into
one class action lawsuit, captioned In re Enterasys Networks,
Inc. Securities Litigation (C.A. No. 02-CV-71). The
complaints allege violations of Sections 10(b) and 20(a) of
the Exchange Act and Rule 10b-5 thereunder. Plaintiffs allege
that during periods spanning from as early as August, 2001
through February, 2002, defendants issued materially false and
misleading financial statements and press releases that
overstated the Companys revenues, income, and earnings per
share, because the Company purportedly recognized revenue in
violation of generally

F-42



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


accepted accounting principles (GAAP)
and the Companys own accounting policies in connection
with transactions in the Companys Asia Pacific region. The
complaints seek unspecified compensatory damages in favor of the
plaintiffs and the other members of the purported class against
all of the defendants, jointly and severally. By order of the
court, the Company has not yet been required to file a
responsive pleading. If plaintiffs prevail on the merits of the
case, the Company could be required to pay substantial damages.

Shareholder Derivative Action in State of New
Hampshire.On February 22, 2002,
a shareholder derivative action was filed on the Companys
behalf in the Superior Court of Rockingham County, State of New
Hampshire. The suit is captioned Nemes v. Fiallo, et al.
Individual defendants are former chairman and chief executive
officer Fiallo and certain members of the Companys Board
of Directors. Plaintiffs allege that the individual defendants
breached their fiduciary duty to shareholders by causing or
allowing the Company to conduct its business in an unsafe,
imprudent, and unlawful manner and failing to implement and
maintain an adequate internal accounting control system.
Plaintiffs allege that this breach caused the Company to
improperly recognize revenue in violation of GAAP and the
Companys own accounting policies in connection with
transactions in the Companys Asia Pacific region, and that
this alleged wrongdoing resulted in damages to the Company.
Plaintiffs seek unspecified compensatory damages. On
October 7, 2002, the Superior Court approved the
parties joint stipulation to stay proceedings.

Shareholder Derivative Action in State of
Delaware.On April 16, 2002, a
shareholder derivative action was filed on the Companys
behalf in the Court of Chancery of the State of Delaware in and
for New Castle County. It is captioned, Meisner v. Enterasys
Networks, Inc., et al. Individual defendants are former
chairman and chief executive officer Fiallo and members of the
Companys Board of Directors. Plaintiffs allege that the
individual defendants permitted wrongful business practices to
occur which had the effect of manipulating revenues and
earnings, inadequately supervised the Companys employees
and managers, and failed to institute legal actions against
those officers, directors and employees responsible for the
alleged conduct. The complaint alleges counts for breach of
fiduciary duty, misappropriation of confidential information for
personal profit, and contribution and indemnification.
Plaintiffs seek judgment directing defendants to account to the
Company for all damages sustained by the Company by reason of
the alleged conduct, return all compensation of whatever kind
paid to them by the Company, pay interest on the damages as well
as costs of the action. On July 11, 2002, the individual
defendants filed a motion to dismiss the complaint. The
plaintiff has not yet filed a brief with respect to this motion.

Securities and Exchange Commission
Investigation.After the close of
business on January 31, 2002, the Securities and Exchange
Commission, or SEC, notified the Company that it had commenced a
Formal Order of Private Investigation into
the Companys financial accounting and reporting practices.
This investigation remains ongoing and the Company is fully
cooperating with the SEC. The Company cannot predict when this
investigation will conclude or its outcome. The SEC has not
commenced legal proceedings against the Company in connection
with this investigation; however, if the SEC were to conclude
that legal action were appropriate, the Company could be
required to pay significant penalties and/or fines and could
become subject to an administrative order and/or a cease and
desist order.

Other.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, individually or
in the aggregate, is not expected to have a materially adverse
effect on the financial condition or results of operations of
the Company.

22.     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. During the ten months ended

F-43



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


December 29, 2001, the Company repurchased
953,201 shares for approximately $8.4 million. During the
fiscal year ended March 3, 2001, the Company repurchased
approximately 2.1 million shares for approximately
$56.5 million. Approximately $335.1 million of the
original authorization had not been used as of December 29,
2001. The Company has no current plans to make additional
repurchases of shares.

The Company has sold equity put options as an
enhancement to its share repurchase program. Each put option
entitled its holder to sell one share of the Companys
common stock to the Company at a specified price. In accordance
with EITF No. 96-13 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock and EITF No. 00-19
Accounting for Derivative Financial Instruments
Determination of Whether Share Settlement Is Within the Control
of the Issuer for the Purposes of Applying Issue
No. 96-13, the Company has recorded the contingent
redemption amount of the outstanding put options, as of
December 29, 2001, as temporary equity.

During the fiscal year ended March 3, 2001,
the Company received $4.9 million in premiums and recorded this
amount as additional paid-in capital. As of March 3, 2001,
no put options remained outstanding. During the ten months ended
December 29, 2001, the Company received $0.1 million
in premiums from the sale of put options covering 150,000 shares
of the Companys common stock and recorded this amount as
additional paid-in capital. The put options outstanding at
December 29, 2001 had an average exercise price of $5.61
per share and a total contingent redemption amount of
approximately $0.8 million, and expired in January 2002.

23.     Preferred
Stock, Warrants and Subsidiary Stock Purchase Rights



| |                                                 
| | ------------------------------------------------
| | Securities Issued to the Strategic
    Investors

On August 29, 2000, the Company and its
operating subsidiaries Riverstone, Enterasys Subsidiary, Aprisma
and GNTS (collectively, the Operating Subsidiaries)
issued securities and granted rights for the purchase of
additional securities to the Strategic Investors. The Company
and its Operating Subsidiaries received approximately
$87.8 million in cash from the Strategic Investors. The
Company issued to the Strategic Investors 4% Series A
Participating Convertible Preferred Stock, par value $1.00 per
share, and 4% Series B Participating Convertible Preferred
Stock, par value $1.00 per share, (the A&B Preferred
Stock) as well as Class A and Class B warrants
to purchase the Companys common stock. The Company also
agreed to issue to the Strategic Investors additional warrants
to purchase its common stock upon the occurrence of certain
events, including the merger of an Operating Subsidiary into the
Company, the sale of the Company or the failure of an Operating
Subsidiary to consummate an IPO. In addition, each of the
Operating Subsidiaries issued to the Strategic Investors rights
to purchase shares of its common stock, and each of the
Operating Subsidiaries agreed to issue rights to purchase
additional shares of its common stock to the Strategic Investors
upon the occurrence of certain events. The exercise prices and
the number of shares issuable upon exercise of the subsidiary
stock purchase rights are dependent upon certain events. An
Operating Subsidiary may require the Strategic Investors to
exercise a portion of these stock purchase rights at the time of
the Operating Subsidiarys IPO.

The Company accounted for the transaction with
the Strategic Investors in accordance with the following
pronouncements: APB No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase
Warrants, EITF No. 00-27, EITF No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios, EITF No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in a Companys Own Stock, and EITF
No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock. In accordance with these
pronouncements, the Company

F-44



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


allocated the proceeds to the various equity
instruments issued by the Company and its Operating Subsidiaries
as set forth below:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $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. The Company recognized a beneficial conversion dividend
    at the time of the issuance of the A&B Preferred Stock of
    $16.9 million, which represents the excess of aggregate
    fair value of the common stock that the Strategic Investors
    would receive at the earliest conversion date over the proceeds
    ascribed to the A&B Preferred Stock. In addition, the
    Company is recording an accretive dividend of $22.0 million
    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.



| |                                          
| | -----------------------------------------
| | Series A, B, D, and E Preferred
    Stock

On August 29, 2000, the Company issued
65,000 shares of 4% Series A Participating Convertible
Preferred Stock (A Preferred Stock) and 25,000
shares of 4% Series B Participating Convertible Preferred
Stock (B Preferred Stock). On July 12,
2001, the Company amended its securities purchase agreement (the
SPA Amendment) with the Strategic Investors and
entered into an exchange agreement with the Strategic Investors
whereby the Strategic Investors exchanged their shares of
A Preferred Stock for an equal number of shares of the
Companys 4% Series D Participating Convertible
Preferred Stock (D Preferred Stock) and
exchanged their shares of B Preferred Stock for an equal
number of shares of the Companys 4% Series E
Participating Convertible Preferred Stock (E Preferred
Stock and together with the D Preferred Stock,
D&E Preferred Stock). The terms of the D&E
Preferred Stock are described below and are substantially the
same as the terms of the A&B Preferred Stock, except with
respect to any distribution of shares to the Companys
stockholders in a spin-off transaction. The differences in this
respect are described below.



| |       
| | ------
| | Voting

Shares of the D&E Preferred Stock vote
together with the common stock as a single class on an
as-converted basis.



| |          
| | ---------
| | Seniority

With respect to liquidations, the D&E
Preferred Stock ranks senior to the common stock and on par with
or senior to all other series of preferred stock that may be
outstanding.



| |                       
| | ----------------------
| | Liquidation Preference

The D&E Preferred Stock has a liquidation
preference equal to the sum of $1,036.14 per share (adjusted for
stock dividends, splits, combinations or similar events) plus
all accrued and unpaid dividends (such sum being the
Liquidation Preference) net of the fair value of the
Strategic Investors 1,300,000 shares of common stock received in
connection with the Riverstone spin-off. This liquidation
preference represents the original $1,000 per share liquidation
preference of the A&B Preferred Stock, increased by accrued
dividends from the issuance of the A&B Preferred Stock to
the issuance of the D&E Preferred Stock. The Liquidation
Preference may be reduced as provided below under the heading
Participation in

F-45



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


Distributions and may be 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
D&E Preferred Stock is convertible, if such liquidation
proceeds are greater.



| |          
| | ---------
| | Dividends

Dividends on the D&E Preferred Stock 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
ordinary cash dividends payable with respect to the common stock
into which the D&E Preferred Stock is convertible and
compound at the end of each of the Companys fiscal
quarters. Cash dividends on the D&E Preferred Stock are not
payable without the consent of a majority of holders of the
D&E Preferred Stock. As of December 29, 2001,
approximately $1.7 million of dividends have been accreted
and are included in the carrying value of the D and E preferred
stock.



| |           
| | ----------
| | Conversion

Each share of D Preferred Stock is convertible at
any time at the option of the holder into a number of shares of
common stock of the Company equal to the Liquidation Preference
of the share of D Preferred Stock at that time divided by
$40.00, adjusted for stock dividends, splits, combinations or
similar events (the Series D Conversion Price).
Each share of E 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 E Preferred Stock at that time divided by $30.00,
adjusted for stock dividends, splits, combinations or similar
events (the Series E Conversion Price, together
with the Series D Conversion Price, the Conversion
Price).

