---

---




SECURITIES AND
   EXCHANGE COMMISSION


Washington, D.C.
   20549











FORM
   10-K


| | (Mark
     One)
| | ---------------




| | x | ANNUAL
     REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
     1934
| | - | -----------------------------------------------------------------------------------------




| | For the fiscal
     year ended February 29, 2000
| | ------------------------------------------------




OR





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




| | For the
     transition period from
      to
| | --------------------------------------------




Commission File
   Number 1-10228











CABLETRON SYSTEMS,
   INC.


(Exact name of
   registrant as specified in its charter)





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




35 Industrial Way,
   Rochester, New Hampshire 03867


(Address of
   principal executive offices and zip code)











(603)
   332-9400


(Registrants
   telephone number, including area code)





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





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




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


None











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





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





As of May 5, 2000,
   184,535,909 shares of the Registrants common stock were outstanding.
   The aggregate market value of the registrants voting stock held by
   non-affiliates of the registrant as of May 5, 2000 was approximately $5.0
   billion.





DOCUMENTS
   INCORPORATED BY REFERENCE





The following
   documents are incorporated by reference:





Certain portions of
   the Proxy Statement to be filed with the Securities and Exchange Commission
   in connection with the 2000 Annual Meeting of Stockholders is incorporated
   by reference into Part III of this Form 10-K.





---

---




TABLE OF
   CONTENTS





PART
   I





|Item                                                                                                    |  | Page(s)
|------------------------------------------------------------------------------------------------------- |  | -------
|1. Business                                                                                             |  | 3      
|2. Properties                                                                                           |  | 12     
|3. Legal
     Proceedings                                                                               |  | 13     
|4. Submission
     of Matters to a Vote of Security Holders                                             |  | 13     
|Executive Officers of the Registrant                                                                    |  | 13-15  
|                                                                                                        | 
|PART
      II                                                                                          
|                                                                                                        | 
|5. Market
        for the Registrants Common Equity and Related Stockholder
        Matters            |  | 16     
|6. Selected
        Financial Data                                                                      |  | 17-18  
|7. Managements Discussion and Analysis of Financial
        Condition and Results of Operations        |  | 18-38  
|7a. Quantitative and Qualitative Disclosures about Market
        Risk                                  |  | 39-40  
|8. Consolidated Financial Statements and Supplementary
        Data                                     |  | 41-66  
|9. Changes
        in and Disagreements with Accountants on Accounting and Financial
        Disclosure |  | 67     
|                                                                                                        | 
|PART
         III                                                                                      
|                                                                                                        | 
|10. Directors and Executive Officers of the
           Registrant                                       |  | 67     
|11. Executive Compensation                                                                              |  | 67     
|12. Security Ownership of Certain Beneficial Owners and
           Management                           |  | 67     
|13. Certain Relationships and Related
           Transactions                                           |  | 67     
|                                                                                                        | 
|PART
            IV                                                                                    
|                                                                                                        | 
|14. Exhibits, Financial Statement Schedules and
              Reports on Form 10-K                      |  | 68     




PART
            I





ITEM
            1.    BUSINESS





Introduction





Cabletron
            Systems, Inc. (the Company or Cabletron)
            delivers flexible and scalable network access and communications
            equipment and software to Global 2000 enterprises, service
            providers and small businesses worldwide. Cabletrons products
            include standards-based Ethernet, Fast Ethernet, Token Ring, fiber
            distributed data interface (FDDI), asynchronous
            transfer mode (ATM) and wide area networks
            (WAN) networking solutions. The Company provides
            its leading edge business solutions to global customers for
            enterprise connectivity, service provider infrastructures, software
            and professional services by maintaining significant operations in
            the United States, Europe, the Pacific Rim (Pac Rim)
            and other industrialized areas of the world. Cabletron has
            announced its plans to establish four subsidiariesAprisma
            Management Technologies, Enterasys Networks, GlobalNetwork
            Technology Services and Riverstone Networksto enable it to
            focus on the key high-growth areas of the communications
            marketplace, including infrastructure management, enterprise
            e-business, professional services and service providers. On May 24,
            2000, the Company entered into a definitive agreement to sell its
            Digital Network Products Group (DNPG) to Gores
            Technology Group. Cabletron is in the process of evaluating its
            strategic options regarding many of its low port count chassis base
            switching solutions and its NetVantage branded switch products to
            exclusively focus on core, high growth products.





Listed on
            the New York Stock Exchange for more than a decade under the symbol
            CS, Cabletron is an S&P 500 Index Company.
            Effective March 1, 2000, the Company changed its fiscal year-end to
            the Saturday closest to the last day of February. Fiscal year 2001
            will end on March 3, 2001.





A Delaware
            corporation organized in 1988, Cabletrons world headquarters
            is located at 35 Industrial Way, Rochester, New Hampshire 03867,
            and its telephone number is (603) 332-9400. Its website is located
            at http://www.cabletron.com.





Formation
            of Operating Companies





On February
            10, 2000, Cabletron announced its intentions to transform its
            business into four operating subsidiaries to improve the
            Companys focus and agility to capitalize on market
            opportunities and better serve its customers. The four subsidiaries
            are Aprisma Management Technologies, Enterasys Networks,
            GlobalNetworkTechnology Services and Riverstone Networks.
            In order to fully realize the benefits of this new structure, the
            Company has announced that it currently plans to conduct an initial
            public offering for each of these subsidiaries, followed by a
            distribution of the remaining shares of one or more of the
            subsidiaries to the Companys stockholders. It is likely that
            implementation and completion of this plan would take twelve to
            eighteen months. The Company has also announced that it intends to
            issue securities that are convertible into common stock in each of
            these operating subsidiaries to employees of the subsidiaries and
            to private investors. The Company may also consider other strategic
            opportunities, including a sale of the business, assets and
            liabilities associated with one or more of the subsidiaries, if it
            determines that such a transaction is more favorable than the
            initial public offering/distribution alternative.





The Company
            is not obligated to complete any of these strategic transactions
            and no assurance can be given as to whether or when any of these
            strategic transactions will be approved and implemented. For
            example, an initial public offering of any of the subsidiaries will
            depend on each of their individual performance, market conditions
            and similar considerations. Any distribution of the remaining
            shares of a subsidiary to the Companys stockholders,
            following an initial public offering, may depend upon receipt from
            the Internal Revenue Service of


a ruling
            that such distribution will be tax-free to the Companys
            stockholders and that the transaction would qualify as a tax-free
            reorganization. Any such strategic transaction would only be
            implemented if the Board of Directors of the Company continues to
            believe that it is in the best interest of each of the subsidiaries
            and the Companys stockholders.





The four
            subsidiaries and their intended products and services are as
            follows:





| | · | Aprisma
              Management Technologies, Inc. (Aprisma) expects to
              focus on delivering infrastructure management software for
              service provider and enterprise markets based around the
              Companys flagship Spectrum® software suite. The Company
              believes that Aprisma will continue to incorporate new, cutting
              edge technology in its offerings of intuitive multi-vendor
              management solutions to meet the service level requirements of
              enterprise and service provider customers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · | Enterasys
              Networks, Inc. (Enterasys) expects to focus on
              enterprise-class customers. By optimizing enterprise network
              solutions for e-business applications, and by providing global
              service and support 24 hours per day, 7 days per week, Enterasys
              plans to provide its enterprise customers with a competitive
              advantage through information technology
              infrastructure.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · | GlobalNetworkTechnologies Services, Inc.
              (GNTS) expects to provide network infrastructure
              solutions that optimize application availability and network
              performance through the design, performance, management and
              security of complex networks. With consultants in more than 66
              locations spanning the globe, GNTS plans to provide network
              infrastructure solutions that optimize application availability
              and performance to enterprise and service provider
              clients.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · | Riverstone
              Networks, Inc. (Riverstone) expects to focus
              exclusively on the data center needs of co-location, content
              hosting and application service providers (ASPs), as
              well as the infrastructure needs of internet service providers
              (ISPs), multi-service operator (MSOs) and
              metro network providers. Riverstone intends to offer
              application-aware switch routers, intelligent load balancers, web
              cache redirectors and software tools for provisioning, billing,
              accounting, monitoring, fault isolation and service level
              management.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Fiscal 2000
            Divestitures





On February
            29, 2000, the Company sold its manufacturing and repair services
            operations located in Rochester, New Hampshire and Limerick,
            Ireland to Flextronics International (Flextronics) for
            approximately $78.6 million in cash. Flextronics purchased, at net
            book value, approximately $18.1 million of the Companys
            manufacturing related fixed assets including buildings, assumed
            leases on certain leased buildings, and hired approximately 970 of
            the Companys manufacturing related employees. As part of the
            separation agreement with the manufacturing employees, the Company
            accelerated certain stock option vesting resulting in a $4.7
            million compensation charge. In addition, Flextronics purchased the
            Companys inventory with a cost of approximately $65.1 million
            for $60.5 million. Simultaneously, the Company entered into an
            agreement with Flextronics to manufacture most of its products as
            an original equipment manufacturer (OEM).





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





Fiscal 1999
            Acquisitions





On September
            25, 1998, Cabletron acquired NetVantage, Inc.
            (NetVantage), a publicly held manufacturer of Ethernet
            workgroup switches. Under the terms of the Merger Agreement,
            Cabletron issued 6.4 million shares of Cabletron common stock to
            the shareholders of NetVantage in exchange for all of the
            outstanding shares of stock of NetVantage. In addition, Cabletron
            assumed 1,309,000 options, valued at approximately $4.8 million.
            Cabletron recorded the cost of the acquisition at approximately
            $77.8 million, including direct costs of $4.2 million. This
            acquisition has been accounted for under the purchase method of
            accounting.





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





On September
            1, 1998, Cabletron acquired the assets and assumed certain
            liabilities of the DSLAM division of Ariel Corporation
            (Ariel), a privately held designer and manufacturer of
            digital subscriber line access multiplexor products. Cabletron
            recorded the cost of the acquisition at approximately $45.1
            million, including fees and expenses of $1.1 million related to the
            acquisition, which consisted of cash payments of $33.5 million and
            other assumed liabilities. This acquisition has been accounted for
            under the purchase method of accounting.





On March 17,
            1998, Cabletron acquired Yago Systems, Inc. (Yago), a
            privately held manufacturer of wire-speed routing and Layer-4
            switching products and solutions. Under the terms of the merger
            agreement, Cabletron issued 6.0 million shares of Cabletron common
            stock to the shareholders of Yago in exchange for all of the
            outstanding shares of Yago, not then owned by Cabletron. Prior to
            the closing of the acquisition, Cabletron held approximately 25% of
            Yagos capital stock, calculated on a fully diluted basis.
            Cabletron also agreed, pursuant to the terms of the merger
            agreement, to issue up to 5.5 million shares of Cabletron common
            stock to the former shareholders of Yago in the event the shares
            originally issued in the transaction did not attain a market value
            of $35 per share eighteen months after the closing of the
            transaction. On September 8, 1999, Cabletron issued approximately
            5.2 million shares of Cabletron common stock to the former
            shareholders of Yago, pursuant to the terms of the merger
            agreement. Cabletron recorded the cost of the acquisition at
            approximately $165.7 million, including direct costs of $2.6
            million. This acquisition has been accounted for under the purchase
            method of accounting.





Fiscal 1998
            Acquisitions





Effective
            February 7, 1998, Cabletron consummated the acquisition of certain
            assets of the Network Products Group (NPG) of Digital
            Equipment Corporation. The NPG, now known as the DIGITAL
            Network Products Group (DNPG), develops and
            supplies a wide range of data networking hardware and software,
            including LAN and WAN products. DNPGs products span a wide
            range of networking technologies, including Ethernet, Fast
            Ethernet, FDDI and ATM switching technologies. The purchase price
            for the acquisition was approximately $439.5 million, before
            closing adjustments, consisting of cash, product credits and
            assumed liabilities as a result of the acquisition. The acquisition
            has been accounted for under the purchase method of
            accounting.





Products
            and Services





Cabletrons smart networking solutions,
            comprised of high-speed, fault-tolerant SmartSwitches;
            full-function, wire-speed SmartSwitch routers; and the
            fully-distributed, multivendor Spectrum Enterprise Management
            platform, work together to create an enterprise solution that is
            designed to meet the demands of todays business environments.
            The Companys products maximize reliability through features
            such as fully-redundant power systems, distributed switching,
            scalability and superior manageability. All of these products are
            backed by the Companys award-winning global service and
            support staff.





During the
            year ended February 29, 2000, Cabletron sold all of the products
            more particularly described below. In order to present
            Cabletrons business as it will exist following its proposed
            transformation, its products and services are organized below by
            the operating subsidiary that will sell the particular product or
            service following the proposed transformation.








Aprisma Management Technologies,
            Inc.





Aprisma will
            develop, market and support e-business infrastructure management
            software solutions that deliver service assurance capabilities on a
            global basis. Spectrum, Aprismas flagship product, views the
            whole of IT as a system managed in terms of Service Level
            Agreements (SLA). The Spectrum software suite bridges
            the gap between legacy network management platforms and technology
            point tools, providing enterprise IT organizations and service
            providers visibility and control of the networks, systems and
            applications critical to their businesses.





Aprismas Spectrum suite of management software offers a
            comprehensive solution that shortens the time required to resolve
            problems, reduces the number of tools required to accomplish
            network management tasks, and addresses the critical need for
            ensuring application and e-business response time and service
            availability.





Spectrum
            offers solutions that include:





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





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





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





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





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





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





Enterasys Networks,
            Inc.





Enterasys
            will offer Cabletrons family of smart products,
            including SmartSwitches, SmartSwitch Routers (SSR),
            SmartSTACKs, wireless RoamAbout solutions, and Spectrum Enterprise
            Management, to enable users to maximize performance while
            cost-effectively migrating to next-generation technologies. This
            comprehensive family of solutions is meant to be implemented in
            both legacy and newer network environments with minimal disruption
            while preserving existing investments and providing genuine
            scalability for future networking requirements.





TheSmartSwitch Router,a best-of-breed gigabit switch router,
            combines the speed of a switch with the efficiency and security of
            a router. The SmartSwitch Router delivers more than 100 times the
            performance of traditional routers at a rate of 30 million
            packets/cells per second (pps) with zero packet loss and no
            degradation in performance when value-added services are
            fully-enabled. These products were designed to integrate the
            customers legacy systems and deliver highly fault tolerant
            performance, all at a fraction of the cost of comparable
            solutions.