On the conversion of D&E Preferred Stock, any
transfer restrictions on stock received in a spin-off
distribution (as described below under the heading
Participation in Distributions) with respect to the
converted shares of D&E Preferred Stock lapse. With respect
to the A&B Preferred Stock, any property placed in escrow
with respect to such stock (as described below under the heading
Participation in Distributions) would have been
released to the holder of such stock. See the description below
under the heading Participation in Distributions for
more information about the differences between the A&B and
the D&E Preferred Stock in this regard.

If certain restrictions prevent the holders of
the D&E 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.



| |                                                           
| | ----------------------------------------------------------
| | Participation in Distributions and Related
    Derivatives

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 D&E Preferred Stock, the holder will
participate in such distribution as described in this paragraph.
If the distribution is of stock of any of the Companys
Operating Subsidiaries in a spin-off distribution (Spin
Shares), the holder will participate in such distribution
immediately on an as-converted basis; however, in conjunction
with the SPA amendment, any Spin Shares received by the holders
of D&E Preferred Stock are subject to certain restrictions
on transfer, and the net proceeds from any permitted sale of
such shares reduce the liquidation preference and redemption
price of the D&E Preferred Stock. With respect to the
A&B Preferred Stock, Spin Shares would have been placed in
escrow, rather than restricted from transfer. The conditions for
release from escrow were similar to the restrictions under which
the transfer restrictions on Spin Shares are released.

F-46



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


In connection with the Riverstone spin-off on
August 6, 2001, the Company distributed approximately
1,300,000 Spin Shares of Riverstone common stock to the
Strategic Investors which resulted in a net increase to the
Companys equity of $18.6 million. These shares are
restricted from transfer and any permitted sales of these shares
reduce the liquidation preference and redemption value of the
D&E Preferred Stock as described above. As the
Companys potential redemption liability is indexed to the
value of the securities of an unrelated entity, this arrangement
constitutes a financial derivative instrument. The Company
recorded $4.0 million of other income as a result of the
increase in the market value from August 6, 2001 to
December 29, 2001 of the 1.3 million shares of
Riverstone stock received by the Strategic Investors as a spin
off distribution made by the Company in August of 2001. As of
December 29, 2001 the value of the Riverstone common stock
Spin Shares was $22.6 million.



| |                              
| | -----------------------------
| | Shareholder Redemption Rights

At any time on or after February 23, 2003, a
holder of D&E Preferred Stock may require the Company to
redeem for cash all (but not less than all) of the holders
D&E Preferred Stock at the Liquidation Preference then in
effect. In the event of a 50% change in control of the Company,
holders of the D&E Preferred Stock have the right to require
the Company to redeem for cash all or any portion of the D&E
Preferred Stock for the greater of (1) 101% of the
Liquidation Preference then in effect plus 1% of the net sale
proceeds received by the holders of D&E Preferred Stock from
any permitted sale of the Spin Shares or (2) the aggregate
market value of the shares of common stock into which the
D&E 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). In the event the Company does not
redeem the shares of Series D&E Preferred Stock as
requested by the holders, the Conversion Price of the shares of
Series D&E Preferred Stock not redeemed will be
immediately adjusted to an amount equal to ninety percent of the
market price of the Companys Common Stock.



| |                                
| | -------------------------------
| | The Companys Redemption Rights

At any time on or after February 23, 2004,
the Company has the right to redeem for cash all (but not less
than all) of the D&E Preferred Stock at the Liquidation
Preference then in effect (subject to the rights of the holders
of the D&E Preferred Stock to convert to common stock 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, splits, combinations or similar events (the
Class A Warrants). In connection with the
Riverstone spin-off, the exercise price of these warrants was
adjusted to $28.424 per share. 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). In connection with the
Riverstone spin-off, the exercise price of these warrants was
adjusted to $22.108 per share. The Class B Warrants are
exercisable until August 2007 and

F-47



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


otherwise contain customary terms and conditions
(including provisions with respect to cashless
exercise and customary anti-dilutive provisions).



| |                     
| | --------------------
| | Replacement Warrants

The Company has agreed to issue to the Strategic
Investors additional warrants to purchase its common stock under
certain circumstances, including the recombination of a majority
of the assets of an Operating Subsidiary with the Company, the
sale of the Company or the failure of an Operating Subsidiary to
engage in an IPO, a spin-off or a sale of all or substantially
all of its assets or capital stock. Such warrants are to be
issued in replacement of the subsidiary stock purchase rights of
the applicable Operating Subsidiary, which would be canceled
upon the occurrence of such an event.

In connection with the SPA Amendment, the Company
and the Strategic Investors agreed that the distribution of the
Companys shares of Riverstone common stock would be deemed
to have occurred prior to the merger of Enterasys Subsidiary
into the Company and, pursuant to the terms of the SPA Amendment
and as a consequence of the merger of Enterasys Subsidiary into
the Company, that the Company would issue warrants to purchase
an additional 7,400,000 shares of its common stock for an
exercise price of $6.20 per share in replacement of all of the
Strategic Investors rights to purchase common stock of
Enterasys Subsidiary. Other than the number of shares subject to
the warrants and the exercise price of the warrants, the terms
of these additional warrants are substantially the same as the
terms of the Class A Warrants and Class B Warrants



| |                         
| | ------------------------
| | Series C Preferred Stock

As part of the acquisition of Indus River,
completed on January 31, 2001, the Company 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. The merger of Enterasys Subsidiary into
the Company on August 6, 2001 represented an
Enterasys Spin-off for purposes of the C Preferred
Stock. In accordance with the C Preferred Stock conversion
provisions, upon the merger, all outstanding shares of the C
Preferred Stock and related options and warrants converted into
approximately 955,000 shares of the Companys common stock.



| |                             
| | ----------------------------
| | Undesignated Preferred Stock

At December 29, 2001, the Company was
authorized to issue up to 1,859,000 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 the Company (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.

24.     Stock
Plans



| |                       
| | ----------------------
| | Equity Incentive Plans

The Companys 1998 Equity Incentive Plan, as
amended, was approved by the stockholders of the Company on
July 9, 1998 and provides for the availability of
14,500,000 shares of common stock for the granting of various
incentive awards to eligible employees. Options granted under
the plan are granted with exercise prices equal to the fair
market value on the date of grant, generally expire ten years
from the date of grant and vest as to one-quarter of the shares
one year from the date of grant with monthly vesting of the
remainder ratably over the following three years. As of
December 29, 2001, 10,528,804 shares

F-48



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


remained available for issuance under the 1998
Equity Incentive Plan and options to purchase 1,471,694 shares
were outstanding under the plan.

Prior to July 9, 1998, the Company
maintained a 1989 Equity Incentive Plan which provided for the
availability of 25,000,000 shares of common stock for the
granting of various incentive awards to eligible employees.
Options granted under the plan were originally granted with
exercise prices equal to the fair market value of the
Companys common stock on the date of grant, generally vest
over a three to five year period and generally expire with in
six to ten years from the date of grant. Upon the adoption of
the Companys 1998 Equity Incentive Plan on July 9,
1998, the 1989 Equity Incentive Plan was terminated except with
respect to options then outstanding. No additional options may
be granted under the 1989 Equity Incentive Plan, and as of
December 29, 2001, options to purchase 502,129 shares remained
outstanding under the plan.

The Companys 2001 Equity Incentive Plan was
adopted by the Board of Directors of the Company on
July 30, 2001 and provides for the availability of
50,000,000 shares of common stock solely for the purpose of
granting options to purchase shares of the Companys common
stock (Replacement Options) to replace options to
purchase shares of the Enterasys Subsidiary (Prior
Options) in connection with the merger of the Enterasys
Subsidiary into the Company on August 6, 2001. Replacement
Options were granted to replace Prior Options held on the basis
of 1.39105 shares of the Companys common stock for each
share of common stock subject to the original Enterasys
Subsidiary options. The exercise price of each Replacement
Option is equal to the exercise price of the Prior Option
divided by 1.39105 to reflect the effect of the merger. The 2001
Equity Incentive Plan was not required to be, and has not been,
approved by the Companys stockholders. No additional
options may be granted under the 2001 Equity Incentive Plan and
as of December 29, 2001, options to purchase 33,647,265
shares remained outstanding under the plan.

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 non-employee 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 vested over a period of three
years and expire six years from the date of grant. Options to
purchase a total of 100,000 shares were outstanding under the
Directors Option Plan at December 29, 2001. After
March 1, 1999, the nonemployee directors of the Company are
eligible to receive options to purchase shares of the
Companys common stock under the 1998 Equity Incentive Plan.

F-49



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


A summary of option transactions under the
Companys Equity Incentive plans follows. Information in
the following table pertaining to fiscal year 2001 and the first
three fiscal quarters of transition 2001 is restated.

|                                          |                              |           |            |                |   |   |       |       | 
|----------------------------------------- | ---------------------------- | --------- | ---------- | -------------- | - | - | ----- | ----- | 
|                                          |                              |           |            | Weighted-     
|                                          |                              | Number of |            | Average       
|                                          |                              | Options   |            | Exercise Price
|                                          |                              |           |            |               
|Options outstanding at February 28, 1999. |                              |           | 18,983,679 |                |   | $ | 9.67  |      
|                                          | 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 |      
|                                          | 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 |      
|                                          | Granted and assumed          |           |            | 1,042,299      |   |   |       | 13.86 | 
|                                          | Converted subsidiary options |           |            | 41,568,878     |   |   |       | 3.47  | 
|                                          | Exercised                    |           |            | (10,477,337    | ) |   |       | 4.62  | 
|                                          | Cancelled                    |           |            | (8,173,832     | ) |   |       | 9.83  | 
|                                          |                              |           |            |                |   |   |       |      
|Options outstanding at December 29, 2001. |                              |           | 35,727,588 |                |   | $ | 3.91  |      
|                                          |                              |           |            |                |   |   |       |      

|                                |  |                   |            |               |  |                  |           |  |  |   |           | 
|------------------------------- |  | ----------------- | ---------- | ------------- |  | ---------------- | --------- |  |  | - | --------- | 
|                                |  | December 29, 2001 |            | March 3, 2001 |  | February 29 2000
|                                |  |                   |            |               |  |                 
|Options exercisable             |  |                   | 11,867,978 |               |  |                  | 4,340,530 |  |  |   | 2,916,651 | 
|Weighted average exercise price |  | $                 | 3.34       |               |  | $                | 11.51     |  |  | $ | 10.26     | 

The following table summarizes information
concerning outstanding and exercisable options as of
December 29, 2001:

|                |                |             |  |                  |              |                  |  |             |     |                  |  |   |       |  |  |  |            |  |  |   |       | 
|--------------- | -------------- | ----------- |  | ---------------- | ------------ | ---------------- |  | ----------- | --- | ---------------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                |                |             |  | Weighted-Average |              |                  |  |             |     |                 
|                |                |             |  | Remaining        |              |                  |  |             |     |                 
|Range of        |                | Options     |  | Contractual Life |              | Weighted-Average |  | Options     |     | Weighted-Average
|Exercise Prices |                | Outstanding |  | (years)          |              | Exercise Price   |  | Exercisable |     | Exercise Price  
|                |                |             |  |                  |              |                  |  |             |     |                 
|                | $ 2.52   2.5  |             |  |                  | 2 22,598,037 |                  |  |             | 8.4 |                  |  | $ | 2.52  |  |  |  | 9,410,860  |  |  | $ | 2.52  | 
|                | 2.53   5.0    |             |  |                  | 5 7,483,897  |                  |  |             | 8.7 |                  |  |   | 3.60  |  |  |  | 1,684,833  |  |  |   | 3.76  | 
|                | 5.06  24.29   |             |  |                  | 5,608,375    |                  |  |             | 8.8 |                  |  |   | 9.62  |  |  |  | 760,077    |  |  |   | 11.96 | 
|                | 24.30  33.06  |             |  |                  | 1,100        |                  |  |             | 8.2 |                  |  |   | 33.06 |  |  |  | 220        |  |  |   | 33.06 | 
|                | $33.07  49.40 |             |  |                  | 36,179       |                  |  |             | 9.7 |                  |  |   | 49.40 |  |  |  | 11,988     |  |  |   | 49.40 | 
|                |                |             |  |                  |              |                  |  |             |     |                  |  |   |       |  |  |  |            |  |  |   |       | 
|                |                |             |  |                  | 35,727,588   |                  |  |             | 8.5 |                  |  | $ | 3.91  |  |  |  | 11,867,978 |  |  | $ | 3.34  | 
|                |                |             |  |                  |              |                  |  |             |     |                  |  |   |       |  |  |  |            |  |  |   |       | 

The weighted average estimated fair values of
stock options granted and assumed during the ten months ended
December 29, 2001 and the years ended March 3, 2001 and
February 29, 2000 were $8.68, $17.24 and $9.06 per share,
respectively.

F-50



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000




| |                              
| | -----------------------------
| | Subsidiary Stock Option Plans

During the fiscal year 2001, each of the
Operating Subsidiaries adopted a 2000 Equity Incentive Plan
(2000 Plan), each of which provided for the grant of
awards of each Operating Subsidiarys common stock to
employees or directors of, or consultants or advisors to the
subsidiary as well as to certain employees of the Company and
its subsidiaries. Awards under each 2000 Plan consisted of stock
options (incentive or non-statutory), restricted and
unrestricted stock awards, stock appreciation rights, deferred
stock awards, performance awards, other stock-based awards loans
and supplemental grants. The 2000 Plans were administered by the
respective subsidiaries boards of directors or by a
committee of the respective boards, which determined 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.

As a result of the merger of the Enterasys
Subsidiary into the Company, Enterasys Subsidiary stock options
were exchanged for options to purchase shares of the
Companys common stock under the Companys 2001 Equity
Incentive Plan as described above. Following the discontinuance
of GNTS business, the Company does not anticipate that
options to purchase GNTS common stock will be exercised. In
connection with the sale of Aprisma, all options to purchase
Aprisma common stock were canceled.

The Company applies APB 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 No. 123,
Accounting for Stock-based Compensation, the
Companys net income (loss) would have been reduced
(increased) to the pro forma amounts indicated below:

|                                                                                 |                      |                   |   |               |   |                   |   |          |   |  |   |         | 
|-------------------------------------------------------------------------------- | -------------------- | ----------------- | - | ------------- | - | ----------------- | - | -------- | - |  | - | ------- | 
|                                                                                 |                      |                   |   |              
|                                                                                 |                      |                   |   | Year Ended   
|                                                                                 |                      | Ten Months Ended  |   |              
|                                                                                 |                      | December 29, 2001 |   | March 3, 2001 |   | February 29, 2000
|                                                                                 |                      |                   |   |               |   |                  
|(In thousands, except per share amounts)                                         |                      |                  
|                                                                                 |                      | (Restated)       
|Net income (loss) available to common
    shareholders:                          |                      |                   |   |               |   |                   |   |          |   |  |   |        
|                                                                                 | As reported/restated |                   | $ | (714,631      | ) |                   | $ | (704,726 | ) |  | $ | 464,271 | 
|                                                                                 | Pro forma            |                   | $ | (743,715      | ) |                   | $ | (766,034 | ) |  | $ | 413,280 | 
|Basic net income (loss) per common share
    available to common shareholders:   |                      |                   |   |               |   |                   |   |          |   |  |   |        
|                                                                                 | As reported/restated |                   | $ | (3.71         | ) |                   | $ | (3.81    | ) |  | $ | 2.62    | 
|                                                                                 | Pro forma            |                   | $ | (3.86         | ) |                   | $ | (4.15    | ) |  | $ | 2.33    | 
|Diluted net income (loss) per common share
    available to common shareholders: |                      |                   |   |               |   |                   |   |          |   |  |   |        
|                                                                                 | As reported/restated |                   | $ | (3.71         | ) |                   | $ | (3.81    | ) |  | $ | 2.46    | 
|                                                                                 | Pro forma            |                   | $ | (3.86         | ) |                   | $ | (4.15    | ) |  | $ | 2.19    | 

The effect of applying SFAS No. 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.

F-51



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The fair value of each Company 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 ten months ended December 29, 2001 and the years ended
March 3, 2001 and February 29, 2000:

|                              |  |                   |       |               |  |                   |       |   |  |  |       |  
|----------------------------- |  | ----------------- | ----- | ------------- |  | ----------------- | ----- | - |  |  | ----- | -
|                              |  | December 29, 2001 |       | March 3, 2001 |  | February 29, 2000
|                              |  |                   |       |               |  |                  
|Risk-free interest rates      |  |                   | 3.86  | %             |  |                   | 4.51  | % |  |  | 6.59  | %
|Expected option lives (years) |  |                   | 2.7   |               |  |                   | 3.8   |   |  |  | 3.7   |  
|Expected volatility           |  |                   | 92.11 | %             |  |                   | 83.18 | % |  |  | 70.14 | %
|Expected dividend yields      |  |                   | 0.0   | %             |  |                   | 0.0   | % |  |  | 0.0   | %

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 the Company 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.



| |                              
| | -----------------------------
| | 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 aggregate withholding percentage of 4% to
20%, to a maximum of $12,500 annually (measured by reference to
share values at the dates of grant of the Purchase rights) 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 ten-month
period ended December 29, 2001, 778,752 shares were
purchased at a weighted-average price of $9.71 per share. The
Companys employees purchased 906,000 shares at $14.85 and
1,043,962 shares at $7.49, during the years ended March 3,
2001 and February 29, 2000, respectively. The remaining
number of shares available for purchase by employees under these
plans at December 29, 2001 was 1,412,427 shares.



| |                         
| | ------------------------
| | Stock-Based Compensation

As of the end of the third quarter of the fiscal
year ended March 3, 2001, each of the Operating
Subsidiaries had granted options to purchase its common stock to
their respective 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 the Company and certain other employees of the
Company, who were not employees of the Operating Subsidiaries.
These individuals were generally restricted from transferring
these options and the underlying shares were 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
Operating Subsidiary level, these options generated variable
stock-based compensation over the vesting period at fair value
using the Black-Scholes option pricing model as the individuals
were considered non-employees of the Operating Subsidiaries. By
approval of each Operating Subsidiarys board of directors
and the Companys Board of Directors, these options were
accelerated to become fully vested in November 2000. At that
time, these options to purchase shares of an Operating
Subsidiary were scheduled to become exercisable at the time the
Company distributed to its shareholders its shares of that
Operating Subsidiarys common stock or April 1, 2004
or upon a sale of the

F-52



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


Operating Subsidiary, if earlier. As a result of
the acceleration, each Operating Subsidiary recorded
compensation expense, during the third quarter of the fiscal
year ended March 3, 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 had measured the intrinsic value at the
date of the acceleration. During the second quarter ended
September 1, 2001, the Company recorded stock based
compensation of $1.9 million and $15.9 million in
continuing operations and discontinued operations, respectively,
as certain employees left the Company and benefited from the
acceleration of vesting discussed above. This amount was based
on the intrinsic value as of the modification date.