SmartSwitchescombine inherent scalability and manageability with
            cost-effectiveness to provide high-end switching capabilities for
            all environments, from the workgroup (SmartSTACK and SmartSwitch
            2000/2500), to the wiring closet (SmartSwitch 6000/6500) or to the
            data center (SmartSwitch 9000/9500) environments. These products
            utilize standards-based ASIC chips that are designed to be fully
            manageable and interoperable with pre-existing equipment. These
            products are available as modular-based chassis systems or in
            stand-alone capacity.





Enterasys
            will offer a full line of ATM SmartSwitches that provide high-speed
            uplinks of LAN workgroups, interconnect data centers, support
            bandwidth-heavy multimedia applications and allow access to public
            ATM services. A SmartSwitch ATM Administrator is designed to
            improve network performance, reduce operational complexity and cut
            network ownership costs.





WAN
            Productsare designed to allow the customer to scale, plan and
            manage their central-site solutions to meet specific remote
            access/WAN requirements while managing and controlling these remote
            sites (including a small office or home office
            environment)all from a single location.





Enterasys
            will offer Aprismas Spectrum network management software to
            enable enterprise customers to manage their complex multivendor IT
            infrastructures. Enterasys will offer Spectrum through a reseller
            agreement with Aprisma.





Security
            Solutionsprograms provide a line of products for Internet
            security applications through an agreement with Nokia that combines
            Cabletrons routing capabilities with Nokias IPSOTM
            routing operating system and Check PointFireWall-1TM, best-of-breed
            firewall software. Enterasys will provide a comprehensive security
            solution for Internet access and Virtual Private Networking
            (VPN).





Service
            and Support,in addition to its broad line of network
            equipment, Enterasys will offer a wide range of support services,
            including maintenance; consulting; design and configuration;
            product planning; project management; training; testing;
            certification and documentation; and performance analysis.
            Enterasys will offer some of these services directly and some
            through GNTS. Enterasys will offer comprehensive training programs
            to ensure that customers receive the maximum benefit from their
            networks. With more than 100 sales and support offices worldwide,
            Enterasys service and support group constitutes a key element
            of the complete networking solution that will be offered by
            Enterasys.





GlobalNetwork Technologies,
            Inc.





GNTS is the
            Companys professional services group that will focus on
            providing network infrastructure solutions that optimize
            application availability and network performance for enterprise
            customers, service providers and service partners. GNTS offers a
            broad range of services using the scalable GNTS Powered Services
            model where intellectual property and standard methodology are used
            to aid partners and direct resources in the delivery of services.
            GNTS area of focus will be Internetworking design, network
            assessment and optimization, network management, outsourcing and
            information assurance.





GNTS will
            provide the following services:





Internetworking Design, to design and build-up of network
            solutions in support of e-commerce and other strategic business
            initiatives.





Network
            Assessment and Optimization, to provide assessment and
            optimization of clients network hardware and design to take
            advantage of cost savings opportunities, performance improvement,
            reduced downtime, and new technologies.





Network
            Management, to provide services aimed at improving the price,
            performance and scalability of the clients network management
            application.





Outsourcing, to provide complete outsourced network
            solutions that better enable the client to focus on their core
            business, while avoiding significant investments in tools, support
            infrastructure and internal staff. The Continuous Improvement
            Process (CIP) is a GNTS service to help meet
            clients SLA.





Information
            Assurance, critical networking solutions for the Internet
            community, including e-commerce solutions, Internet connectivity,
            security assesment and assurance, security system design and
            training.





Riverstone
            Networks





Riverstone
            is focused on emerging content and infrastructure service providers
            in the new metropolitan area network. Riverstones solutions
            meet the infrastructure needs of ISPs, MSOs and metro network
            providers, as well as the data center needs of co-location, content
            hosting and ASPs. Riverstones products include Internet
            routers, application-aware switch routers, intelligent load
            balancers, web cache redirectors and software tools for
            provisioning, accounting, billing, monitoring, fault isolation and
            service level management.





RS8000
            and 8600.    Formerly known as the SSR 8000
            and 8600, Riverstone has re-branded these products the RS 8000 and
            RS 8600 and future development will continue to focus on service
            provider enhancements to these leading edge products. Built for
            service providers, Riverstone Networks chassis-based RS
            family combines wire-speed routing with integrated LAN/WAN
            capability, pinpoint control of application flows, and superior
            routing table capacity. Key applications include POP site and NOC
            center buildout as well as traffic aggregation or load balancing in
            hosting environments. The RS family delivers wire-speed
            standards-based IP routingboth unicast and
            multicast.





RS 2000
            and 2100.Riverstone Networks
            compact RS 2000 and 2100 (formerly known as the SSR 2000 and 2100)
            are the leading low-cost wire-speed platform. Key applications
            include building out 100 MB to 1 Gigabit Ethernet backbones, and
            traffic aggregation for multi-tenant unit opportunities, or for
            content and application hosting environments where top performance
            is required and space is a premium. Both the RS 2000 and 2100
            deliver wire-speed standards-based IP routingboth unicast and
            multicast.





The RS 8000
            and RS 2000 series are the only switch routers proven to
            maintain wire-speed layer 2/3 and 4 switching and routing with all
            features enabled. Prioritization, filtering or Quality policies can
            be extended across the entire network, to allocate appropriate
            resources to groups of users, or specific applications. This
            feature-rich application-aware platform enables pinpoint control of
            bandwidth and is optimized for establishing and policing Service
            Level Agreements (SLAs). Detailed accounting information can
            be gathered enabling direct confirmation that SLAs are being met.
            Accounting capability is enabled through the standards-based
            Lightweight Flow Accounting Protocol.





Internet
            Appliance (IA) 1100 and 1200.Designed
            for high-performance hosting environments, Riverstone
            Networks IA 1100 and 1200 provide line rate device load
            balancing, traffic load balancing and traffic policing. With the
            exponential growth of traffic on the Internet, the IA family
            ensures that visitors to an internet site are able to complete
            their transactions seamlesslywhether downloading information,
            buying products or upgrading account status. The IA family brings a
            unique combination of security, reliability, control and
            performance to a hosting solution.





Distribution and Marketing





The Company
            has strengthened and expanded its relationship with distributors
            and resellers over the last several years. These distributors and
            resellers commit to focusing on the customers needs and providing
            quality professional service support to the end-user in addition to
            carrying the Companys line of products. The Company extends
            limited product return and price protection rights to certain
            distributors and resellers. These rights are generally limited to a
            certain percentage of sales over primarily a three month period. In
            addition to the Companys use of distributors and resellers,
            the Company maintains its own direct sales force with
            representatives located around the world. The direct sales force is
            supplemented by employees located at Cabletrons headquarters
            and regional in-house technical services and sales support staff.
            The Company believes that its ratio of in-house sales, marketing
            and technical services and sales support staff to field sales staff
            contributes significantly to the effectiveness of its field sales
            staff.





The
            Companys international locations use various sales strategies
            tailored to the preferred channels of distribution for each
            country. These strategies include a direct sales presence, a direct
            sales force working with local distributors or a combination of the
            two.





The
            CompanysSynergy Plus Program sets forth the
            principles of the relationship between the Company and the
            reseller, including information and training, business support and
            services, pricing structure, and levels of organization.Synergy
            Plus offers a comprehensive, well-defined business strategy, a
            clear pricing policy, and effective support in sales and
            marketing.





Following
            the Companys transformation into four new companies,
            Enterasys will continue to offer its products and services through
            the Companys existing distributors and resellers. Aprisma,
            GNTS and Riverstone may offer their products and services through
            these existing distributors and resellers, particularly outside the
            United States, but will likely develop new partners over time. In
            particular, Aprisma, GNTS and Riverstone will initially use
            Enterasys itself as a significant reseller both domestically and
            internationally.





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





Customers





The
            Companys end-user customers include brokerage, investment
            banking firms and other financial institutions; federal, state and
            local government agencies; commercial, industrial and manufacturing
            companies; multinational and international companies;
            telecommunications companies; internet service providers; health
            care facilities; insurance companies; universities; and leading
            accounting and law firms. The four new companies will continue to
            sell to the same customer base with one distinction: Riverstone
            will sell its products and services nearly exclusively to service
            providers and Enterasys will sell its products and services nearly
            exclusively to enterprise customers and not to service
            providers.





During the
            year ended February 29, 2000, the Company had one customer, Compaq,
            which accounted for 16% of net sales and 8% of total accounts
            receivable, and the United States federal government accounted for
            approximately 14% of net sales. During the year ended February 28,
            1999, the Company had one customer, Compaq, which accounted for 11%
            of net sales and 7% of total accounts receivable, and the United
            States federal government accounted for approximately 14% of net
            sales. Cabletrons top ten customers, excluding the United
            States federal government, represented, in the aggregate,
            approximately 28% and 22% of its net sales for the years ended
            February 29, 2000 and February 28, 1999, respectively. During the
            year ended February 29, 2000, the Company and Compaq entered into a
            new alliance agreement that is expected to result in lower sales to
            Compaq, but may result in higher direct sales to Compaqs
            channel partners. On May 23, 2000, the Company entered into a
            definitive agreement to sell DNPG. If this sale is consummated, it
            will result in lower overall sales to Compaqs channel
            partners. Most of the Companys contracts with the United
            States federal government are on a fixed-price basis. The books and
            records of the Company are subject to audit by the General Services
            Administration, the Department of Labor and other government
            agencies.





Research
            and Development





During the
            years ended February 29, 2000, February 28, 1999 and 1998, research
            and development expenses (R&D) were $184.6 million,
            $210.4 million and $181.8 million, respectively. The Company has
            consistently invested in R&D, because it believes its future
            success will be largely dependent on new product development. The
            Company believes that as customers place more reliance on their
            networks and those networks grow larger and more complex, customers
            will evaluate their network technology more formally, particularly
            in the area of network control management; thus the Company has
            continued to emphasize its R&D efforts in areas identified as
            most valuable to customers.





As part of
            its March 1999 restructuring initiative and through strategic
            decisions, the Company discontinued research on non-core technology
            projects and focused on core projects only. Through the elimination
            of non-core R&D projects, the Company was able to reduce its
            R&D expense by lowering the total number of engineers focused
            on research and development efforts. Examples of the streamlining
            include the Companys strategic decision to sell the digital
            subscriber line modem business acquired in the FlowPoint
            acquisition, the Companys discontinuation of its research
            efforts related to the digital subscriber line access multiplexor
            products acquired in the Ariel acquisition, and the Companys
            discontinuation of its research efforts on Fast Ethernet products
            acquired in the DNPG acquisition. The Company is currently
            reviewing its strategic options regarding the ethernet workgroup
            switch technology acquired in the NetVantage acquisition. The
            Company continues to develop products from its acquisition of Yago,
            including Layer-4 switching products and solutions.





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





Supply of
            Components





The
            Companys products include certain components, including
            application specific integrated circuits (ASICs), that
            are currently available from single or limited sources, some of
            which require long order lead times. In addition, certain of the
            Companys products and subassemblies are manufactured by
            single-source third parties. With the increasing technological
            sophistication of new products and the associated design and
            manufacturing complexities, the Company anticipates that it may
            need to rely on additional single-source or limited suppliers for
            components or manufacture of products and subassemblies. Any
            reduction in supply, interruption or extended delay in timely
            supply, variances in actual needs from forecasts for long order
            lead time components, or change in costs of components could affect
            Cabletrons ability to deliver its products in a timely and
            cost-effective manner and may adversely impact the Companys
            operating results and supplier relationships. Following the
            transformation, the risks associated with component supply
            shortages will principally affect Riverstone and Enterasys and not
            GNTS or Aprisma.





Manufacturing





From
            inception through February 29, 2000, Cabletron manufactured and
            assembled most of its products. However, the recent emergence of
            credible, third-party OEM manufacturers led the Company to
            re-evaluate the manufacture and assembly processes related to its
            products. During the year ended February 29, 2000 Cabletron
            completed the outsourcing of 100% of its manufacturing activities
            to a few OEM manufacturers and sold its manufacturing operations in
            Rochester, New Hampshire and Limerick, Ireland to Flextronics (its
            primary OEM). The Company believes that these third-party
            manufacturers will be able to satisfy Cabletrons high quality
            standards in a timely and cost-effective manner. Following the
            transformation, Enterasys and Riverstone will
          continue to have their products manufactured by the Companys
            current third party manufacturers. GNTS and Aprisma do not offer
            products that require third-party manufacturers.





In
            connection with the Companys sale of its manufacturing
            facilities in Rochester, New Hampshire and Limerick, Ireland to
            Flextronics, the Company and Flextronics entered into a supply
            agreement under which Flextronics will supply the products formerly
            manufactured using these assets to the Company. The supply
            agreement includes initial pricing for the products that
            Flextronics will supply to Cabletron under the agreement and
            provides for the periodic repricing of these products, allowing the
            Company to benefit from future cost savings. The term of the
            agreement is two years.





Competition





The data
            networking industry is intensely competitive and subject to
            increasing consolidation. Competition in the data networking
            industry has increased in recent periods, and Cabletron expects
            competition to continue to increase significantly in the future
            from its current competitors, as well as from potential competitors
            that may enter the Companys existing or future markets. The
            Companys competitors include many large domestic and foreign
            companies, as well as emerging companies attempting to sell
            products to specialized markets addressed by Cabletron.
            Cabletrons primary competitors in the data networking
            industry are Alcatel, Cisco Systems, Inc., Ericsson, Lucent
            Technologies, Inc., Nokia Corp., Northern Telecom Ltd. and Siemens.
            Following the transformation, Enterasys will have the same
            competitors. Riverstone will primarily compete with these same
            competitors and additionally will compete with Extreme Networks,
            Foundry Networks and Juniper Networks. Aprisma will compete
            primarily with Hewlett Packards OpenView, IBMs Tivoli,
            BMC Software, Visual Networks and Micromuse Corp. GNTS will compete
            primarily with Predictive Systems, Inc. and with the professional
            service organizations of large telecommunications companies such as
            Compaq and IBM. These competitors compete upon the basis of price,
            technology, and brand recognition. Competitors may introduce new or
            enhanced products that offer greater performance or functionality
            than the products and services of Aprisma, Enterasys, GNTS and
            Riverstone. Increased competition could result in price reductions,
            reduced margins and loss of market share, any or all of which could
            increase fluctuations in operating results and materially and
            adversely affect the business, financial condition and operating
            results of Aprisma, Enterasys, GNTS and Riverstone.