In connection with the acquisition of Indus
River, the Company issued stock options to employees in respect
of unvested stock options. The Company calculated the fair value
of these unvested stock options using the Black-Scholes option
pricing model. The Company recorded approximately $2.9 million
of unearned stock-based compensation expense for the value of
the options, of which it recognized $1.9 million and
$0.1 million of compensation expense in operations during
the ten months ended December 29, 2001 and the fiscal year
ended March 3, 2001, respectively.

In connection with the Companys acquisition
of NSW, the Company agreed to issue 157,714 additional shares of
common stock contingent upon future services to be rendered to
the Company by certain employees of NSW. These shares of common
stock were held in escrow at December 29, 2001. The Company
recorded approximately $5.5 million of unearned stock-based
compensation for the value of these shares at the date of the
acquisition. This compensation expense will be recognized over
the required service period of two years. The Company recorded a
stock-based compensation expense in operations of approximately
$2.3 million and $1.4 million during the ten months
ended December 29, 2001 and fiscal year ended March 3,
2001, respectively.

In connection with certain Riverstone 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 fiscal year ended
March 3, 2001. Prior to the Riverstone distribution, the
compensation expense was recognized over the options
vesting period of four years. As a result of these grants, the
Company recorded stock-based compensation expense in
discontinued operations of $0.7 million and
$1.4 million for the ten months ended December 29,
2001 and fiscal year ended March 3, 2001, respectively.

Stock-based compensation expense related to stock
options granted to consultants is recognized in accordance with
EITF No. 96-18. The fair value of the stock options granted
is calculated at each reporting date using the Black-Scholes
option pricing model. The Company believes that the fair value
of the stock options are more reliably measurable than the fair
value of the services rendered. The Company recorded stock-based
compensation expense in discontinued operations of
$2.1 million during the fiscal year ended March 3,
2001.

In connection with the transformation events of
August 6, 2001, the portion of each option (an
Applicable Cabletron Option) to purchase common
stock of Cabletron that was held by an employee (other than the
employees of Aprisma and certain other individuals) that would
have vested after February 28, 2002 was cancelled and the
portion of the option that was scheduled to vest prior to that
date (assuming a quarterly vesting schedule for those options
scheduled to vest yearly) was accelerated. The Applicable
Cabletron Options expire on November 6, 2001. The Company
recorded a net $24.5 million non-cash stock-based
compensation charge related to the acceleration of these options.

On August 6, 2001, each employee who held
options, taking into account the acceleration described above,
to purchase Cabletrons common stock received an option to
purchase 0.5131 shares of Riverstone common stock (the
Rainbow Awards) for each share of Cabletron common
stock subject to their

F-53



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


options. The exercise price of the options to
purchase the Companys stock were adjusted, and the
exercise price of the Rainbow Awards established, to preserve as
closely as possible, without increasing, the intrinsic value
and, without decreasing, the ratio of the exercise price to
market value that existed in the Cabletron option prior to the
distribution.

The Replacement Options and the Rainbow Awards
described previously were granted, and the options adjusted, in
accordance with the guidance set forth in FASB Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion
No. 25 regarding equity restructuring.

25.     Compaq
Agreement

On May 25, 1999, Compaq Computer Corporation
(Compaq), now part of Hewlett-Packard Corporation,
entered into an 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 agreement contained,
among other things, a pricing rebate that compensated the
Company for Compaq purchase shortfalls. The agreement was
scheduled to expire on June 30, 2001.

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
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 that the Company would continue to
resell, and Compaq was expected to continue servicing,
Digital-branded products. Further, Compaq was to continue as a
reseller of Company-branded networking hardware and
Aprismas SPECTRUM network management software. In
terminating the 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 products were accepted by Compaq and recorded in
sales by the Company.

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 the fiscal year ended February 29,
2000 because the payment was not refundable under any
circumstances.

Additionally, as part of the transition from the
agreement, Compaq returned to the Company certain networking
product inventory, previously purchased and paid for, which was
reworked and resold as Company-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 the fiscal year ended February 29, 2000.

As part of the agreement, Compaq agreed to
continue to act as a reseller of the Companys products
through the third quarter of 2002. Pursuant to this agreement,
Compaq issued $34.0 million of prepaid purchase orders for
Company product of which $32.4 million had been shipped as
of December 29, 2001. The balance remaining at
December 29, 2001 of $1.6 million is included in
accrued expenses.

26.     Initial
Public Offering and Distribution of Riverstone

On February 16, 2001, Riverstone completed
the initial public offering of 10.0 million shares of its
common stock at $12 per share. Prior to the offering, Riverstone
was a wholly owned subsidiary of the

F-54



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


Company. Net proceeds from the offering totaled
$108.8 million and were raised for general working capital
purposes.

After Riverstones registration statement
relating to the initial public offering had been declared
effective, the Strategic Investors exercised stock purchase
rights such that Riverstone issued 5.4 million shares of
its common stock in respect of such rights. Riverstone received
net proceeds from the purchase rights exercise of approximately
$46.6 million. The Company continued to own approximately
85 percent of Riverstone subsequent to the offering and
exercise by the Strategic Investors of the stock purchase
rights. On August 6, 2001, the Company distributed its
shares of Riverstones common stock to its stockholders in
a tax-free spin-off transaction.

27.     401(k)
Plan

The Companys eligible employees may
participate in the Enterasys Networks, 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 Companys 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 the
Company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 one-year vesting schedule
based on initial date of hire. The Companys expenses
related to matching contributions to the 401(k) Plan for the
ten-month period ended December 29, 2001, and the years
ended March 3, 2001 and February 29, 2000 were
approximately $0.9 million, $0.9 million and
$0.7 million, respectively.

28.     Related Party
Transactions



| |            
| | -----------
| | Investments

The Company has minority investments in debt and
equity securities of certain companies. The Company does not
have a controlling interest in these entities.

In certain instances the Company recorded revenue
from transactions where the Company received equity instruments
in exchange for products sold. Investment-related revenue
recorded during the period was as follows:

|                                                        |                                                         |                   |        |               |  |                   |        |        |  |   |        |        | 
|------------------------------------------------------- | ------------------------------------------------------- | ----------------- | ------ | ------------- |  | ----------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                        |                                                         |                   |        |              
|                                                        |                                                         |                   |        | Year Ended   
|                                                        |                                                         | Ten Months Ended  |        |              
|                                                        |                                                         | December 29, 2001 |        | March 3, 2001 |  | February 29, 2000
|                                                        |                                                         |                   |        |               |  |                  
|(In thousands)                                          |                                                         |                  
|                                                        |                                                         | (Restated)       
|Revenue recognized in connection with investments       |                                                         | $                 | 6,988  |               |  | $                 | 1,435  |        |  | $ | 20,370 |       
|Revenue recognized from sales to investee
    companies |                                                         |                   | 40,196 |               |  |                   | 38,619 |        |  |   | 958    |       
|                                                        |                                                         |                   |        |               |  |                   |        |        |  |   |        |       
|                                                        | Total revenue recognized from investee
    transactions |                   | $      | 47,184        |  |                   | $      | 40,054 |  |   | $      | 21,328 | 
|                                                        |                                                         |                   |        |               |  |                   |        |        |  |   |        |       

F-55



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000




| |          
| | ---------
| | Severance

In connection with the merger of the Enterasys
Subsidiary into the Company on August 6, 2001, senior
Cabletron management resigned their executive positions and the
Company paid lump-sum severance payments of approximately
$2.4 million.



| |                        
| | -----------------------
| | Consulting Arrangements

In connection with the senior management
resignations in September 2001, the Company entered into
consulting arrangements with two former members of senior
Cabletron management to provide strategic advice and assistance
to the Company for a period of one year. The Company paid
consulting fees of $0.2 million in the ten months ended
December 29, 2001 and is obligated to pay consulting fees
of $0.2 million in the fiscal year ended December 31,
2002.



| |             
| | ------------
| | Indebtedness

On January 1, 2000, the Company entered into
a promissory note with Romulus Pereira, the President and Chief
Executive Officer of Riverstone, in the amount of $125,000. The
note was repaid in full on September 13, 2000.

On April 12, 2000, the Company entered into
a promissory note with Mr. Pereira in the amount of
$400,000 to be applied to the payment of certain taxes owed by
Mr. Pereira with respect to the Companys shares that
he received in connection with the Companys acquisition of
Yago Systems, Inc. The note with interest at the rate of 6.46%
per annum was forgiven in April 2002.

On August 23, 1999, the Company entered into
an interest-free promissory note with Mr. Fiallo, former
Chief Executive Officer of the Company, in the amount of
$100,000. The outstanding principal balance on the note of
$100,000 was forgiven by the Company in connection with
Mr. Fiallos resignation and termination of employment
in April 2002.