Intellectual Property





The
            Companys success depends in part on its proprietary
            technology. The Company attempts to protect its proprietary
            technology through patents, copyrights, trademarks, trade secrets
            and license agreements. There can be no assurance that the steps
            taken by the Company in this regard will be adequate to prevent
            misappropriation of its technology or that the Companys
            competitors will not independently develop technologies that are
            substantially equivalent or superior to the Companys
            technology. In addition, the laws of some foreign countries may not
            protect the Companys proprietary rights to the same extent as
            do the laws of the United States. The Company has been issued a
            number of patents and has other patent applications pending. There
            is no assurance that patents will be issued from pending
            applications, or that claims allowed on any future patents will be
            sufficiently broad to protect the Companys technology. No
            assurance can be given that any patents issued to the Company will
            not be challenged, invalidated or circumvented or that the rights
            granted thereunder will provide competitive advantages. As part of
            the transformation, the Company will assign its proprietary
            technology to the applicable new company. The four new companies
            will each seek to protect their respective proprietary intellectual
            property in a manner similar to the Company.





Backlog





The
            Companys backlog at February 29, 2000 was approximately
            $118.0 million, compared with backlog at February 28, 1999 of
            approximately $170.0 million. During the year ended February 29,
            2000, the Company and Compaq agreed to restructure their
            relationship. The new relationship has resulted in the Company
            maintaining a lower amount of backlog related to Compaq. In
            general, orders included in backlog may be canceled or
          rescheduled by the customer without significant penalty. Therefore,
            backlog as of any particular date may not be indicative of the
            Companys actual sales for any succeeding fiscal
            period.





Inventory
            and working capital





The Company
            has sold a portion of its inventory to Flextronics, increased its
            focus on supply chain management and streamlined its product
            offerings which has resulted in inventory levels decreasing from
            $229.5 million, at February 28, 1999, to $85.0 million, at February
            29, 2000, while still maintaining what the Company believes are
            sufficient inventory levels that allow for shipment of most
            customer orders in a timely manner. In addition, working capital
            increased as a result of the Companys sale of its FlowPoint
            subsidiary and fixed assets that related to manufacturing
            operations, as the Company completed its outsourcing of
            manufacturing. As of February 29, 2000, working capital was $448.2
            million compared to $370.9 million at February 28,
            1999.





Employees





As of
            February 29, 2000, the Company had approximately 4,456 full-time
            employees compared to 5,951 full-time employees as of February 28,
            1999. The decrease resulted from the Companys outsourcing
            arrangement with Flextronics, which resulted in approximately 970
            employees transferring to Flextronics, and the termination of 418
            full-time employees in accordance with the Companys
            restructuring initiative announced in March 1999. The
            Companys employees are not represented by a union or other
            collective bargaining agent and the Company considers its relations
            with its employees to be good.





See
            Business Environment and Risk Factors beginning on page
            32 for additional information.





Domestic
            and Foreign Financial Information





Financial
            information concerning foreign and domestic operations is contained
            in Note 15 of Notes to the Consolidated Financial
            Statements included at page 58 of this document.





ITEM
            2.    PROPERTIES





Cabletron
            owns and occupies a number of buildings in Rochester, New
            Hampshire, including a 206,000 square-foot manufacturing facility
            which houses a portion of corporate engineering, in addition to
            manufacturing facilities which are being converted to office use.
            Other buildings, totaling 122,000 square-feet, accommodate sales,
            marketing, administration and technical support personnel. On
            February 29, 2000 another building, which had served as a
            warehousing and distribution facility, totaling 208,000 square
            feet, was sold to Flextronics. As a result of the Flextronics
            arrangement, the Company expects to have sufficient manufacturing
            capacity through use of its contract manufacturers.





In addition
            to owning numerous buildings, the Company leases other facilities.
            Cabletron leases a variety of buildings for R&D and engineering
            including a 78,000 square-foot facility in Durham, New Hampshire, a
            facility totaling 68,000 square feet in Nashua, New Hampshire and a
            152,000 square-foot building in Andover, Massachusetts. The Company
            has entered into various leases in Ireland to support its
            international sales activities. Through February 29, 2000,
            Cabletron occupied a 100,000 square-foot manufacturing facility in
            Limerick, Ireland. As part of the outsourcing of manufacturing to
            Flextronics, the Company will sublease this facility to
            Flextronics. The Company continues to lease a 75,000 square-foot
            distribution center in Shannon, Ireland. Cabletron has consolidated
            its west coast operations in a 129,000 square-foot facility in
            Santa Clara, California. The Company also continues to occupy a
            41,000 square-foot facility in Salt Lake City, Utah. Cabletron also
            leases sales and technical support offices that range from 1,000 to
            25,000 square feet at various locations throughout the
            world.





During the
            year ended February 29, 2000, the Company consolidated some
            facilities and staff as a result of a restructuring plan that was
            announced in March 1999. As part of this consolidation, the Company
            sold an engineering facility in Merrimac, NH totaling 115,000
            square feet, housed on a 54 acre site.





Financial
            information regarding leases and lease commitments are contained in
            Note 10 of Notes to the Consolidated Financial
            Statements included at page 55 of this document.





ITEM
            3.    LEGAL PROCEEDINGS





As
            previously disclosed in Cabletrons annual reports on Form
            10-K for the years ended February 28, 1999 and 1998, a consolidated
            class action lawsuit purporting to state claims against Cabletron
            and certain officers and directors of Cabletron was filed in the
            United States District Court for the District of New Hampshire and,
            following transfer, is pending in the District of Rhode Island. The
            complaint alleges that Cabletron and several of its officers and
            directors disseminated materially false and misleading information
            about Cabletrons operations and acted in violation of Section
            10(b) and Rule 10b-5 of the Exchange Act during the period between
            March 3, 1997 and December 2, 1997. The complaint also alleges that
            certain of the Companys alleged accounting practices resulted
            in the disclosure of materially misleading financial results during
            the same period. More specifically, the complaint challenged the
            Companys revenue recognition policies, accounting for product
            returns, and the validity of certain sales. The complaint does not
            specify the amount of damages sought on behalf of the class.
            Cabletron and other defendants moved to dismiss the complaint and,
            by Order dated December 23, 1998, the District Court expressed its
            intention to grant Cabletrons motion to dismiss unless the
            plaintiffs amended their complaint. The Plaintiffs timely served a
            Second Consolidation Class Action Complaint, and the Company has
            filed a motion to dismiss this second complaint. A ruling on that
            motion is not expected earlier than June 2000. The legal costs
            incurred by Cabletron in defending itself and its officers and
            directors against this litigation, whether or not it prevails,
            could be substantial, and in the event that the plaintiffs prevail,
            the Company could be required to pay substantial damages. This
            litigation may be protracted and may result in a diversion of
            management and other resources of the Company. The payment of
            substantial legal costs or damages, or the diversion of management
            and other resources, could have a material adverse effect on the
            Companys business, financial condition or results of
            operations.





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





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





Executive
            Officers of the Registrant





The
            executive officers of the Company are as follows:





|Name                               |  | Age |  | Position                                                                                                        
|---------------------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------
|Thomas D.
              Bunce      |  | 56  |  | Executive
              Vice President, Product Development                                                     
|Enrique P.
              Fiallo    |  | 47  |  | President
              of Enterasys Networks                                                                   
|Thomas N.
              Gleason    |  | 36  |  | Executive
              Vice President, North American/South
            
            American Sales            
|Earle S.
              Humphreys   |  | 54  |  | President
              of GlobalNetworkTechnology Services                                                     
|Eric
              Jaeger          |  | 37  |  | Executive
              Vice President of Corporate Affairs                                                     
|David J.
              Kirkpatrick |  | 48  |  | Corporate
              Executive Vice President of Finance and Chief
            
            Financial Officer
|Piyush
              Patel         |  | 44  |  | Chief
              Executive Officer and President                                                             
|Romulus S.
              Pereira   |  | 34  |  | President
              of Riverstone Networks                                                                  
|John J.
              Roese        |  | 30  |  | Chief
              Technology Officer                                                                          
|Joseph H.
              Solari     |  | 58  |  | President
              of Europe, Middle East and Africa                                                       
|Michael A.
              Skubisz   |  | 33  |  | President
              of Aprisma Management Technologies, Inc.                                                
|Gary M.
              Workman      |  | 53  |  | President
              of Operations, Asia Pacific                                                             




Thomas D. Buncehas been with Cabletron for six years, serving since 1997 as
            Executive Vice President of Product Development. Prior to joining
            Cabletron, he served as Vice President of Engineering and
            Operations for Lucas Duralith. Prior to joining Lucas Duralith, he
            served as Vice President of Engineering and Operations for the
            Mupac Corporation.





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





Thomas N.
            Gleasonhas served as Executive Vice President of North
            American/South American Sales, since September 1999. From April
            1999 to September 1999, he served as Regional Vice President of
            North America. From November 1990 to March 1999, he held a variety
            of sales management positions at Cabletron. Prior to joining
            Cabletron, he held various positions at IBM during a 4-year
            tenure.





Earle S.
            Humphreyshas served as President of GlobalNetworkTechnology Services since February 2000. From July 1998 through
            February 2000, he was Executive Vice President of Global Services.
            Prior to joining Cabletron, he served as Senior Director of
            Services Solution Marketing at Compaq Computer Corp. Prior to
            joining Compaq, he held a variety of senior management roles,
            including Vice President of Consulting Services at Tandem
            Computers, during a 10-year tenure.





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





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





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





Romulus
            S. Pereirahas served as President of Riverstone Networks since
            February 2000. From June 1999 through February 2000, he was Chief
            Operating Officer. From March 1998 to June 1999, he served as
            general manager of Cabletrons service provider business.
            Prior to joining Cabletron, he served as Chief Technology Officer
            and Vice President of Engineering of Yago Systems. Prior to
            co-founding Yago Systems with Piyush Patel, he held various
            technical roles at Cisco Systems, Kalpana and Wollongong
            Group.





John J.
            Roesehas served as Chief Technology Officer since October
            1999. Since 1991, he has held various positions at Cabletron,
            including Senior Technical Director of Engineering, Deputy Chief
            Technology Officer, Director of Systems Engineering, Senior Product
            Manager and Senior Technical Trainer.





Joseph H.
            Solariserved as President of Europe, Middle East and Africa
            from August 1997 through March 2000, his date of separation from
            the Company. Prior to joining Cabletron, he served as President and
            CEO of Zenith Data Systems S.A., a division of Groupe Bull. Prior
            to joining Zenith, he held a variety of positions in sales and
            management within the electronics and computer industries,
            including an 18-year tenure at Schlumberger Ltd.





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





Gary M.
            Workmanhas served as President of Operations in the Asia
            Pacific region since January 1999. Prior to joining Cabletron, he
            held a variety of senior management positions with Anixter
            International, Inc., including Senior Vice President of the Western
            Group and President of Asia Pacific, during a 25-year
            career.





Key
            Personnel





On June 3,
            1999, Piyush Patel was appointed to the positions of President,
            Chief Executive Officer and Chairman and Craig R. Benson resigned
            as President, Chief Executive Officer, Chairman and Treasurer. Mr.
            Benson has remained a member of the Companys Board of
            Directors. The Companys success is dependent in large part on
            Mr. Patel and other key technical, sales and management personnel.
            The loss of one or more of these individuals could adversely affect
            the Companys business.





PART
            II





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





STOCK
            PRICE HISTORY





The
            following table sets forth the high and low sale prices for the
            Companys Common Stock as reported on the New York Stock
            Exchange (symbolCS) during the last two fiscal years. As of
            May 5, 2000, the Company had approximately 2,821 stockholders of
            record. The Company has paid no dividends on its Common Stock and
            anticipates it will continue to reinvest earnings to finance future
            growth.





|                             |  | High   |  | Low    
|---------------------------- |  | ------ |  | -------
|Fiscal
              2000    |  |        |  |        
|First
              quarter  |  | $15.31 |  | $  7.25
|Second
              quarter |  | 16.81  |  | 11.94  
|Third
              quarter  |  | 24.38  |  | 14.81  
|Fourth
              quarter |  | $49.00 |  | $22.00 
|                            
|Fiscal
              1999    |  |        |  |        
|First
              quarter  |  | $15.56 |  | $12.50 
|Second
              quarter |  | 14.31  |  | 6.63   
|Third
              quarter  |  | 15.31  |  | 6.63   
|Fourth
              quarter |  | $14.38 |  | $  7.69




ITEM
            6.    SELECTED FINANCIAL DATA





CABLETRON
            SYSTEMS, INC.





|                                                                                                  |  | Fiscal
              Year Ended
|------------------------------------------------------------------------------------------------- |  | -------------------------------
|
|
|Statement of Operations Data:                                                                     |  |                                
|Net
              sales                                                                           |  | $1,459,593                     
|Cost of
              sales                                                                       |  | 817,844                        
|Research
              and development                                                            |  | 184,614                        
|Selling,
              general and administrative                                                 |  | 400,544                        
|Amortization of intangible assets                                                                 |  | 41,270                         
|Special
              charges                                                                     |  | 21,096                         
|                                                                                                  |  |                                
|Income (loss) from operations                                                                     |  | (5,775                         
|Interest
              income, net                                                                |  | 18,587                         
|Other
              income, net                                                                   |  | 746,209                        
|                                                                                                  |  |                                
|Income (loss) before taxes                                                                        |  | 759,021                        
|Income tax
              expense (benefit)                                                        |  | 294,750                        
|                                                                                                  |  |                                
|Net income
              (loss)                                                                   |  | $    464,271                   
|                                                                                                  |  |                                
|Net income
              (loss) per sharebasic                                                   |  | $        
                2.62 
|                                                                                                  |  |                                
|Net income
              (loss) per sharediluted                                                 |  | $        
                2.46 
|                                                                                                  |  |                                
|Weighted
              average number of shares
            
                 outstandingbasic   |  | 177,541                        
|                                                                                                  |  |                                
|Weighted
              average number of shares
            
                 outstandingdiluted |  | 188,618                        
|                                                                                                  |  |                                




Note:Included in fiscal 2000
            results are charges related to the write-off related to
            discontinuations of several product lines ($9.8 million, net of
            tax), amortization of intangible assets related to purchased
            acquisitions ($21.2 million, net of tax), the write-off of goodwill
            associated with the closing of the Ariel operations ($9.0 million,
            net of tax) which is included in amortization of intangible assets,
            the implementation of a restructuring plan ($12.9 million, net of
            tax), other income and expenses related to the Companys sale
            of its FlowPoint subsidiary ($421.5 million, net of tax), and the
            income from its new alliance agreement with Compaq Computer
            Corporation (Compaq) ($25.8 million, net of tax).
            Included in fiscal 1999 results are charges related to amortization
            of intangible assets related to purchased acquisitions ($18.3
            million, net of tax), special charges ($207.2 million, net of tax)
            related to the acquisitions of Yago Systems, Inc., the DSLAM
            division of Ariel Corporation, FlowPoint Corp. and NetVantage, Inc.
            and $10.4 million, net of tax, related to fixed asset loss for
            idle, obsolete and discarded equipment. Included in fiscal 1998
            results are special charges related to the acquisition of
            Digitals Network Products Group and the implementation of a
            strategic realignment plan consisting of $121.8 million and $21.5
            million, net of tax, respectively. Included in fiscal 1997 and
            fiscal 1996 results are $13.5 million, net of tax, and $60.8
            million, net of tax, of special charge items related to all
            acquisitions for each fiscal year, respectively. Excluding the
            aforementioned charges, the amortization of intangible assets and
            other income, pro forma net income (loss) and pro forma diluted net
            income (loss) per share are as follows:





|                                                                                          |  | Fiscal
              Year Ended
|----------------------------------------------------------------------------------------- |  | -------------------------------
|
|
|
|Pro forma
              net income (loss)                                                 |  | $69,917                        
|Pro forma
              diluted net income per share
            
                 (loss) |  | $    0.37                      




|                                  |  | Fiscal
              Year Ended
|--------------------------------- |  | -------------------------------
|
|
|Balance
              Sheet Data: |  |                                
|Working
              capital     |  | $    448,168                   
|Total
              assets        |  | 3,166,507                      
|Stockholders equity              |  | $2,147,439                     




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





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





Results of
            Operations





This table
            sets forth the Companys net sales, cost of sales, expenses by
            category, income (loss) from operations, interest income, net,
            other income, net, income (loss) before income taxes and net income
            (loss), each expressed as percentages of net sales, for the fiscal
            years ended February 29, 2000 and February 28, 1999 and
            1998:





|                                                  |  | 2000  |   | 1999 |       | 1998
|------------------------------------------------- |  | ----- | - | ---- | ----- | ----
|Net
              sales                           |  | 100.0 | % |      | 100.0 | %   
|Cost of
              sales                       |  | 56.0  |   |      | 57.5  |     
|                                                  |  |       |   |      |       |     
|Gross profit                                      |  | 44.0  |   |      | 42.5  |     
|Research
              and development            |  | 12.6  |   |      | 14.9  |     
|Selling,
              general and administrative |  | 27.4  |   |      | 29.6  |     
|Amortization of intangible assets                 |  | 2.8   |   |      | 2.0   |     
|Special
              charges                     |  | 1.4   |   |      | 16.6  |     
|                                                  |  |       |   |      |       |     
|Loss from operations                              |  | (0.2  | ) |      | (20.6 | )   
|Interest
              income, net                |  | 1.3   |   |      | 1.1   |     
|Other
              income, net                   |  | 51.1  |   |      |      |     
|                                                  |  |       |   |      |       |     
|Income (loss) before income taxes                 |  | 52.2  |   |      | (19.5 | )   
|                                                  |  |       |   |      |       |     
|Income tax
              expense (benefit)        |  | 20.2  |   |      | (2.1  | )   
|                                                  |  |       |   |      |       |     
|Net income (loss)                                 |  | 31.8  | % |      | (17.4 | )%  
|                                                  |  |       |   |      |       |     




Net Sales





Net sales
            for the year ended February 29, 2000 increased by 3.4% to $1,459.6
            million from $1,411.3 million for the year ended February 28, 1999
            and compared to $1,377.3 million in the year ended February 28,
            1998. Sales increased primarily as a result of increased sales of
            the Companys Layer-3 and Layer-4 switched technology
            products. Worldwide sales of switched products increased
            approximately $138.2 million, or 17.1%, to $948.4 million in the
            year ended February 29, 2000 compared to $810.2 million in the year
            ended February 28, 1999. The increase in sales of switched products
            was principally due to an increase in sales of the Companys
            SmartSwitch Router products, which offset declining sales of older
            switched products. The sales increase has been as a result of the
            Companys success in penetrating the WAN segment of the
            Layer-3 switching market, creation of Layer-4 switching technology
            products and continuation of customers migrating from the older
            shared media technology products. Secondarily, sales increased as a
            result of increased sales to Compaq in connection with the
            transition from an OEM agreement between Compaq and the Company,
            with minimum purchase commitments, to an alliance agreement. As
            part of this transition, Compaq purchased $85.0 million ($48.7
            million in the fourth quarter of fiscal 2000) of existing inventory
            that was in the Companys manufacturing pipeline and paid the
            Company $11.7 million as a pricing rebate for Compaqs failure
            to meet its minimum purchase commitments in the year ended February
            29, 2000. Sales of switched products increased 19.0% to $810.2
            million in the year ended February 28, 1999 compared to sales of
            $680.6 million in the year ended February 28, 1998. The increase in
            sales of switched products was a result of increasing unit sales,
            primarily related to the SmartSwitch 6000 products. Prices per
            product decreased slightly for some of the older switched products
            during the year ended February 28, 1999, but shipments of new
            products offset this slight price decline. The year ended February
            28, 1999 included a full year of DNPG/Compaq sales, largely
            contributing to the increase in sales of switched products,
            compared to the year ended February 28, 1998 which included just
            three weeks of sales. Sales of shared media products decreased by
            approximately $99.5 million, or 60.0%, to $66.3 million in the year
            ended February 29, 2000 from $165.8 million in the year ended
            February 28, 1999 and sales of $317.6 million in the year ended
            February 28, 1998. Sales of shared media products steadily
            decreased throughout the years ended February 29, 2000 and February
            28, 1999 as a result of both declining unit shipments and lower
            prices per product. The Company is evaluating its options regarding
            products that utilize shared media technology including exiting
            this line of business. Sales of other various legacy products and
            Spectrum increased by approximately $11.7 million, or 7.1%, to
            $177.0 million in the year ended February 29, 2000 compared to
            $165.3 million in the year ended February 28, 1999. This increase
            was largely a result of customers purchasing various legacy
            products that enable them to maintain their existing systems.
            Revenues from professional services and maintenance remained
            relatively flat at approximately $267.9 million in the year ended
            February 29, 2000 and $270.0 million in the year ended February 28,
            1999. As a result of terminating Compaqs minimum purchase
            commitments, the Company believes that future purchases by Compaq
            will be significantly lower than recent purchase levels. Under the
            alliance agreement, sales to Compaq are expected to be lower than
            recent levels, but may result in higher direct sales to
            Compaqs channel partners. These revenue sources have more
            risk than the minimum purchase commitments which previously
            existed. Further, the new revenue sources are subject to execution
            risk in obtaining such sales. In summary, there is a risk that as a
            result of terminating Compaqs minimum purchase commitments,
            Compaqs purchases of the Companys products will decline
            substantially in the year ending March 3, 2001 as compared to the
            year ended February 29, 2000. This would have a materially adverse
            impact on the Companys results of operations. Additionally,
            on May 23, 2000, the Company entered into a definitive agreement to
            sell its DNPG subsidiary. The sale of DNPG is expected to
            materially reduce net sales in the year ending March 3, 2001.
            Further, the discontinuation of other product lines and other
            actions taken in connection with the transformation are expected to
            decrease overall net sales in the year ending March 3,
            2001.





Net sales
            within the United States (domestic) in the year ended
            February 29, 2000 were $951.3 million or 65.2% of net sales,
            compared to $829.4 million or 58.8% of net sales in the year ended
            February 28, 1999 and $923.3 million or 67.0% of net sales in the
            year ended February 28, 1998. Domestic net sales increased in the
            year ended February 29, 2000 compared to the year ended February
            28, 1999, largely due to sales of switched media products
            increasing by more than 29% domestically and sales of products in
            the Companys manufacturing pipeline to Compaq. Sales
            decreased in the year ended February 28, 1999 compared to the year
            ended February 28, 1998
          due to pricing competitiveness that resulted in lower prices and
            decreased sales of shared media products as the Company
            transitioned to switched technology products.





Net sales in
            Europe were $342.2 million or 23.4% of total net sales in the year
            ended February 29, 2000 compared to $430.3 million or 30.5% of
            total net sales in the year ended February 28, 1999 and $323.7
            million or 23.5% of net sales in the year ended February 28, 1998.
            The decrease in sales was a result of decreases across a majority
            of the product lines, including a $39.5 million, or 66.1%, from the
            year ended February 28, 1999 to the year ended February 29, 2000,
            decrease in shared media products and a $10.3 million, or 4.0%,
            from the year ended February 28, 1999 to the year ended February
            29, 2000, decrease in sales of switched products. Sales decreased
            in the year ended February 29, 2000 compared to February 28, 1999
            as sales of DNPG/Compaq products began to decline. Sales increased
            in the year ended February 28, 1999 compared to the year ended
            February 28, 1998 as the Company had a full year of sales of DNPG
            products.





Net sales in
            the Pac Rim were $116.4 million or 8.0% of total net sales in the
            year ended February 29, 2000 compared to $114.2 million or 8.1% of
            total net sales in the year ended February 28, 1999 and $77.6
            million or 5.6% of net sales in the year ended February 28, 1998.
            Sales of switched products increased $21.6 million, or 31.9%, from
            the year ended February 28, 1999 to the year ended February 29,
            2000, but were offset by decreases in sales across a majority of
            the other product lines, including a $8.6 million, or 61.7%,
            decrease in service revenues. Sales increased in the year ended
            February 28, 1999 compared to the year ended February 28, 1998 as
            the Company had a full year of DNPG/Compaq activity and the Company
            placed a greater emphasis on its Pac Rim operations.





Net sales in
            other regions were $49.7 million, or 3.4%, of total net sales in
            the year ended February 29, 2000 compared to $37.4 million, or
            2.7%, of total net sales in the year ended February 28, 1999 and
            $52.7 million, or 3.8%, of net sales in the year ended February 28,
            1998. Sales increased primarily due to increased sales of switched
            products, which increased $14.5 million, or 76.1%, from the year
            ended February 28, 1999 to the year ended February 29, 2000. The
            decrease in sales during the year ended February 28, 1999 compared
            to February 28, 1998 was primarily due to decreased sales in Latin
            America.





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





Gross Profit, Expenses and
            Interest Income





Gross profit
            was $641.7 million, or 44.0% of net sales, in the year ended
            February 29, 2000 compared to $599.9 million, or 42.5% of net
            sales, in the year ended February 28, 1999 and compared to $701.0
            million, or 50.9% of net sales, in the year ended February 28,
            1998. The improvement in gross profit during the year ended
            February 29, 2000, as compared to the year ended February 28, 1999,
            reflects lower materials costs associated with streamlined product
            offerings. The decrease in gross profit in the year ended February
            28, 1999, as compared to the year ended February 28, 1998, as a
            percentage of net sales reflects the impact on pricing from
            increased sales to channel resellers and independent distributors,
            rather than selling directly to end-users, and a more competitive
            pricing environment. Additionally, the shift from shared media to
            switched products resulted in higher inventory obsolescence. In the
            future, the Companys gross profit may be affected by the same
            factors as the year ended February 29, 2000, including the price
            per product sold, inventory obsolescence, the distribution channels
            used, price competition, the mix of products sold, the acquisition
            of newer products at different margins and the result of the
            anticipated savings recognized through its outsourcing of the
            manufacturing process.





Research and
            development (R&D) expenses in the year ended
            February 29, 2000 decreased to $184.6 million, or 12.6% of net
            sales, compared to $210.4 million, or 14.9% of net sales, in the
            year ended February 28, 1999 and $181.8 million, or 13.2% of net
            sales, in the year ended February 28, 1998. R&D decreased, in
            the year ended February 29, 2000 compared to the year ended
            February 28, 1999, as a result of the elimination of staff and
            facilities from various R&D departments and refocused efforts
            on core projects identified in the restructuring initiative.
            R&D increased in the year ended February 28, 1999 compared to
            the year ended
          February 28, 1998 as a result of higher spending on the addition of
            software and hardware engineering personnel, directly hired and as
            a result of the Companys acquisitions, and the associated
            costs related to development of new products and the next
            generation of existing products. The Company plans to continue
            emphasizing research and development as a critical strategy point.
            The Company plans to continue to develop new products through a
            combination of internal development efforts and acquisitions. There
            can be no assurance that research and development efforts or
            acquisitions of technology will result in commercially successful
            new technology and products in the future, or that such technology
            and products will be introduced in time to meet market
            requirements. The Companys research and development efforts
            may be adversely affected by other factors discussed more fully
            below in Business Environment and Risk
            Factors.





Selling,
            general and administrative (SG&A) expenses were
            $400.5 million, or 27.4% of net sales, in the year ended February
            29, 2000 compared to $418.3 million, or 29.6% of net sales, in the
            year ended February 28, 1999 and compared to $372.2 million, or
            27.0% of net sales, in the year ended February 28, 1998. The
            decrease in SG&A expenses, as a percentage of net sales in the
            year ended February 29, 2000 compared to the year ended February
            28, 1999, was primarily a result of reductions in sales offices and
            staff. The increase in the year ended February 28, 1999 compared to
            the year ended February 28, 1998 was a result of an increase in
            sales and technical personnel, incentive payments to employees
            added through acquisitions and increased marketing programs. The
            Company expects to focus more of the future SG&A expenditures
            on core spending, advertising and marketing to potential customers
            for revenue generation, and that other components of SG&A will
            remain approximately constant, in absolute dollars, in the upcoming
            year.





Amortization
            of intangible assets expenses was $41.3 million, or 2.8% of net
            sales, in the year ended February 29, 2000 compared to $28.0
            million, or 2.0% of net sales, in the year ended February 28, 1999
            and $1.6 million, or 0.1% of net sales, in the year ended February
            28, 1998. The change in amortization expense was a result of
            acquisitions completed during the years ended February 28, 1999 and
            February 28, 1998. The February 29, 2000 amount includes a writeoff
            of $12.1 million of goodwill related to Ariel.