On January 1, 2000, the Company entered into
interest-free promissory notes with each of Messrs. Fiallo
and Jaeger, former Executive Vice-President of the Company, each
for the principal amount of $125,000. The Company entered into a
similar promissory note with Mr. Kirkpatrick, former Chief
Financial Officer and Chief Operating Officer of the Company, on
June 15, 2000. Pursuant to the terms of the notes, the
Company forgave 25% of the original principal balance of the
notes on January 1, 2001 for Messrs. Fiallo and Jaeger
and on February 28, 2001 for Mr. Kirkpatrick. In
connection with the merger of the Enterasys Subsidiary into the
Company, on August 6, 2001, the Company forgave the
remaining original principal balance of the notes issued by
Messrs. Fiallo, Jaeger and Kirkpatrick of $93,500.

On April 12, 2000, the Company entered into
a promissory note with Mr. Patel, former Chief Executive
Officer and President of the Company, in the principal amount of
$385,000 bearing interest at a rate of 6.46% per year. The
proceeds of the note were to be applied to the payment of taxes
owed by Mr. Patel relating to the shares of the Company he
received in connection with the Companys acquisition of
Yago Systems in 1998. On August 6, 2001, the Company
forgave the outstanding principal and all accrued interest on
the note of $427,742.

On June 1, 2000, the Company entered into a
promissory note with Mr. Kirkpatrick for the principal amount of
$200,000 bearing interest at a rate of 8% per year. The
outstanding principal balance and all accrued interest on the
note of $229,246 was forgiven by the Company in connection with
Mr. Kirkpatricks resignation and termination of employment
in April 2002.

On September 6, 2001, the Company entered
into an interest-free promissory note with Mr. Riddle,
former Executive Vice-President of the Company, for the
principal amount of $100,000. The outstanding

F-56



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


principal balance on the note of $100,000 was
forgiven by the Company in connection with
Mr. Riddles resignation and termination of employment
in April 2002.



| |                             
| | ----------------------------
| | Transactions with Riverstone

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

In accordance with the terms in the commercial
agreement with Riverstone, during the fiscal year ended
March 3, 2001, the Company paid referral fees to Riverstone
of $2.9 million. This amount reflects Riverstones
commission for sales of Company products to Riverstone customers
and has been recorded in selling, general and administrative
expenses. There were no referral fees paid to Riverstone during
the ten months ended December 29, 2001. Upon completion of
the August 6, 2001 tax-free spin-off transaction, the
Company no longer sells product through Riverstone.

29.     Subsequent
Events

On April 8, 2002, the Company announced a
cost reduction plan including a reduction in work force of
approximately 30%. The cost reduction plan also includes other
programs intended to reduce costs, including initiatives related
to supply chain management and incentive programs with our
distributors and channel partners.

On April 26, 2002 the Board of Directors of
the Company approved a dividend of one right to purchase one
one-thousandth (1/1,000) of a share of Series F Preferred
Stock, $1.00 par value per share, of the Company for each
outstanding share of common stock, $.01 par value per share, of
the Company. The Company paid this dividend on June 25,
2002 to shareholders of record at the close of business on
June 11, 2002.

F-57



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


30.     Quarterly
Financial Data (Unaudited)

The effect of the restatements described in
Note 2 on the individual quarters of the ten-month period
ended December 29, 2001 and the fiscal year ended
March 3, 2001 was as follows:

|                                                                              |  |                                          |         |                      |  |                       |          |                      |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | -------------------- |  | --------------------- | -------- | -------------------- |  | - | -------- | - |  | - | -------- | -
|                                                                              |  |                                         
|                                                                              |  | Ten Months Ended December 29, 2001      
|                                                                              |  |                                         
|                                                                              |  |                                          |         |                     
|                                                                              |  | As Restated                              |         |                     
|                                                                              |  |                                          |         |                     
|                                                                              |  | First Quarter                            |         | Second Quarter       |  | Third Quarter         |          | Fourth Quarter Ended
|                                                                              |  | Ended                                    |         | Ended                |  | Ended                 |          | December 29,        
|                                                                              |  | June 2, 2001                             |         | September 1, 2001(1) |  | September 29, 2001(1) |          | 2001(2)             
|                                                                              |  |                                          |         |                      |  |                       |          |                     
|                                                                              |  |                                         
|                                                                              |  | (In thousands, except per share amounts)
|Net revenue                                                                   |  | $                                        | 185,005 |                      |  | $                     | 156,936  |                      |  | $ | 161,158  |   |  | $ | 143,734  |  
|Gross margin                                                                  |  | $                                        | 86,302  |                      |  | $                     | 48,047   |                      |  | $ | 19,355   |   |  | $ | 5,703    |  
|Income (loss) from continuing operations
    available to common shareholders |  | $                                        | 473     |                      |  | $                     | (157,438 | )                    |  | $ | (183,194 | ) |  | $ | (309,381 | )
|Loss from discontinued operations                                             |  | $                                        | (11,112 | )                    |  | $                     | (84,560  | )                    |  | $ | (56,075  | ) |  | $ | (4,004   | )
|Net loss available to common shareholders(3)                                  |  | $                                        | (2,898  | )                    |  | $                     | (241,998 | )                    |  | $ | (239,269 | ) |  | $ | (318,334 | )
|Basic and diluted loss per common share:                                      |  |                                          |         |                      |  |                       |          |                      |  |   |          |   |  |   |          |  
|Loss from continuing operations available to
    common shareholders          |  | $                                        | 0.04    |                      |  | $                     | (0.83    | )                    |  | $ | (0.95    | ) |  | $ | (1.61    | )
|Discontinued operations                                                       |  | $                                        | (0.06   | )                    |  | $                     | (0.44    | )                    |  | $ | (0.29    | ) |  | $ | (0.02    | )
|Net loss available to common shareholders(3)                                  |  | $                                        | (0.02   | )                    |  | $                     | (1.27    | )                    |  | $ | (1.24    | ) |  | $ | (1.65    | )

|                                                                     |  |                                          |         |                   |  |                  |          |                |  |   |         |   |  |   |          |  
|-------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ----------------- |  | ---------------- | -------- | -------------- |  | - | ------- | - |  | - | -------- | -
|                                                                     |  |                                         
|                                                                     |  | Fiscal Year Ended March 3, 2001         
|                                                                     |  |                                         
|                                                                     |  |                                         
|                                                                     |  | As restated                             
|                                                                     |  |                                         
|                                                                     |  | First Quarter                            |         | Second Quarter    |  | Third Quarter    |          | Fourth Quarter
|                                                                     |  | Ended                                    |         | Ended             |  | Ended            |          | Ended         
|                                                                     |  | June 3, 2000                             |         | September 2, 2000 |  | December 2, 2000 |          | March 3, 2001 
|                                                                     |  |                                          |         |                   |  |                  |          |               
|                                                                     |  |                                         
|                                                                     |  | (In thousands, except per share amounts)
|Net revenue                                                          |  | $                                        | 219,742 |                   |  | $                | 200,436  |                |  | $ | 178,227 |   |  | $ | 185,300  |  
|Gross margin                                                         |  | $                                        | 87,406  |                   |  | $                | 86,790   |                |  | $ | 81,114  |   |  | $ | 81,893   |  
|Loss from continuing operations available to
    common shareholders |  | $                                        | (33,028 | )                 |  | $                | (125,905 | )              |  | $ | 34,618  |   |  | $ | (434,869 | )
|Loss from discontinued operations                                    |  | $                                        | (14,193 | )                 |  | $                | (9,398   | )              |  | $ | 13,240  |   |  | $ | (39,475  | )
|Net loss available to common shareholders                            |  | $                                        | (47,221 | )                 |  | $                | (135,303 | )              |  | $ | 47,858  |   |  | $ | (474,344 | )
|Basic and diluted loss per common share:                             |  |                                          |         |                   |  |                  |          |                |  |   |         |   |  |   |          |  
|Loss from continuing operations available to
    common shareholders |  | $                                        | (0.18   | )                 |  | $                | (0.68    | )              |  | $ | (0.17   | ) |  | $ | (2.33    | )
|Discontinued operations                                              |  | $                                        | (0.08   | )                 |  | $                | (0.05    | )              |  | $ | (0.10   | ) |  | $ | (0.21    | )
|Net loss available to common shareholders                            |  | $                                        | (0.26   | )                 |  | $                | (0.73    | )              |  | $ | (0.27   | ) |  | $ | (2.54    | )

F-58



---



##### Table of Contents



ENTERASYS NETWORKS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Ten months ended December 29, 2001 and
years ended March 3, 2001 (restated) and
February 29, 2000


The above quarterly data has been restated to
reflect the adjustments more fully described in Note 2 and
summarized below.