In the year
            ended February 29, 2000, the Company recorded $21.1 million of
            special charges for the restructuring initiative undertaken during
            March 1999. These charges reflect the closure of the Companys
            manufacturing facility in Ohio, the planned closure of 40 sales
            offices worldwide (37 closed through February 29, 2000), the
            consolidation and outsourcing of various manufacturing operations,
            the write-off of certain assets that were not required subsequent
            to the restructuring and the planned reduction of approximately
            1,000 individuals from the Companys global workforce. The
            reduction in the global workforce was principally manufacturing and
            distribution personnel but also included targeted reductions
            impacting most functions within the Company. The exit costs which
            the Company expects to incur relate primarily to long-term lease
            commitments and repayments of economic development grants resulting
            from the closing of the Ohio facility. This initiative was intended
            to reduce the expense structure of the Company; reduce cost of
            goods sold; increase cash reserves; provide higher return on assets
            and revenue per employee; enable aggressive asset reduction and
            consolidation initiatives and increase net income. There is no
            assurance that the Company will achieve the intended benefits of
            the restructuring initiative. The benefits are subject to numerous
            risks that could impair the Companys ability to realize the
            expected benefits when expected, or ever. In the year ended
            February 28, 1999, special charges were taken for in-process
            research and development related to the acquisition of Yago
            Systems, Inc. ($150.0 million), Ariel ($26.0 million), FlowPoint
            ($12.0 million) and NetVantage ($29.4 million). Also in the year
            ended February 28, 1999, the Company performed a physical inventory
            of manufacturing equipment and fixtures in preparation for the
            planned outsourcing of its manufacturing operations. As a result of
            this physical inventory, the Company wrote off approximately $17.6
            million of assets. The write-off consisted of equipment and
            fixtures that could not be located and equipment identified as
            idled with no future value. In the year ended February 28, 1998,
            special charges were taken for in-process research and development
            related to the acquisition of the DNPG ($199.3 million) and the
            implementation of a realignment plan ($35.0 million), totaling
            $234.3 million. The December 16, 1997 realignment plan was intended
            to better align the Companys business strategy with its focus
            in the enterprise and service provider markets. The realignment was
            intended to better position the Company to provide more
            solutions-oriented products and service; to increase its
            distribution of
          products through third-party distributors and resellers; to improve
            its position internationally and to aggressively develop
            partnership and acquisition opportunities. The realignment included
            general expense reduction through the elimination of duplicate
            facilities, consolidation of related operations, reallocation of
            resources, including the elimination of certain existing projects,
            and personnel reduction. During the year ended February 28, 1999,
            the Company completed the reductions required to better align its
            global initiative.





Net interest
            income in the year ended February 29, 2000 was $18.6 million
            compared to $15.1 million in the year ended February 28, 1999 and
            compared to $18.6 million in the year ended February 28, 1998. The
            increase in net interest income in the year ended February 29, 2000
            as compared to the year ended February 28, 1999 was due to higher
            invested balances and generally higher interest rates. The decrease
            of net interest income in the year ended February 28, 1999 as
            compared to fiscal 1998 is a result of lower cash available for
            short-term investments caused by Compaqs utilization of
            product credits in place of cash to settle accounts receivable and
            cash used to fund acquisitions.





Net other
            income in the year ended February 29, 2000 was $746.2 million. Of
            this total $705.1 million relates to the gain from the sale of a
            subsidiary, FlowPoint, $37.2 million relates to the transitioning
            of the Companys relationship with Compaq and $3.9 million
            relates to the sales of corporate equities.





Income (Loss) Before Income
            Taxes





Income
            before income taxes was $759.0 million in the year ended February
            29, 2000, compared to a loss before income taxes of $276.5 million
            in the year ended February 28, 1999 and a loss before income taxes
            of $70.2 million in the year ended February 28, 1998. In the year
            ended February 29, 2000, the Company recorded $746.2 million of
            other income and a $21.1 million restructuring charge. In the year
            ended February 28, 1999, the Company recorded special charges of
            $234.9 million for in-process research & development, arising
            out of the acquisitions of NetVantage for $29.4 million, FlowPoint
            for $12.0 million, Ariel for $26.0 million and Yago for $150.0
            million and a fixed asset loss of $17.5 million. In fiscal 1998,
            the Company recorded special charges of $234.3 million, consisting
            of in process research and development of $199.3 million in
            connection with the acquisition of the DNPG, and charges relating
            to the Companys realignment of $35.0 million. The improvement
            from a loss before income taxes, in the year ended February 28,
            1999, to income before income taxes, in the year ended February 29,
            2000, was primarily due to the Companys sale of its FlowPoint
            subsidiary and income related to its restructured relationship with
            Compaq as well as higher gross profit margins and lower operating
            expenses. The increase in loss before taxes in the year ended
            February 28, 1999 was due to lower gross profit margins as the
            Company continued its migration from shared media products to
            switched products and higher personnel costs in R&D
            departments. Excluding amortization of intangible assets, other
            income, net and special charges, income before income taxes was
            $75.2 million compared to loss before income taxes of $28.7 million
            in the year ended February 28, 1999 and to income before income
            taxes of $165.6 million in the year ended February 28, 1998. The
            Company expects income before income taxes to decrease in the year
            ending on March 3, 2001, due to the pending sale of DNPG, the
            discontinuation of other product lines and other actions taken in
            connection with the transformation.





Income Tax Expense
            (Benefit)





The
            Companys effective tax rate was 38.8% for the year ended
            February 29, 2000 compared to 11.3% for the year ended February 28,
            1999 and 50.2% for the year ended February 28, 1998. The income tax
            expense was $294.8 million in the year ended February 29, 2000
            compared to an income tax benefit of $31.1 million in the year
            ended February 28, 1999 and an income tax benefit of $35.3 million
            in the year ended February 28, 1998. The tax expense in the year
            ended February 29, 2000 included other income items, which in
            total, were taxed at higher tax rates than normal operating income
            and expenses. The tax benefit for the year ended February 28, 1999
            included large non-deductible in-process research and development
            charges and acquisition costs and tax benefits related to the Ariel
            acquisition, fixed asset loss and a loss from operations, which
            produced a higher tax rate than normal operating income and
            expenses. The year ended February 29, 2000 income tax expense
            included a $277.0 million tax charge related to the sale of
            FlowPoint, a $13.3 million tax charge related to the Compaq
          alliance agreement, a $9.1 million tax benefit related to the
            amortization of purchased acquisition costs, a $8.2 million tax
            benefit related to the write-off of product lines and a $6.5
            million tax benefit related to the manufacturing divestiture. The
            year ended February 28, 1999 income tax benefit included a $10.2
            million tax benefit related to the acquisition of Ariel and a $6.8
            million tax benefit related to the fixed asset loss. The year ended
            February 28, 1998 income tax benefit included $77.5 million related
            to the acquisition of the DNPG and $13.5 million related to the
            Companys realignment. Net income in the year ended February
            19, 2000 was $464.3 million compared to a net loss of $245.4
            million in the year ended February 28, 1999 and a net loss of $35.0
            million in the year ended February 28, 1998.





Business
            Combinations





During the
            year ended February 29, 2000, the Company made the strategic
            decision to pursue divesting itself of the manufacturing process,
            certain non-core product lines and non-core subsidiaries. The
            Company sold most of its manufacturing related assets and
            inventories to Flextronics and simultaneously entered into an
            agreement to purchase a significant amount of its products from
            Flextronics. The Company intends to divest itself of non-core
            product lines and subsidiaries through selling those identified
            assets to a third party buyer or in some other manner that is yet
            to be determined. In addition, the Company has made the strategic
            decision to transform the Company into four separate operating
            subsidiaries. The Company expects that by having four separate
            operating subsidiaries it will provide increased flexibility to
            better develop and implement other strategic transactions that are
            based on specific products or services and customer
            bases.





Fiscal
            2000 Divestitures





On January
            18, 2000, the Company and Flextronics entered into a definitive
            agreement for Cabletron to divest its manufacturing and repair
            services operations located in Rochester, New Hampshire and
            Limerick, Ireland to Flextronics. Flextronics acquired the
            Companys manufacturing assets, inventories and manufacturing
            personnel. Simultaneously with this transaction, the Company
            contracted with Flextronics as an OEM to produce most of its
            products. In anticipation of this divestiture, the Company recorded
            a charge of $4.6 million related to lowering its carrying value of
            inventory as cost of goods sold and recorded a $4.7 million charge
            related to personnel costs as SG&A expense. The Company
            received $60.5 million for inventory that it sold to Flextronics
            and $18.1 million which reflected the net book value for
            manufacturing related fixed assets, including
            buildings.





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





Fiscal
            1999 Acquisitions





Yago Systems,
            Inc.





On March 17,
            1998, Cabletron acquired Yago Systems, Inc. (Yago), a
            privately held manufacturer of wire-speed routing and Layer-4
            switching products and solutions. Under the terms of the merger
            agreement, Cabletron issued 6.0 million shares of Cabletron common
            stock to the shareholders of Yago in exchange for all of the
            outstanding shares of Yago, not then owned by Cabletron. Prior to
            the closing of the acquisition, Cabletron held approximately 25% of
            Yagos capital stock, calculated on a fully diluted basis.
            Cabletron also agreed, pursuant to the terms of the merger
            agreement, to issue up to 5.5 million shares of Cabletron common
            stock to the former shareholders of Yago in the event the shares
            originally issued in the transaction do not attain a market value
            of $35 per share eighteen months after the closing of the
            transaction. On September 8, 1999, Cabletron issued approximately
            5.2 million shares of Cabletron common stock to the former
            shareholders of Yago, pursuant to the terms of the merger
            agreement. Cabletron recorded the cost of the acquisition at
            approximately $165.7
          million, including direct costs of $2.6 million. This acquisition has
            been accounted for under the purchase method of
            accounting.





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





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





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





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





The nature
            of the efforts to develop the acquired in-process technology into
            commercially viable products principally related to the completion
            of all planning, designing, prototyping, high-volume verification,
            and testing activities that were necessary to establish that the
            proposed technologies met their design specifications including
            functional, technical, and economic performance requirements.
            Anticipated completion dates for the projects in progress were
            expected to occur over the two years following the acquisition and
            the Company expected to begin generating the economic benefits from
            the technologies in the second half of 1998. Funding for such
            projects was expected to be obtained from internally generated
            sources. Expenditures to complete the MSR technology were expected
            to total approximately $10.0 million over the next two
            years.





To date,
            Yagos results have not differed significantly from the
            forecast assumptions. Yago released a fully featured MSR8000 in
            July 1998. The Companys R&D expenditures since the Yago
            acquisition have not differed materially from expectations. The
            Company continues to work toward the completion of the projects
            underway at Yago at the time of the acquisition. Most of the
            projects are on schedule. The risks associated with these efforts
          are still considered significant and no assurance can be made that
            Yagos upcoming products will meet market
            expectations.





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





In the model
            used to value in-process research and development in the Yago
            acquisition, as of March 17, 1998, total revenues attributable to
            Yago were projected to exceed $900 million in 2002, assuming the
            successful completion and market acceptance of the major R&D
            efforts. As of the valuation date, Yago had no existing products
            and accordingly all revenue growth in the first several years were
            related to the in-process technologies. The estimated revenues for
            the in-process were projected to peak in 2003 and then decline as
            other new products and technologies were projected to enter the
            market.





Cost of
            sales was estimated based on Yagos internally generated
            projections and discussions with management regarding anticipated
            gross margin improvements. Due to the market opportunities in the
            Gigabit Ethernet arena and Yagos unique product architecture
            substantial gross margins are expected through calendar year 2000.
            Thereafter, gross margins are expected to gradually decline as
            competition increases. Cost of sales was projected to average
            approximately 47.5% through 2003. SG&A expenses (including
            depreciation), was projected to remain constant as a percentage of
            sales at approximately 23.0%. R&D expenditures were projected
            to decrease as a percentage of sales as the in-process projects
            were completed. R&D expenditures were expected to peak in 1998
            at 7.1% of sales, decline, and then level out at 5.0% of sales in
            2000 and thereafter.





The rates
            utilized to discount the net cash flows to their present value were
            based on venture capital rates of return. Due to the nature of the
            forecast and the risks associated with the projected growth,
            profitability and developmental projects, discount rates of 45.0 to
            50.0% were used for the business enterprise and for the in-process
            R&D. The Company believes these rates were appropriate because
            they were commensurate with Yagos stage of development; the
            uncertainties in the economic estimates described above; the
            inherent uncertainty surrounding the successful development of the
            purchased in-process technology; the useful life of such
            technology; the profitability levels of such technology; and, the
            uncertainty of technological advances that are unknown at this
            time.





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





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





DSLAM division of Ariel
            Corporation





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





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





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





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





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





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





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





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





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





FlowPoint Corp.





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





Cabletron
            recorded the cost of the acquisition at approximately $25.0
            million, including direct costs of the acquisition.
            Cabletrons consolidated results of operations include the
            operating results of FlowPoint, Corp. from the acquisition
            date.





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





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





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





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





For purposes
            of the in-process R&D valuation, the total revenues
            attributable to FlowPoint were projected to exceed $150.0 million
            within 5 years, assuming the successful completion and market
            acceptance of the major R&D efforts. As of the valuation date,
            FlowPoint had a few existing products, which lacked the
            technological breadth and depth necessary in the evolving
            networking equipment market. Accordingly, for purposes of the in-
          process R&D valuation, it was estimated that significant revenue
            growth in the first several years would be primarily related to the
            in-process technologies. The estimated revenues for the in-process
            projects were projected to peak in 2007 and then decline as other
            new products and technologies were expected to enter the
            market.





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





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





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





NetVantage, Inc.





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





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





In
            connection with the acquisition of NetVantage, the Company recorded
            special charges of $29.4 million for in-process research and
            development projects. The valuation of the IPR&D incorporated
            the guidance on IPR&D valuation methodologies promulgated by
            the SEC. These methodologies incorporate the notion that cash flows
            attributable to development efforts, including the effort to be
            completed on the development effort underway, and development of
            future versions of the product that have not yet been undertaken,
            should be excluded in the valuation of IPR&D. This allocation
            represents risk-adjusted cash flows related to the incomplete
            products. At the date of acquisition, the development of these
            projects had not yet reached technological feasibility and the
            R&D in progress had no alternative future uses. Accordingly,
            these costs were expensed as of the acquisition date.





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





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





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





For purposes
            of the IPR&D valuation, the total revenues attributable to
            NetVantage were projected to exceed $250.0 million within 5 years,
            assuming the successful completion and market acceptance of the
            major R&D efforts. As of the valuation date, NetVantage had a
            few existing products, which lacked the technological breadth and
            depth necessary in the evolving networking equipment market.
            Accordingly, it was estimated that the significant revenue growth
            in the first several years would be primarily related to the
            in-process technologies. The estimated revenues for the in-process
            projects were expected to peak in 2004 and then decline as other
            new products and technologies were expected to enter the market. To
            date, actual revenues have been substantially similar to those
            projected.





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





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





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





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





NetVantages in-process research and development value
            is comprised of several significant individual on-going projects.
            Remaining development efforts for these projects include various
            phases of design, development and testing. Anticipated completion
            dates for the projects in progress are estimated to occur over the
            next year. The Company began recognizing the economic benefits from
            the technologies in the fourth quarter of the year
          ended February 28, 1999. Funding for such projects was estimated to
            be obtained from internally generated sources. The estimated
            expenditures to complete these projects appear to be reasonable as
            compared to actual expenditures incurred. These estimates are
            subject to change, given the uncertainties of the development
            process, and no assurance can be given that deviations from these
            estimates will not occur.





The Company
            believes that the foregoing assumptions used in the forecasts were
            reasonable at the time of acquisition. The Company is presently
            evaluating strategic options regarding the NetVantage projects,
            including selling the entire subsidiary. This evaluation is
            expected to be completed prior to June 30, 2000.





Fiscal
            1998 Acquisitions








Effective
            February 7, 1998, Cabletron consummated the acquisition of certain
            assets of the Network Products Group (NPG) of Digital
            Equipment Corporation. The NPG, now known as the DIGITAL
            Network Products Group (DNPG), develops and
            supplies a wide range of data networking hardware and software,
            including LAN and WAN products. DNPGs products span a wide
            range of networking technologies, including Ethernet, Fast
            Ethernet, FDDI and ATM switching technologies. The purchase price
            for the acquisition was approximately $439.5 million, before
            closing adjustments, consisting of cash, product credits and
            assumed liabilities as a result of the acquisition. The acquisition
            was accounted for by Cabletron under the purchase method of
            accounting.





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





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





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





The nature
            of the efforts to fully develop the acquired in-process technology
            into commercially viable products, technologies, and services
            principally related to the completion of all planning, designing,
            prototyping, high-volume verification, and testing activities that
            were necessary to establish that the proposed technologies met
            their design specifications including functional, technical, and
            economic performance requirements. Anticipated completion dates for
            the projects in progress were expected to occur over the next one
            and one-half years, at which time the Company expected to begin
            generating economic benefits from the technologies. Funding for
            such projects was expected to be obtained from internally generated
            sources. As of February 7, 1998, expenditures to complete these
            projects were expected to total approximately $61.0 million for the
            remainder of calendar year 1998 and $10.0 million in calendar year
            1999. These estimates are subject to change, given the
          uncertainties of the development process, and no assurance can be
            given that deviations from these estimates will not
            occur.





The value
            assigned to purchased in-process technology was determined by
            estimating the costs to develop the purchased in-process technology
            into commercially viable products, estimating the resulting net
            cash flows from the projects and discounting the net cash flows to
            their present value. The revenue projection used to value the
            in-process research and development was based on estimates of
            relevant market sizes and growth factors, expected trends in
            technology and the nature and expected timing of new product
            introductions by the Company and its competitors. In the model used
            to value NPGs in-process research and development, as of
            February 7, 1998, NPGs total revenues were projected to
            exceed $1.1 billion in 2002, assuming the successful completion and
            market acceptance of the major R&D programs. Estimated revenue
            from NPGs existing technologies was expected to be $350.0
            million in 1998, with a rapid decline as existing processes and
            know-how approached obsolescence. The estimated revenues for the
            in-process projects were estimated to peak in 2002 and then decline
            as other new products and technologies were expected to enter the
            market.





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





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





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





On May 23,
            2000, the Company entered into a definitive agreement to sell the
            DNPG division. The Company believes, as it did at the time of the
            NPG acquisition, that if NPG did not successfully complete its
            outstanding in-process research and development efforts,
            Cabletrons future operating results could be materially
            impacted and the value of the in-process research and development
            might never be realized.





Liquidity and Capital
            Resources





Cash, cash
            equivalents and short and long-term investments increased to
            $2,476.8 million at February 29, 2000 from $476.3 million at
            February 28, 1999. The balance at February 29, 2000 includes
            $1,665.5 million, recorded as long-term investments, related to the
            Companys investment in Efficient Networks. This amount is
            subject to change based on market conditions and the market value
            of Efficient Networks stock. Net cash provided by operating
            activities was $190.4 million in the year ended February 29, 2000
            compared to $83.9 million in the year ended February 28, 1999 and
            compared to $49.5 million in the year ended February 28, 1998. The
            increase in net cash provided by operating activities during the
            year ended February 29, 2000 compared to
          the year ended February 28, 1999 was a result of increased focus on
            supply chain management and lower inventory due to the use of
            contract manufacturers. The increase in net cash provided by
            operating activities during the year ended February 28, 1999 was a
            result of improved inventory controls that resulted in a reduction
            in inventory and improved collections from customers, which were
            partially offset by Compaqs utilization of product credits
            received in the Companys acquisition of the DNPG. Compaq had
            been allowed to use the product credits through February 7, 2000 to
            purchase certain Cabletron products that were ordered under the
            Reseller Agreement. See Note 9 (Notes to the Consolidated Financial
            Statements) included at page 54 of this document for additional
            details regarding the product credits. Net cash used in investing
            activities increased to $67.3 million in the year ended February
            29, 2000 compared to net cash used in investing activities of
            $139.9 million in the year ended February 28, 1999. The increase in
            cash from investing activities was largely due to the
            Companys sale of its FlowPoint subsidiary. On April 24, 2000,
            the Companys Board of Directors authorized the Company to
            purchase up to $400.0 million of the Companys outstanding
            shares of common stock. The Company expects to use cash as it
            repurchases some of its outstanding shares of common stock. In
            connection with its stock repurchase program, the Company may enter
            into various hedging transactions and derivative contracts designed
            to manage its cash and the costs of the program.





Accounts
            receivable, net of allowance for doubtful accounts, were $228.4
            million, or 54 days of sales outstanding, at February 29, 2000
            compared to $216.8 million at February 28, 1999, or 57 days sales
            outstanding. The decrease in days of sales outstanding was a result
            of the Companys focused sales efforts through resellers and
            distributors. The Company has been able to monitor these
            relationships and has improved collection efficiency, as there are
            fewer resellers and distributors than end-users the Company shipped
            to during the year ended February 28, 1999.





Worldwide
            inventories were $85.0 million at February 29, 2000, or 36 days of
            inventory, compared to $229.5 million, or 107 days of inventory, at
            February 28, 1999. The decrease of days in inventory was due to the
            use of contract manufacturers and increased focus on supply chain
            management. The February 29, 2000 balance excludes items purchased
            by Flextronics on February 29, 2000. The Company expects inventory
            levels to decrease further as it realizes the full benefit from
            outsourcing its manufacturing process.





During the
            year ended February 29, 2000, capital expenditures totaled $44.4
            million and were principally related to upgrades of computer
            related equipment and investments in technology to improve
            productivity. During the year ended February 28, 1999, capital
            expenditures totaled $44.8 million and were primarily related to
            upgrades of computers, computer related equipment and manufacturing
            equipment. Capital expenditures for the year ended February 28,
            1998 totaled $74.3 million and were primarily related to software
            and hardware products and upgrades of computers.





On March 31,
            2000, the Companys $250.0 million revolving credit facility
            with Chase Manhattan Bank, First National Bank of Chicago and
            several other lenders expired. The Company had not drawn down any
            money under the facility. The Company has chosen not to enter into
            a new revolving credit facility.





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





Business Environment and Risk
            Factors





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





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





Transformation.The Company has
            announced its intentions, subject to shareholder approval at the
            July 2000 Annual Meeting of Shareholders, to transform its business
            by creating four operating subsidiaries and transferring a portion
            of the Companys operating assets and related liabilities to
            the four subsidiaries. The Company currently plans to conduct an
            initial public offering for each of the operating subsidiaries,
            followed by a distribution of the remaining shares of one or more
            of the subsidiaries to the Companys stockholders. In
            addition, the Company may also consider other strategic
            alternatives, including the sale of one or more of the operating
            subsidiaries.





In
            connection with this transformation, the Company has announced its
            plans to discontinue several product lines to allow each of the new
            subsidiaries to focus on its core competencies and next generation
            technologies. The discontinuance of these products will cause the
            Companys overall revenue to decrease. Also, the creation of
            four independent operating companies may lead to increases in
            expenses for the build-up of management and administrative capacity
            at each subsidiary to satisfy the demands of operation as a public
            company. Any decrease in revenue or increase in costs associated
            with the transformation could adversely affect the Companys
            operating results.





The Company
            currently plans to realize the value of the operating subsidiaries
            through an initial public offering, then subsequent spin-off of
            each or through private sales of the subsidiaries. Recently, the
            public market for technology stocks has experienced a significant
            downturn, with many such stocks suffering price declines of 50 to
            75% or more. Trading in these stocks has become extremely volatile.
            If current market conditions persist, the Company may be unable or
            unwilling to complete initial public offerings or private sales of
            any of its operating subsidiaries, which may inhibit the
            Companys ability to realize the value of its planned
            transformation.





The Company
            is not obliged to complete any of these strategic transactions and
            no assurance can be given as to whether or when any of these
            strategic transactions will be approved and implemented. For
            example, an initial public offering of any of the subsidiaries will
            depend on each of their individual performance, market conditions
            and similar considerations. Any distribution of the remaining
            shares of a subsidiary to the Companys stockholders,
            following an initial public offering, may depend upon receipt from
            the Internal Revenue Service of a ruling that such distribution
            will be tax-free to the Companys stockholders and that the
            transaction would qualify as a tax-free reorganization or other
            regulatory approvals. Any such strategic transaction would only be
            implemented if the Board of Directors of the Company continues to
            believe that it is in the best interests of each of the
            subsidiaries and the Companys stockholders.





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





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





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





Margin
            pressure.Cabletrons margins may
            decrease as a result of a shift in product mix toward lower margin
            products, increased sales through lower margin distributor and
            reseller sales channels, increased component costs and increased
            expenses, which may be necessary in future periods to meet the
            demands of greater competition and if the expected cost savings
            from outsourcing the manufacturing process does not occur. For
            example, as a result of various acquisitions completed during
            fiscal 1999, the Company acquired products that contribute a lower
            gross margin than the Companys core products have
            historically contributed. Additionally, as a result of the DNPG
            acquisition and other business strategy initiatives, Cabletron
            makes a higher percentage of its sales through resellers, which
            reduces Cabletrons margin on those sales, as well as, to a
            lesser extent, Cabletrons overall margins. Margins in any
            given period may be adversely affected by additional factors. See
            Fluctuations in Operating Results.





Fluctuations in Operating
            Results.A variety of factors may cause
            period-to-period fluctuations in the operating results of
            Cabletron. Such factors include, but are not limited to: (i) the
            rate of growth of the markets for Cabletrons products, (ii)
            competitive pressures, including pricing, brand and technological
            competition, (iii) availability of components, including unique
            integrated circuits, (iv) adverse effects of delays in the
            establishment of industry standards, including delays or reductions
            in customer orders, delays in new product introductions and
            increased expenses associated with standards compliance, (v) delays
            by Cabletron in the introduction of new or enhanced products, (vi)
            changes in product mix, (vii) delays or reductions in customer
            purchases in anticipation of the introduction of new products by
            Cabletron or its competitors and (viii) instability of the
            international markets in which Cabletron sells its products.
            Backlog as of any particular date is not indicative of future
            revenue due, in part, to the possibility of order cancellations,
            customer requested delivery delays, shifting purchasing patterns
            and inventory level variability. In particular, Cabletron has been
            experiencing
          longer sales cycles for its core products as a result of the
            increasing dollar amount of customer orders and longer customer
            planning cycles. Further, Cabletron has recently increased its
            sales to service providers. Although sales to the service provider
            market have grown, this market is characterized by large, and often
            sporadic purchases. Sales activity in this industry depends upon
            various factors, including the stage of completion of expanding
            network infrastructures and the availability of funding. A decline
            or delay in sales orders from this industry could have a material
            adverse effect on Cabletrons business, operating results and
            financial condition. Also, Cabletron has experienced back-end
            loading of its quarterly sales, making the predictability of the
            quarterly results very difficult. These factors, together with
            increased competition, have led to an increase in sales variability
            and a decrease in Cabletrons ability to predict aggregate
            sales demand for any given period. These factors have increased the
            possibility that the operating results for a quarter could be
            materially adversely affected by the failure to obtain or delays in
            obtaining a limited number of large customer orders, due, for
            example, to cancellations, delays or deferrals by customers. If
            growth in Cabletrons revenues in any quarter fails to match
            Cabletrons expectations, its earnings and margins would be
            materially adversely affected.





As the
            Company transforms its business, there can be no assurance that net
            sales will not decrease in future periods. Any decrease in net
            sales could have a material adverse affect on the Companys
            business, financial condition and results of operations. As
            expenses are relatively fixed in the near term, Cabletron may not
            be able to adjust expense levels to match any shortfall in
            revenues. As the industry becomes more competitive and
            standards-based, Cabletron is facing greater price competition from
            its competitors. If Cabletron does not respond with lower
            production costs, pricing pressures could adversely affect future
            earnings. Accordingly, past results may not be indicative of future
            results. There can be no assurance that the announcement or
            introduction of new products by Cabletron or its competitors, or a
            change in industry standards, will not cause customers to defer or
            cancel purchases of Cabletrons existing products, which could
            have a material adverse effect on Cabletrons business,
            financial condition or results of operations. The market for
            Cabletrons products is evolving. The rate of growth of the
            market and the resulting demand for Cabletrons recently
            introduced products is subject to a high level of uncertainty. If
            the market fails to grow or grows more slowly than anticipated,
            Cabletrons business, financial condition or results of
            operations would be materially adversely affected. In addition,
            because of the global nature of Cabletrons business, a
            variety of uncontrollable and changing factors including foreign
            exchange rates, political and economic factors, foreign regulators
            and natural disasters could have a material adverse effect on
            future results. See Quantitative and Qualitative Disclosures
            About Market Risks.