|                                                                     |             |                                    |         |                                 |   |               |         |         |   |              |         |             |   |          |        |         |   |   |        |         |   |   |         |         |   |   |         |         |  
|-------------------------------------------------------------------- | ----------- | ---------------------------------- | ------- | ------------------------------- | - | ------------- | ------- | ------- | - | ------------ | ------- | ----------- | - | -------- | ------ | ------- | - | - | ------ | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                     |             |                                   
|                                                                     |             | Restatement Adjustments           
|                                                                     |             |                                   
|                                                                     |             |                                    |         |                                
|                                                                     |             | Ten Months Ended December 29, 2001 |         | Fiscal Year Ended March 3, 2001
|                                                                     |             |                                    |         |                                
|                                                                     |             | First                              |         | Second                          |   | Third         |         | First   |   | Second       |         | Third       |   | Fourth  
|                                                                     |             | Quarter                            |         | Quarter                         |   | Quarter       |         | Quarter |   | Quarter      |         | Quarter     |   | Quarter 
|                                                                     |             | Ended                              |         | Ended                           |   | Ended         |         | Ended   |   | Ended        |         | Ended       |   | Ended   
|                                                                     |             | June 2,                            |         | September 1,                    |   | September 29, |         | June 3, |   | September 2, |         | December 2, |   | March 3,
|                                                                     |             | 2001                               |         | 2001                            |   | 2001(4)       |         | 2000    |   | 2000         |         | 2000        |   | 2001    
|                                                                     |             |                                    |         |                                 |   |               |         |         |   |              |         |             |   |         
|                                                                     |             |                                   
|                                                                     |             | (In thousands)                    
|Sales/investment transactions                                        |             | $                                  | (13,415 | )                               |   | $             | (6,111  | )       |   | $            | (11,826 | )           |   | $        | (2,637 | )       |   | $ | (3,809 | )       |   | $ | (6,020  | )       |   | $ | (9,783  | )      
|Sales to foreign distributors                                        |             |                                    | (7,797  | )                               |   |               | (28,395 | )       |   |              | (20,152 | )           |   |          | (4,917 | )       |   |   | (6,297 | )       |   |   | (432    | )       |   |   | (10,306 | )      
|Pricing allowances                                                   |             |                                    | (2,008  | )                               |   |               | (9,115  | )       |   |              | (5,922  | )           |   |          | (589   | )       |   |   | (807   | )       |   |   | 146     |         |   |   | (4,506  | )      
|Return rights                                                        |             |                                    | 507     |                                 |   |               | (26,545 | )       |   |              | 4,414   |             |   |          |       |         |   |   | (1,458 | )       |   |   | (186    | )       |   |   | (4,288  | )      
|Other                                                                |             |                                    | (24,467 | )                               |   |               | (13,058 | )       |   |              | 5,885   |             |   |          | (8,284 | )       |   |   | (61    | )       |   |   | (7,106  | )       |   |   | (6,355  | )      
|                                                                     |             |                                    |         |                                 |   |               |         |         |   |              |         |             |   |          |        |         |   |   |        |         |   |   |         |         |   |   |         |        
|                                                                     | Net revenue |                                    | $       | (47,180                         | ) |               | $       | (83,224 | ) |              | $       | (27,601     | ) |          | $      | (16,427 | ) |   | $      | (12,432 | ) |   | $       | (13,598 | ) |   | $       | (35,238 | )
|Cost of revenue                                                      |             | $                                  | (20,822 | )                               |   | $             | (21,280 | )       |   | $            | (671    | )           |   | $        | (4,883 | )       |   | $ | (5,715 | )       |   | $ | (5,591  | )       |   | $ | (9,777  | )      
|Operating expense                                                    |             | $                                  | (1,148  | )                               |   | $             | (31,894 | )       |   | $            | (32,075 | )           |   | $        |       |         |   | $ | 399    |         |   | $ | (652    | )       |   | $ | 2,739   |        
|Loss from continuing operations available to
    common shareholders |             | $                                  | (10,155 | )                               |   | $             | (74,405 | )       |   | $            | (42,081 | )           |   | $        | (7,996 | )       |   | $ | (7,567 | )       |   | $ | (10,011 | )       |   | $ | (45,985 | )      
|Loss from discontinued operations                                    |             | $                                  | (2,543  | )                               |   | $             | (16,315 | )       |   | $            | (13,859 | )           |   | $        | (1,365 | )       |   | $ | (9     | )       |   | $ | (2,392  | )       |   | $ | (500    | )      
|Net loss available to common shareholders                            |             | $                                  | (12,698 | )                               |   | $             | (90,720 | )       |   | $            | (55,940 | )           |   | $        | (9,361 | )       |   | $ | (7,576 | )       |   | $ | (12,403 | )       |   | $ | (46,485 | )      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Both of the quarters ended September 1, 2001
    and September 29, 2001 include the months of July 2001 and
    August 2001 as a result of the Companys change in fiscal
    year-end from the Saturday closest to the last day in February
    to the Saturday closest to the last day in December. The
    consolidated results of operations for July and August 2001 are
    summarized as follows: net revenue of $167.5 million; gross
    margin of $73.1 million; loss from continuing operations
    available to common shareholders of $159.0 million; loss
    from discontinued operations available to common shareholders of
    $16.3 million and net loss available to common shareholders
    of $175.3 million.
|   
|(2) | Significant items during the fourth quarter ended
    December 29, 2001 included the following: provisions for
    excess and obsolete inventory of $30.5 million; valuation
    provision for deferred taxes of $82.3 million; and
    impairment of intangible assets of $104.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Included in the net loss available to common
    shareholders is the cumulative effect of an accounting change.
    In the first quarter the effect totaled $7.7 million, or
    $0.04 per share. In the fourth quarter, the tax effect of the
    change was reversed due to a net loss for the 10 months ended
    December 29, 2001. This reversal lowered the net loss
    $4.9 million, or $0.03 per share.                                                                                                                                                                                                                                                                                                                   
|   
|(4) | Included in third quarter ended
    September 29, 2001 restatement adjustments are the second
    quarter ended September 1, 2001 adjustments due to the
    change in the Companys fiscal year-end as discussed in
    (1), above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-59



---



##### Table of Contents



ENTERASYS NETWORKS, INC.

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Ten months ended December 29, 2001 and
years ended


March 3, 2001 (Restated) and
February 29, 2000


|                                     |  |                |         |            |  |            |         |         |  |            |           |  |  |   |         |      |  |   |         | 
|------------------------------------ |  | -------------- | ------- | ---------- |  | ---------- | ------- | ------- |  | ---------- | --------- |  |  | - | ------- | ---- |  | - | ------- | 
|                                     |  |                |         |            |  | Additions  |         |         |  |           
|                                     |  | Balance at     |         | Additions  |  | Charged to |         | Amounts |  | Balance at
|                                     |  | Beginning      |         | Charged to |  | Other      |         | Written |  | the End of
|                                     |  | of Period      |         | Expense    |  | Accounts   |         | Off     |  | Period    
|                                     |  |                |         |            |  |            |         |         |  |           
|                                     |  |               
|                                     |  | (In thousands)
|Allowance for doubtful accounts      |  |                |         |            |  |            |         |         |  |            |           |  |  |   |         |      |  |   |         | 
|December 29, 2001                    |  | $              | 24,784  |            |  | $          | 12,523  |         |  | $          |          |  |  | $ | (4,738  | )    |  | $ | 32,569  | 
|March 3, 2001                        |  | $              | 18,311  |            |  | $          | 17,788  |         |  | $          |          |  |  | $ | (11,315 | )    |  | $ | 24,784  | 
|February 29, 2000                    |  | $              | 22,171  |            |  | $          | 14,386  |         |  | $          |          |  |  | $ | (18,246 | )    |  | $ | 18,311  | 
|Inventory reserves                   |  |                |         |            |  |            |         |         |  |            |           |  |  |   |         |      |  |   |         | 
|December 29, 2001                    |  | $              | 42,257  |            |  | $          | 72,888  |         |  | $          |          |  |  | $ | (32,867 | )    |  | $ | 82,278  | 
|March 3, 2001                        |  | $              | 79,894  |            |  | $          | 44,686  |         |  | $          |          |  |  | $ | (82,323 | )    |  | $ | 42,257  | 
|February 29, 2000                    |  | $              | 153,441 |            |  | $          | 10,159  |         |  | $          |          |  |  | $ | (83,706 | )    |  | $ | 79,894  | 
|Notes receivable valuation allowance |  |                |         |            |  |            |         |         |  |            |           |  |  |   |         |      |  |   |         | 
|December 29, 2001                    |  | $              | 30,000  |            |  | $          | 6,125   |         |  | $          |          |  |  | $ |        |      |  | $ | 36,125  | 
|March 3, 2001                        |  | $              |        |            |  | $          | 30,000  |         |  | $          |          |  |  | $ |        |      |  | $ | 30,000  | 
|February 29, 2000                    |  | $              |        |            |  | $          |        |         |  | $          |          |  |  | $ |        |      |  | $ |        | 
|Deferred tax valuation allowance     |  |                |         |            |  |            |         |         |  |            |           |  |  |   |         |      |  |   |         | 
|December 29, 2001                    |  | $              | 230,717 |            |  | $          | 259,963 |         |  | $          | 19,771[a] |  |  | $ | (58,399 | )[b] |  | $ | 452,052 | 
|March 3, 2001                        |  | $              | 26,672  |            |  | $          | 173,215 |         |  | $          | 30,830[c] |  |  | $ |        |      |  | $ | 230,717 | 
|February 29, 2000                    |  | $              | 34,644  |            |  | $          | 3,723   |         |  | $          |          |  |  | $ | (11,695 | )[d] |  | $ | 26,672  | 



---



|    |  |                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------
|[a] |  | Represents amounts for unbenefitted stock
    compensation.                                         
|   
|[b] |  | Represents amounts attributable to the
    distribution of shares of a former subsidiary.           
|   
|[c] |  | Represents amounts for unbenefitted stock
    compensation and acquired losses.                     
|   
|[d] |  | Realization of deferred tax assets for which a
    valuation allowance had previously been provided.

S-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

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

Under date of November 21, 2002, we reported on
the consolidated balance sheets of Enterasys Networks, Inc. and
subsidiaries as of December 29, 2001 and March 3, 2001, and
the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity, and
cash flows for the ten-month period ended December 29, 2001
and for each of the years in the two-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.

Our audit report on the Companys
consolidated financial statements referred to above indicates
that the consolidated balance sheet as of March 3, 2001,
and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders
equity, and cash flows for the year ended March 3, 2001
have been restated.

Our audit report also indicates that, effective
March 4, 2001, the Company changed its method of accounting
for derivative financial instruments and hedging activities.



| |             
| | ------------
| | /S/ KPMG LLP

Boston, Massachusetts

November 21, 2002


S-2



---



##### Table of Contents






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.

|                      |  |                                                                                 
|--------------------- |  | --------------------------------------------------------------------------------
|                      |  | ENTERASYS NETWORKS, INC.                                                        
|                     
|                     
|November 25, 2002Date |  | By: /s/ WILLIAM K. OBRIENWilliam K. OBrienChief Executive Officer and Director

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.

|                                             |  |                                                                          |  |                   |  |     
|-------------------------------------------- |  | ------------------------------------------------------------------------ |  | ----------------- |  | ----
|                                             |  | Signature                                                                |  | Title(s)          |  | Date
|                                             |  |                                                                          |  |                   |  |     
|                                            
|/s/ WILLIAM K. OBRIENWilliam K. OBrien     |  | Chief Executive Officer and Director (Principal
    Executive Officer)   |  | November 25, 2002
|                                            
|/s/ RICHARD S. HAAK, JR.Richard S. Haak, Jr. |  | Chief Financial Officer (Principal Financial and
    Accounting Officer) |  | November 25, 2002
|                                            
|/s/ CRAIG R. BENSONCraig R. Benson           |  | Director                                                                 |  | November 25, 2002
|                                            
|/s/ PAUL R. DUNCANPaul R. Duncan             |  | Director                                                                 |  | November 25, 2002
|                                            
|/s/ EDWIN A. HUSTONEdwin A. Huston           |  | Director                                                                 |  | November 25, 2002
|                                            
|/s/ JAMES A. DAVIDSONJames A. Davidson       |  | Director                                                                 |  | November 25, 2002



---



##### Table of Contents






CERTIFICATIONS

I, William K. OBrien, Chief Executive
Officer of Enterasys Networks, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this transition report on
    Form 10-K of Enterasys Networks, Inc.;                                                                                                                                                                                                                                            
|
| | 2. Based on my knowledge, the report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by the
    report; and
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in the
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of Enterasys
    Networks, Inc. as of, and for, the periods presented in the
    report.             



| |                       
| | ----------------------
| | /s/ WILLIAM K. OBRIEN
| |                       
| | William K. OBrien    

Date: November 25, 2002

I, Richard S. Haak, Jr., Chief Financial
Officer of Enterasys Networks, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this transition report on
    Form 10-K of Enterasys Networks, Inc.;                                                                                                                                                                                                                                            
|
| | 2. Based on my knowledge, the report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by the
    report; and
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in the
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of Enterasys
    Networks, Inc. as of, and for, the periods presented in the
    report.             



| |                         
| | ------------------------
| | /s/ RICHARD S. HAAK, JR.
| |                         
| | Richard S. Haak, Jr.    

Date: November 25, 2002

C-1



---



##### Table of Contents



EXHIBIT INDEX

| |      |  |  |                                                                                                                                                                                                                                                                                                                                                    
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |  |  | Restated Certificate of Incorporation of the
    Registrant, a Delaware corporation, incorporated by reference to
    Exhibit 3.1 to the Registrants Registration Statement
    on Form S-1, No. 33-28055.                                                                                                                                        
| | 3.2  |  |  | Certificate of Correction of the
    Registrants Restated Certificate of Incorporation,
    incorporated by reference to Exhibit 3.1.2 to the
    Registrants Registration Statement on Form S-1,
    No. 33-42534.                                                                                                                              
| | 3.3  |  |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Registrant, incorporated by
    reference to Exhibit 4.3 to the Registrants
    Registration Statement on Form S-3, No. 33-544666.                                                                                                                               
| | 3.4  |  |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Registrant, incorporated by
    reference to Exhibit 3.5 to the Registrants annual
    report on Form 10-K filed on May 30, 2000.                                                                                                                                
| | 3.5  |  |  | Certificate of Designations, Preferences and
    Rights for Series A and Series B Convertible Preferred Stock of
    the Registrant, incorporated by reference to Exhibit 2.4 to
    the Registrants current report on Form 8-K filed on
    September 11, 2000 (the Silver Lake 8-K).                                                          
| | 3.6  |  |  | Certificate of Designations, Preferences and
    Rights for Series C Convertible Preferred Stock of the
    Registrant, incorporated by reference to Exhibit 3.3 to the
    Registrants annual report on Form 10-K filed on
    June 4, 2001 (the 2001 10-K).                                                                                   
| | 3.7  |  |  | Certificate of Designations, Preferences and
    Rights for Series D and Series E Participating
    Convertible Preferred Stock of the Registrant, incorporated by
    reference to Exhibit 4.1 to the Registrants quarterly
    report on Form 10-Q for the period ended September 1, 2001,
    filed October 16, 2001 (the October 2001 10-Q).
| | 3.8  |  |  | Amended and Restated By-laws of the Registrant.                                                                                                                                                                                                                                                                                                    
| | 4.1  |  |  | Specimen stock certificate of the
    Registrants Common Stock.                                                                                                                                                                                                                                                                                   
| | 4.2  |  |  | Specimen stock certificate of the
    Registrants Series A Convertible Preferred Stock,
    incorporated by reference to Exhibit 4.2 to the 2001 10-K.                                                                                                                                                                                            
| | 4.3  |  |  | Specimen stock certificate of the
    Registrants Series B Convertible Preferred Stock,
    incorporated by reference to Exhibit 4.3 to the 2001 10-K.                                                                                                                                                                                            
| | 4.4  |  |  | Specimen stock certificate of the
    Registrants Series C Convertible Preferred Stock,
    incorporated by reference to Exhibit 4 to the
    Registrants Registration Statement on Form S-4,
    No. 333-47854.                                                                                                                                 
| | 4.5  |  |  | Specimen stock certificate of the
    Registrants Series D Convertible Preferred Stock.                                                                                                                                                                                                                                                           
| | 4.6  |  |  | Specimen stock certificate of the
    Registrants Series E Convertible Preferred Stock.                                                                                                                                                                                                                                                           
| | 4.7  |  |  | Amended and Restated Securities Purchase
    Agreement, dated August 29, 2000, between Silver Lake Partners,
    L.P. (Silver Lake) and the Registrant, incorporated
    by reference to Exhibit 2.1 of the Silver Lake 8-K.                                                                                                                     
| | 4.8  |  |  | Standstill Agreement, dated August 29, 2000,
    between the Registrant and the Investors named therein,
    incorporated by reference to Exhibit 2.3 to the Silver Lake
    8-K.                                                                                                                                                                  
| | 4.9  |  |  | Form of Class A Warrant of the Registrant,
    incorporated by reference to Exhibit 2.5 to the Silver Lake
    8-K.                                                                                                                                                                                                                                
| | 4.10 |  |  | Form of Class B Warrant of the Registrant,
    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 to the February
    2001 10-Q/A.                                                                                                                                                                                                                             
| | 4.12 |  |  | Form of Subsidiary Warrant, incorporated by
    reference to Exhibit 4.7 to the February 2001 10-Q/A.                                                                                                                                                                                                                                              
| | 4.13 |  |  | First Amendment to Amended and Restated
    Securities Purchase Agreement, Standstill Agreement and
    Registration Rights Agreement, dated July 12, 2001, by and
    between the Registrant, Silver Lake Partners, L.P. and the
    Investors named therein, incorporated by reference to
    Exhibit 10.1 to the October 2001 10-Q.             
| | 4.14 |  |  | Form of Common Stock Purchase Warrant issued
    pursuant to the Amended and Restated Securities Purchase
    Agreement, as amended, incorporated by reference to
    Exhibit 4.2 to the October 2001 10-Q.                                                                                                                                        