Competition for Key Personnel; Management
            Structure.During the year ended
            February 29, 2000, the Company implemented a new management
            structure, which included the creation of new senior officer
            positions and the realignment of management structures. The
            implementation of these new management structures and
            Cabletrons planned transformation have required the
            dedication of the Companys existing management resources and
            provided distractions from the day-to-day demands of running
            Cabletrons business. This distraction of managements
            attention may negatively impact the Companys operating
            results.





The
            Companys success depends to a significant extent upon a
            number of key employees and management, including the
            presidents of the four new companies. The loss of the
            services of key employees could adversely affect Cabletrons
            business, operating results or financial condition. Recruiting and
            retaining skilled personnel, including engineers, is highly
            competitive. If Cabletron cannot successfully recruit and retain
            skilled personnel, particularly engineers and sales personnel, its
            ability to compete may be adversely affected and it may have
            difficulty managing its business and meeting key objectives on
            time. In addition, the Company must carefully balance the growth of
            its employees commensurate with its anticipated sales growth. If
            the Companys sales growth or attrition levels vary
            significantly, its results of operations or financial condition
            could be adversely affected. Further, Cabletrons common stock
            price has been, and may continue to be extremely volatile. When the
            Cabletron common stock price is less than the exercise price of
            stock options granted to employees, turnover is likely to increase,
            which could adversely affect the Companys results of
            operations or financial condition.





Acquisition Strategy.Cabletron
            has addressed the need to develop new products, in part, through
            the acquisition of other companies and businesses. Acquisitions,
            such as the acquisition of NetVantage, Ariel, Yago and the DNPG,
            involve numerous risks including difficulties in assimilating the
            operations, technologies and
          products of the acquired companies, the diversion of
            managements attention from other business concerns, risks of
            entering markets in which competitors have established market
            positions, and the potential loss of key employees of the acquired
            company. Achieving the anticipated benefits of an acquisition will
            depend in part upon whether the integration of the companies
            businesses is accomplished in an efficient and effective manner,
            and there can be no assurance that this will occur. The successful
            combination of companies in the high technology industry may be
            more difficult to accomplish than in other industries. The
            combination of such companies will require, among other things,
            integration of the companies respective product offerings and
            coordination of their sales and marketing and research and
            development efforts. For example, during the year ended February
            29, 2000, the Company abandoned the projects associated with the
            DSL technology related to Ariel and wrote off the remaining
            goodwill. There can be no assurance that such integration will be
            accomplished smoothly or successfully. The difficulties of such
            integration may be exacerbated by the necessity of coordinating
            geographically separated organizations. The efforts required to
            successfully integrate acquired companies require the dedication of
            management resources that may temporarily distract attention from
            the day-to-day business of Cabletron. The inability to successfully
            integrate the operations of acquired companies could have a
            material adverse effect on the business and results of operations
            of Cabletron. The acquisition of early stage companies, such as
            NetVantage, Ariel and Yago, poses risks in addition to those
            identified above. Such companies often have limited operating
            histories, limited or no prior sales, and may not yet have achieved
            profitability. In addition, the technologies possessed by such
            companies are often unproven. The development and marketing of
            products based upon such technologies may require the investment of
            substantial time and resources and, despite such investment, may
            not result in commercially saleable products or may not yield
            revenues sufficient to justify Cabletrons investment.
            Further, aggressive competitors often undertake initiatives to
            attract customers and to recruit key employees of acquired
            companies through various incentives. In addition to NetVantage,
            Ariel, Yago and the DNPG, Cabletron has stated that it will
            continue to explore other possible acquisitions in the future.
            Multiple acquisitions during a period increases the risks
            identified above, including in particular the difficulty of
            integrating the acquired businesses and the distraction of
            management from the day-to-day business activities of
            Cabletron.





Near the end
            of the year ended February 28, 1998, the Company acquired certain
            assets of the Network Products Group of Digital Equipment
            Corporation. With this acquisition, Digital Equipment Corporation
            (Digital) entered into a reseller agreement with the
            Company pursuant to which Digital committed to purchase from the
            Company a minimum amount of product bearing the Digital brand name.
            The reseller agreement was scheduled to expire on June 30, 2001. On
            June 11, 1998, Digital was acquired by Compaq. On May 25, 1999,
            Compaq entered into an OEM agreement with the Company pursuant to
            which Compaq committed to purchase from the Company a minimum
            amount of networking product bearing the Compaq brand name as well
            as product bearing the Digital brand name. The OEM agreement
            contained, among other things, a pricing rebate that compensated
            the Company for Compaq purchase shortfalls. The OEM agreement was
            scheduled to expire on June 30, 2001. Compaq/Digital accounted for
            approximately 16.0% of Cabletrons revenues in the year ended
            February 29, 2000. On September 20, 1999, Compaq and the Company
            agreed to terminate the OEM agreement and enter into a new alliance
            agreement. Under the alliance agreement, the two companies intend
            to transition sales of legacy Digital branded products from Compaq
            and its resellers to the Company. Further, the two companies have
            agreed to expand the relationship between the Company and
            Compaqs professional services organization and Cabletron will
            continue to resell, and Compaq is expected to continue servicing,
            Digital branded products. Further, Compaq is continuing as a
            reseller of Cabletron-branded networking hardware and
            Cabletrons Spectrum network management software. In
            terminating the OEM agreement, Compaq agreed to pay the Company
            approximately $85.0 million, in November 1999, as a final purchase
            of Compaq and Digital branded products in the Companys
            manufacturing pipeline. Finally, the Company entered into a
            definitive agreement to sell its DNPG business to Gores Technology
            Group, on May 23, 2000. If this divestiture is completed, the
            Company will no longer sell Digital branded products and as a
            result will have lower overall sales.





There can be
            no assurance that Compaq will be an effective reseller of the
            Companys products or that the volume of such purchases will
            not decline significantly. A higher than expected rate of return
            from resellers, the Companys failure to adequately manage the
            marketing and distribution of such products, or the loss of material
          resellers or a material decline in sales volume through the third
            party resellers, could have a material adverse effect on the
            Companys business, results of operations or financial
            condition.





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





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





Customer
            Credit Risk.As Cabletrons sales
            to emerging service providers increases, it is experiencing
            increased demands for customer financing and leasing solutions.
            This demand is coming particularly from competitive local exchange
            carriers (CLECs) and metropolitan backbone providers.
            These customers typically finance significant networking
            infrastructure deployments through alternative forms of financing,
            including leasing, through the Company or through third parties in
            which the Company guarantees a significant portion of the lease to
            the third party. Although Cabletron has programs in place to
            monitor and mitigate the associated risk, there can be no assurance
            that such programs will alleviate all of its credit risk. Although
            Cabletron has not experienced significant losses due to customers
            failing to meet their obligations to date, such losses, if
            incurred, could harm the Companys business and have a
            material adverse effect on its operating results and financial
            condition.





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





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





Dependence on
            Suppliers.Cabletrons products
            include certain components, including application specific
            integrated circuits (ASICs), that are currently
            available from single or limited sources, some of which require
            long order lead times. In addition, certain of Cabletrons
            products and sub-assemblies are manufactured by single source third
            parties. With the increasing technological sophistication of new
            products and the associated design and manufacturing complexities,
            Cabletron anticipates that it may need to rely on additional single
            source or limited suppliers for components or manufacture of
            products and subassemblies. Any reduction in supply, interruption
            or extended delay in timely supply, variances in actual needs from
            forecasts for long order lead time components, or change in costs
            of components could affect Cabletrons ability to deliver its
            products in a timely and cost-effective manner and may adversely
            impact Cabletrons operating results and supplier
            relationships. Nearly all of the Companys products, and the
            products of its subsidiaries, will be manufactured by third-party
            contract manufacturers, beginning in fiscal 2001. The failure of a
            third-party manufacturer to manufacture the products or to deliver
            the products in time for Cabletron to meet its delivery
            requirements could have a material adverse effect on
            Cabletrons business, financial condition and results of
            operations.





Year 2000





The
            Companys Year 2000 initiative was an overall success. No
            significant interruptions to the Companys business processes
            occurred, and no material problems are expected. The projects
            actual spending approximated the budgeted amount.





New Accounting
            Pronouncements





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





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





ITEM
            7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES
            ABOUT MARKET RISK





The
            following discussion about the Companys market risk
            disclosures involves forward-looking statements. Actual results
            could differ materially from those projected in the forward-looking
            statements. The Company is exposed to market risk related to
            changes in interest rates, foreign currency exchange rates and the
            share price of corporate equities. The hedging activity of the
            Company is intended to offset the impact of currency fluctuations
            on certain nonfunctional currency assets and liabilities, and the
            Company does not use derivative financial instruments for trading
            or speculative purposes. The Companys investment portfolio
            also includes minority equity investments in some publicly traded
            companies, the values of which are subject to market price
            volatility.





Interest
            Rate Sensitivity.The Company maintains
            an investment portfolio consisting partly of debt securities of
            various issuers, types and maturities. The securities that the
            Company classifies as held-to-maturity are recorded on the balance
            sheet at amortized cost, which approximates market value.
            Unrealized gains or losses associated with these securities are not
            material. The securities that the Company classifies as
            available-for-sale are recorded on the balance sheet at fair market
            value with unrealized gains or losses reported as part of
            accumulated other comprehensive income, net of tax as a component
            of stockholders equity. A hypothetical 50 or 100 basis point
            increase in interest rates would result in an approximate $0.3
            million or $3.9 million decrease, respectively (approximately 0.1
            percent or 0.7 percent, respectively) in the fair market value of
            the securities. The Company has the ability to hold its fixed
            income investments until maturity, and therefore the Company does
            not expect its operating results or cash flows to be affected to
            any significant degree by the effect of a sudden change in market
            interest rates on its securities portfolio.





Foreign
            Currency Exchange Risk.The Company, as
            a result of its global operating and financial activities, is
            exposed to changes in foreign currency exchange rates which may
            adversely affect its results of operations and financial position.
            In order to minimize the potential adverse impact, the Company uses
            foreign currency forward and option contracts to hedge the currency
            risk inherent in global operations. The Company does not utilize
            financial instruments for trading or other speculative purposes.
            Gains and losses on the contracts are largely offset by gains and
            losses on the underlying assets or liabilities. At February 29,
            2000, the Company had purchased forwards with a notional value of
            approximately $3.9 million and options with a notional value of
            approximately $28.0 million. A hypothetical 10 percent appreciation
            or depreciation of the U.S. Dollar from February 29, 2000 market
            rates would not result in a material decrease in fair market value,
            earnings or cash flows. Also, any gains or losses on the contracts
            are largely offset by the gains or losses on the underlying
            transactions and consequently a sudden or significant change in
            foreign exchange rates would not have a material impact on future
            net income or cash flows associated with the contracts.





Equity
            Risk Sensitivity. At February 29, 2000, Cabletron held
            approximately 5.2 million shares of common stock of Efficient and
            6,300 shares of preferred stock of Efficient, which were converted
            into 6.3 million shares of Efficient common stock on April 12,
            2000. Cabletron received this stock as consideration for the sale
            of its FlowPoint subsidiary on December 18, 1999. At February 29,
            2000, Cabletrons holdings of Efficient stock, accounted for
            under the cost method, totaled $1,665.5 million and represented
            52.6% of Cabletrons total assets.





The trading
            price of Efficients common stock has been highly volatile
            since Efficients initial public offering in 1999, from a low
            of approximately $29.25 per share to a high of approximately
            $187.75 per share. Based on its holdings at February 29, 2000, a
            hypothetical $10.00, $50.00 or $100.00 change in the trading price
            of Efficient common stock causes the value of Cabletrons
            holdings to change by approximately $115.9 million, $833.1 million
            and $1,147.6 million, respectively.





Cabletron
            has entered into a Standstill and Disposition Agreement with
            Efficient which among other things, limits Cabletrons ability
            to sell its shares of Efficient common stock. The restrictions
            contained in this agreement, combined with a protracted decline in
            the market value of Efficients common stock, could materially
            reduce the value of Cabletrons holdings in Efficient Stock
            and Cabletrons total assets. Cabletron intends, to the extent
            permitted by the Standstill and Disposition Agreement and market
            conditions permitting,
          to reduce its current exposure to changes in the price of Efficient
            common stock by selling a portion of its position in the year ended
            March 3, 2001.





Euro
            Conversion





Effective
            January 1, 1999, eleven of the fifteen member countries of the
            European Union established fixed conversion rates between their
            existing sovereign currencies (the legacy currencies)
            and one common currency (the Euro). The participating
            countries adopted the Euro as their common legal currency on that
            date (the Euro Conversion). Since that date, the Euro
            began trading on currency exchanges and has been used in business
            transactions. On January 1, 2002, participating countries will
            issue new Euro-denominated bills and coins. The legacy currencies
            will be withdrawn from circulation as legal tender effective
            January 1, 2002. During the period from January 1, 1999 to June 30,
            2002, parties may use either the Euro or a participating
            countrys legacy currency as legal tender.





During the
            year ended February 28, 1999, the Company formed a Euro Committee.
            The Euro Committee analyzed the impact of the Euro conversion on
            the Company in a number of areas, including the Companys
            information systems, product pricing, finance and banking
            resources, foreign exchange management, contracts, accounting and
            tax policies. The Company has made certain adjustments to its
            business and operations to accommodate the Euro
            conversion.





ITEM
            8.    CONSOLIDATED FINANCIAL STATEMENTS AND
            SUPPLEMENTARY DATA





CABLETRON
            SYSTEMS, INC.