---



##### Table of Contents



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                
| | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  |  |  | 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 to the Registrants quarterly report on Form
    10-Q filed on January 16, 2001 (the January 2001
    10-Q).                                     
| | 10.2  |  |  | Amended and Restated Asset Contribution
    Agreement, effective as of June 3, 2000, between Cabletron
    and Aprisma, incorporated by reference to Exhibit 2.2 to
    the January 2001 10-Q.                                                                                                                                                 
| | 10.3  |  |  | Amended and Restated Asset Contribution
    Agreement, effective as of June 3, 2000, between Cabletron
    and Enterasys, incorporated by reference to Exhibit 2.3 to
    the January 2001 10-Q.                                                                                                                                               
| | 10.4  |  |  | 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 January 2001 10-Q.                                                                                                                                              
| | 10.5  |  |  | 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 October 2000 10-Q).                                                                         
| | 10.6  |  |  | 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 Registrant and Flextronics
    International USA, Inc., incorporated by reference to Exhibit
    2.8 of the October 2000 10-Q.
| | 10.7  |  |  | Services Agreement, dated as of August 28, 2000,
    between Cabletron and Aprisma, incorporated by reference to
    Exhibit 2.19 of the October 2000 10-Q.                                                                                                                                                                                    
| | 10.8  |  |  | Agency Agreement between the Registrant and
    International Cable Networks Inc., incorporated by reference to
    Exhibit 10.6 to the Registrants Registration
    Statement on Form S-1, No. 33-28055.                                                                                                                                     
| | 10.9  |  |  | 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 to the Registrants Registration
    Statement on Form S-3, No. 33-54466.                                                                         
| | 10.10 |  |  | Letter Sublease Agreement, dated June 4,
    1998, between the Registrant and Picturetel Corporation,
    together with related documents, incorporated by reference to
    Exhibit 10.8 to the 2001 10-K.                                                                                                                                     
| | 10.11 |  |  | Sublease, dated as of December 4, 2000,
    between 273 Corporate Drive, LLC and Aprisma, together with
    related documents, incorporated by reference to
    Exhibit 10.9 to the 2001 10-K.                                                                                                                                                 
| | 10.12 |  |  | Lease, dated as of October 31, 2001, between
    Thomas J. Flatley d/b/a The Flatley Company, and Enterasys
    Networks, Inc., relating to a leased premises in Portsmouth, New
    Hampshire.                                                                                                                                                
| | 10.13 |  |  | Registration Rights Agreement, dated as of August
    29, 2000, among the Registrant and the Investors, incorporated
    by reference to Exhibit 2.7 to the Silver Lake 8-K.                                                                                                                                                                   
| | 10.14 |  |  | Registration Rights Agreement, dated as of August
    29, 2000, among Aprisma and the Investors, incorporated by
    reference to Exhibit 2.8 to the Silver Lake 8-K.                                                                                                                                                                          
| | 10.15 |  |  | Manufacturing Services Agreement, dated as of
    March 1, 2000, between the Registrant and Flextronics
    International USA, Inc., incorporated by reference to
    Exhibit 10.6 to the February 2001 10-Q/A.                                                                                                                                
| | 10.16 |  |  | 1998 Equity Incentive Plan, incorporated by
    reference to Exhibit 4.1 to the Registrants
    registration statement on Form S-8, No. 333-83991.                                                                                                                                                                                            
| | 10.17 |  |  | 2001 Equity Incentive Plan, incorporated by
    reference to Exhibit 4.1 to the Registrants
    registration statement on Form S-8, No. 333-66774.                                                                                                                                                                                            
| | 10.18 |  |  | 1989 Employee Stock Purchase Plan, as restated.                                                                                                                                                                                                                                                                                                
| | 10.19 |  |  | 1995 Employee Stock Purchase Plan, as restated.                                                                                                                                                                                                                                                                                                
| | 10.20 |  |  | Amended and Restated Aprisma 2000 Equity
    Incentive Plan, incorporated by reference to Exhibit 10.7
    to the February 2001 10-Q/A.                                                                                                                                                                                                        
| | 10.21 |  |  | Amended and Restated Change-in-Control Severance
    Benefit Plan for Key Employees, incorporated by reference to
    Exhibit 10.19 to the 2001 10-K.                                                                                                                                                                                          
| | 10.22 |  |  | Enterasys Change-in-Control Severance Benefit
    Plan for Key Employees, incorporated by reference to
    Exhibit 10.2 to the January 2001 10-Q.                                                                                                                                                                                              
| | 10.23 |  |  | Aprisma Change-In-Control Severance Benefit Plan
    for Key Employees, incorporated by reference to
    Exhibit 10.2 to the October 2001 10-Q.                                                                                                                                                                                                
| | 10.24 |  |  | Deferral Plan for Directors.                                                                                                                                                                                                                                                                                                                   



---



##### Table of Contents



| |       |  |  |                                                                                                                                                                                                                               
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.25 |  |  | Form of Subsidiary Option Grant for Messrs.
    Patel, Kirkpatrick and Jaeger for options granted from the 2000
    Equity Incentive Plans of Aprisma, incorporated by reference to
    Exhibit 10.5 to the October 2001 10-Q.
| | 10.26 |  |  | Promissory Note, dated April 12, 2000 of Piyush
    Patel, incorporated by reference to Exhibit 10.25 to
    Registrants annual report on Form 10-K filed on May 30,
    2000 (the 2000 10-K).                             
| | 10.27 |  |  | Promissory Note, dated August 23, 1999 of
    Enrique P. (Henry) Fiallo, incorporated by reference to
    Exhibit 10.28 to the 2000 10-K.                                                                                     
| | 10.28 |  |  | Promissory Note, dated January 1, 2000 of
    Enrique P. (Henry) Fiallo, incorporated by reference to
    Exhibit 10.27 to the 2000 10-K.                                                                                     
| | 10.29 |  |  | Promissory Note, dated June 1, 2000, of
    David Kirkpatrick, incorporated by reference to
    Exhibit 10.37 to the 2001 10-K.                                                                                               
| | 10.30 |  |  | Promissory Note, dated June 15, 2000, of
    David Kirkpatrick, incorporated by reference to
    Exhibit 10.38 to the 2001 10-K.                                                                                              
| | 10.31 |  |  | Promissory Note, dated January 1, 2000, of
    Eric Jaeger, incorporated by reference to Exhibit 10.39 to the
    2001 10-K.                                                                                                  
| | 10.32 |  |  | Promissory Note, dated September 6, 2001, of
    James E. Riddle.                                                                                                                                                             
| | 10.33 |  |  | Letter agreement between the Registrant and
    Piyush Patel, dated August 2, 2001, for the provision of
    certain consulting services.                                                                                     
| | 10.34 |  |  | Letter agreement between the Registrant and Eric
    Jaeger, dated August 2, 2001, for the provision of certain
    consulting services.                                                                                      
| | 10.35 |  |  | Letter agreement between the Registrant and
    Piyush Patel, dated August 3, 2001, regarding severance
    arrangements.                                                                                                     
| | 10.36 |  |  | Letter agreement between the Registrant and Eric
    Jaeger, dated August 3, 2001, regarding severance
    arrangements.                                                                                                      
| | 10.37 |  |  | Letter agreement between the Registrant and David
    Kirkpatrick, dated August 3, 2001, regarding severance
    arrangements.                                                                                                
| | 22.1  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                               
| | 23.1  |  |  | Consent of Independent Auditors.                                                                                                                                                                                              
| | 99.1  |  |  | Certification of William K. OBrien
    under Section 906 of the Sarbanes-Oxley Act.                                                                                                                                          
| | 99.2  |  |  | Certification of Richard S. Haak, Jr.
    under Section 906 of the Sarbanes-Oxley Act.                                                                                                                                        



---



##### Table of Contents



(ENTERASYS NETWORKS LOGO)

Dear Enterasys Networks Shareholder:

This is my first report to you since joining
Enterasys Networks as Chief Executive Officer on April 1,
2002. At that time, the Company was facing significant
challenges including a general economic downturn and a
deteriorating environment for technology spending. Additionally,
Enterasys was facing its own internal review of historical
accounting matters and an investigation by the Securities and
Exchange Commission.

I am pleased to report that Enterasys is now
emerging from this very difficult period in its history, rapidly
transforming itself into a more stable, agile, and
customer-driven business. Even as we continue executing on our
business strategies and driving further operational
improvements, I am encouraged by our significant progress to
date, the continued loyalty of our customers, the strength of
our product portfolio, and the determination of our employees.

Transition Year 2001

As many of you are probably aware, this report
was delayed so that the Company could complete its internal
review of historical accounting matters. That review is now
complete, and the Annual Report on Form 10-K that follows this
letter reflects the cumulative impact of restatements for
periods included in the transition year ended December 29,
2001 and the fiscal year ended March 3, 2001.

Reviewing and analyzing the accounting issues has
consumed significant resources and a great deal of management
focus over the past several months and the completion and filing
of the Form 10-K represents a critical step forward in terms of
putting these issues behind us and focusing on our business and
the task of rebuilding confidence among all our stakeholders.
While the restated results included in the 10-K reflect
historical matters are not indicative of the current or future
performance of the Company, they do relate to many of the
changes made to enhance the Companys ability to provide
timely, accurate and reliable financial reporting going forward.

Now, I would like to report our progress on our
initial strategies to stabilize Enterasys.

Progress Report for Fiscal Year 2002
(To-Date)

Over the course of the past eight months, we have
accomplished a great deal. In addition to completing the
internal review and preparing our restated financial results, we
have taken aggressive steps aimed at improving our operations by
reducing costs, stabilizing revenue, strengthening our
leadership team, enhancing financial and other processes, and
improving our customer focus.

Our actions to reduce costs and improve
operational efficiency and effectiveness have lowered our cash
usage rate significantly, furthering our efforts to achieve
cash-positive, profitable operations as soon as possible. As of
September 28, 2002, the Company had approximately
$270 million in cash and marketable securities on hand.
Importantly, we reduced costs while maintaining a high level of
customer service, supporting our technology roadmaps and
sustaining critical investments in research and development
programs. We believe these efforts have created a cost structure
more appropriately aligned with our present sales levels.

The results of our efforts to stabilize sales
through the first three quarters of fiscal 2002, which yielded
quarterly revenue of $120 million or more, speak for
themselves. While there is still much to do to reestablish sales
momentum, our ability to stabilize sales in this environment
speaks volumes about the



---



##### Table of Contents



strength of our product portfolio, our partners,
and the loyalty of our installed customer base. Despite
challenging economic and market conditions, we rose above the
noise and delivered solid performance.


We have also made many changes to our people,
processes and systems to improve customer focus, increase
productivity, strengthen our internal controls and ensure the
ongoing integrity of our financial reporting. We continue
recruiting selectively to find new, experienced talent to
support our efforts, while we build and strengthen relationships
with key resellers and system integrators to expand our market
reach.

Moving Forward into Fiscal Year 2003

We have made very significant progress in a short
period of time. Our objective for the coming quarters is to
restore our competitive position in the broad enterprise market
and position Enterasys for future growth. We believe that
resolving the historical accounting issues has removed a
significant barrier to our future progress, setting us on a
clear path to move forward. Accordingly, we are focusing on
forward-looking efforts touching every aspect of the
Company  from product development and sales, to
channel development and supply chain management, with our
customers and partners as the central point of focus. We believe
this will enable us to capitalize on our strengths and
opportunities  clearly distinguishing Enterasys
Networks as a leading provider of broadline data networking
infrastructures for enterprise-class customers.

Thank you for the confidence you have placed in
us. We believe that with the support of our customers, partners
and dedicated employees, we can drive Enterasys into the future,
with the opportunity for solid value creation for our
shareholders.



| |                                     
| | ------------------------------------
| | (-s- William K. O'Brien)            
| | WILLIAM K. OBRIEN                  
| | Chief Executive Officer and Director