CONSOLIDATED BALANCE SHEETS


February
            29, 2000 and February 28, 1999





|                                                                                                                                                                                                                                 |  | 2000         |  | 1999        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------
|
|Assets                                                                                                                                                                                                                           |  |              |  |             
|Current
              assets:                                                                                                                                                                                                    |  |              |  |             
|Cash and cash equivalents                                                                                                                                                                                                        |  | $    350,980 |  | $    159,422
|Short-term investments (note 4)                                                                                                                                                                                                  |  | 221,981      |  | 113,932     
|Accounts receivable, net of allowance for doubtful
              accounts ($21,684 and
            

                        
                   $23,260 in 2000 and 1999,
              respectively)                           |  | 228,372      |  | 216,793     
|Inventories (note 5)                                                                                                                                                                                                             |  | 85,016       |  | 229,512     
|Deferred income taxes (note 11)                                                                                                                                                                                                  |  | 82,813       |  | 60,252      
|Prepaid expenses and other assets                                                                                                                                                                                                |  | 38,211       |  | 60,510      
|                                                                                                                                                                                                                                 |  |              |  |             
|Total current assets                                                                                                                                                                                                             |  | 1,007,373    |  | 840,421     
|                                                                                                                                                                                                                                 |  |              |  |             
|Long-term
              investments (note 4)                                                                                                                                                                                     |  | 1,903,858    |  | 202,984     
|Long-term
              deferred income taxes (note 11)                                                                                                                                                                          |  |             |  | 135,197     
|Property,
              plant and equipment, net (note 6)                                                                                                                                                                        |  | 124,992      |  | 188,479     
|Intangible
              assets, net (note 7)                                                                                                                                                                                    |  | 130,284      |  | 199,419     
|                                                                                                                                                                                                                                 |  |              |  |             
|Total assets                                                                                                                                                                                                                     |  | $3,166,507   |  | $1,566,500  
|                                                                                                                                                                                                                                 |  |              |  |             
|Liabilities and Stockholders
              Equity                                                                                                                                                                               |  |              |  |             
|Current
              liabilities:                                                                                                                                                                                               |  |              |  |             
|Accounts payable                                                                                                                                                                                                                 |  | $    117,631 |  | $    121,580
|Accrued expenses (note 8)                                                                                                                                                                                                        |  | 132,701      |  | 124,126     
|Deferred revenue                                                                                                                                                                                                                 |  | 119,011      |  | 94,023      
|Deferred gain (note 3)                                                                                                                                                                                                           |  | 189,862      |  |            
|Other obligations (note 9)                                                                                                                                                                                                       |  |             |  | 129,747     
|                                                                                                                                                                                                                                 |  |              |  |             
|Total current liabilities                                                                                                                                                                                                        |  | 559,205      |  | 469,476     
|Long-term deferred income taxes (note 11)                                                                                                                                                                                        |  | 459,863      |  | 7,191       
|                                                                                                                                                                                                                                 |  |              |  |             
|Total liabilities                                                                                                                                                                                                                |  | 1,019,068    |  | 476,667     
|                                                                                                                                                                                                                                 |  |              |  |             
|Commitments and contingencies (notes 10, 14 and
              16)                                                                                                                                                                |  |              |  |             
|                                                                                                                                                                                                                                
|Stockholders equity (note 17):                                                                                                                                                                                                  |  |              |  |             
|Preferred stock, $1.00 par value. Authorized 2,000
              shares; none issued                                                                                                                                             |  |             |  |            
|Common stock, $0.01 par value. Authorized 240,000
              shares; issued and
            

                        
                   outstanding 183,585 and 172,184
              shares in 2000 and 1999, respectively |  | 1,836        |  | 1,722       
|Additional paid-in capital                                                                                                                                                                                                       |  | 630,155      |  | 551,232     
|Retained earnings                                                                                                                                                                                                                |  | 1,000,758    |  | 536,487     
|Accumulated other comprehensive income                                                                                                                                                                                           |  | 514,690      |  | 392         
|                                                                                                                                                                                                                                 |  |              |  |             
|Total stockholders equity                                                                                                                                                                                                       |  | 2,147,439    |  | 1,089,833   
|                                                                                                                                                                                                                                 |  |              |  |             
|Total liabilities and stockholders
              equity                                                                                                                                                                         |  | $3,166,507   |  | $1,566,500  
|                                                                                                                                                                                                                                 |  |              |  |             




See
            accompanying notes to consolidated financial
            statements.





CABLETRON SYSTEMS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


Years
            Ended February 29, 2000, February 28, 1999 and 1998


(in
            thousands, except per share amounts)





|                                                             |  | 2000                           |   | 1999 |                               | 1998
|------------------------------------------------------------ |  | ------------------------------ | - | ---- | ----------------------------- | ----
|Net
              sales                                      |  | $1,459,593                     |   |      | $1,411,279                    |     
|Cost of
              sales                                  |  | 817,844                        |   |      | 811,350                       |     
|                                                             |  |                                |   |      |                               |     
|Gross profit                                                 |  | 641,749                        |   |      | 599,929                       |     
|Operating
              expenses:                           
|Research and development                                     |  | 184,614                        |   |      | 210,393                       |     
|Selling, general and administrative                          |  | 400,544                        |   |      | 418,254                       |     
|Amortization of intangible assets                            |  | 41,270                         |   |      | 27,978                        |     
|Special charges (notes 3, 6 and 18)                          |  | 21,096                         |   |      | 234,920                       |     
|                                                             |  |                                |   |      |                               |     
|Loss from operations                                         |  | (5,775                         | ) |      | (291,616                      | )   
|Interest
              income, net                           |  | 18,587                         |   |      | 15,089                        |     
|Other
              income, net (notes 3 and 19)             |  | 746,209                        |   |      |                              |     
|                                                             |  |                                |   |      |                               |     
|Income (loss) before income taxes                            |  | 759,021                        |   |      | (276,527                      | )   
|Income tax
              expense (benefit) (note 11)         |  | 294,750                        |   |      | (31,136                       | )   
|                                                             |  |                                |   |      |                               |     
|Net income (loss)                                            |  | $    464,271                   |   |      | $  (245,391                   | )   
|                                                             |  |                                |   |      |                               |     
|Net income
              (loss) per share:                  
|Basic                                                        |  | $        
                2.62 |   |      | $       
               (1.47 | )   
|                                                             |  |                                |   |      |                               |     
|Diluted                                                      |  | $        
                2.46 |   |      | $       
               (1.47 | )   
|                                                             |  |                                |   |      |                               |     
|Weighted
              average number of shares outstanding:
|Basic                                                        |  | 177,541                        |   |      | 167,432                       |     
|                                                             |  |                                |   |      |                               |     
|Diluted                                                      |  | 188,618                        |   |      | 167,432                       |     
|                                                             |  |                                |   |      |                               |     




See
            accompanying notes to consolidated financial
            statements.





CABLETRON SYSTEMS, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS
            EQUITY


Years
            ended February 29, 2000, February 28, 1999 and 1998


(in
            thousands, except number of shares)





|                                                                                                                                 |  | Common
            
            Shares |   | Common
            
            Stock |        | Additional
            
            Paid-in
            
            Capital |          | Retained
            
            Earnings |              | Accumulated
            
            Other
            
            Comprehensive
            
            Income |  | Total
            
            Stockholders
            
            Equity
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | - | ------------------------------------- | ------ | ---------------------------------------------------------------------------- | -------- | ------------------------------------------ | ------------ | ----------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------
|BALANCE AT
              FEBRUARY 28, 1997                                                                                       |  | 156,305,312                            |   |                                       | $1,563 |                                                                              | $266,829 |                                            | $    816,839 |                                                                                                                   |  | $      221                                                                  
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Comprehensive income (loss):                                                                                                    
|Net loss                                                                                                                         |  |                                       |   |                                       |       |                                                                              |         |                                            | (34,961      | )                                                                                                                 |  |                                                                            
|Other comprehensive
              income:                                                                                       
|Effect of foreign currency
              translation                                                                             |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | 559                                                                         
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Total
              comprehensive income                                                                                         |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | 559                                                                         
|Retirement
              of treasury stock                                                                                       |  | (32,209                                | ) |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  |                                                                            
|Exercise
              of options for shares of common
            
                stock                                        |  | 1,762,565                              |   |                                       | 18     |                                                                              | 17,291   |                                            |             |                                                                                                                   |  |                                                                            
|Tax
              benefit for options exercised                                                                                  |  |                                       |   |                                       |       |                                                                              | 10,469   |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of shares under employee stock
            
                purchase plan                                 |  | 231,326                                |   |                                       | 2      |                                                                              | 6,245    |                                            |             |                                                                                                                   |  |                                                                            
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|BALANCE AT
              FEBRUARY 28, 1998                                                                                       |  | 158,266,994                            |   |                                       | 1,583  |                                                                              | 300,834  |                                            | 781,878      |                                                                                                                   |  | 780                                                                         
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Comprehensive income (loss):                                                                                                    
|Net loss                                                                                                                         |  |                                       |   |                                       |       |                                                                              |         |                                            | (245,391     | )                                                                                                                 |  |                                                                            
|Other comprehensive
              income:                                                                                       
|Unrealized gain/(loss) on
              available-for-sale
            
                    securities, net of
              tax |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | 1,186                                                                       
|Effect of foreign currency
              translation                                                                             |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | (1,574                                                                      
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Total
              comprehensive income                                                                                         |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | (388                                                                        
|Exercise
              of options for shares of common
            
                stock                                        |  | 497,696                                |   |                                       | 5      |                                                                              | 2,761    |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of common stock for purchased
            
                acquisitions                                   |  | 12,757,395                             |   |                                       | 127    |                                                                              | 239,621  |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of common stock for minority
            
                interests                                       |  | 89,921                                 |   |                                       | 1      |                                                                              | 1,117    |                                            |             |                                                                                                                   |  |                                                                            
|Tax
              benefit for options exercised                                                                                  |  |                                       |   |                                       |       |                                                                              | 1,521    |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of shares under employee stock
            
                purchase plan                                 |  | 572,087                                |   |                                       | 6      |                                                                              | 5,378    |                                            |             |                                                                                                                   |  |                                                                            
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|BALANCE AT
              FEBRUARY 28, 1999                                                                                       |  | 172,184,093                            |   |                                       | 1,722  |                                                                              | 551,232  |                                            | 536,487      |                                                                                                                   |  | 392                                                                         
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Comprehensive income (loss):                                                                                                    
|Net income                                                                                                                       |  |                                       |   |                                       |       |                                                                              |         |                                            | 464,271      |                                                                                                                   |  |                                                                            
|Other comprehensive
              income:                                                                                       
|Unrealized gain/(loss) on
              available-for-sale
            
                    securities, net of
              tax |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | 515,339                                                                     
|Effect of foreign currency
              translation                                                                             |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | (1,041                                                                      
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|Total
              comprehensive income                                                                                         |  |                                       |   |                                       |       |                                                                              |         |                                            |             |                                                                                                                   |  | 514,298                                                                     
|Exercise
              of options for shares of common
            
                stock                                        |  | 4,158,603                              |   |                                       | 42     |                                                                              | 44,265   |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of common stock for purchased
            
                acquisitions                                   |  | 6,198,779                              |   |                                       | 62     |                                                                              | 10,233   |                                            |             |                                                                                                                   |  |                                                                            
|Tax
              benefit for options exercised                                                                                  |  |                                       |   |                                       |       |                                                                              | 16,612   |                                            |             |                                                                                                                   |  |                                                                            
|Issuance
              of shares under employee stock
            
                purchase plan                                 |  | 1,043,962                              |   |                                       | 10     |                                                                              | 7,813    |                                            |             |                                                                                                                   |  |                                                                            
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             
|BALANCE AT
              FEBRUARY 29, 2000                                                                                       |  | 183,585,437                            |   |                                       | $1,836 |                                                                              | $630,155 |                                            | $1,000,758   |                                                                                                                   |  | $514,690                                                                    
|                                                                                                                                 |  |                                        |   |                                       |        |                                                                              |          |                                            |              |                                                                                                                   |  |                                                                             




See
            accompanying notes to consolidated financial
            statements.





CABLETRON SYSTEMS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


Years
            Ended February 29, 2000, February 28, 1999 and 1998


(in
            thousands)





|                                                                                                                                                                 |  | 2000        |   | 1999 |            | 1998
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | - | ---- | ---------- | ----
|Cash flows
              from operating activities:                                                                                                             
|Net income (loss)                                                                                                                                                |  | $  464,271  |   |      | $(245,391  | )   
|Adjustments to reconcile net income (loss) to net
              cash provided by
            

                        
                   operating activities:
|Depreciation and amortization                                                                                                                                    |  | 123,466     |   |      | 114,679    |     
|Provision for losses on accounts
              receivable                                                                                                        |  | (1,576      | ) |      | 2,240      |     
|Deferred income taxes                                                                                                                                            |  | 220,509     |   |      | (6,475     | )   
|Asset impairment                                                                                                                                                 |  | 7,869       |   |      | 17,570     |     
|Loss (gain) on disposal of property, plant and
              equipment                                                                                           |  | 1,589       |   |      | 781        |     
|Purchased research and development from
              acquisitions                                                                                               |  |            |   |      | 217,350    |     
|Gain on sale of FlowPoint                                                                                                                                        |  | (705,090    | ) |      |           |     
|Other income (non-cash)                                                                                                                                          |  | (16,330     | ) |      |           |     
|Changes in assets and liabilities:                                                                                                                              
|Accounts receivable                                                                                                                                              |  | (12,543     | ) |      | (9,059     | )   
|Inventories                                                                                                                                                      |  | 96,979      |   |      | 88,682     |     
|Prepaid expenses and other assets                                                                                                                                |  | 29,044      |   |      | (7,527     | )   
|Accounts payable and accrued expenses                                                                                                                            |  | 4,627       |   |      | (88,992    | )   
|Deferred revenue                                                                                                                                                 |  | 24,988      |   |      |           |     
|Deferred gain on sale of FlowPoint                                                                                                                               |  | (47,363     | ) |      |           |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Net cash provided by operating activities                                                                                                                        |  | 190,440     |   |      | 83,858     |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Cash flows
              from investing activities:                                                                                                             
|Capital expenditures                                                                                                                                             |  | (44,373     | ) |      | (44,773    | )   
|Cash paid for business acquisitions, net                                                                                                                         |  |            |   |      | (32,193    | )   
|Proceeds from sale of fixed assets                                                                                                                               |  | 6,680       |   |      | 24,531     |     
|Outsourcing of manufacturing                                                                                                                                     |  | 78,613      |   |      |           |     
|Purchase of available-for-sale securities                                                                                                                        |  | (392,130    | ) |      | (101,331   | )   
|Purchase of held-to-maturity securities                                                                                                                          |  | (302,168    | ) |      | (121,740   | )   
|Sales/maturities of marketable securities                                                                                                                        |  | 586,048     |   |      | 135,648    |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Net cash used in investing activities                                                                                                                            |  | (67,330     | ) |      | (139,858   | )   
|                                                                                                                                                                 |  |             |   |      |            |     
|Cash flows
              from financing activities:                                                                                                             
|Common stock issued to employee stock purchase
              plan                                                                                                |  | 7,823       |   |      | 5,384      |     
|Tax benefit of options exercised                                                                                                                                 |  | 16,612      |   |      | 1,510      |     
|Proceeds from exercise of stock options                                                                                                                          |  | 44,307      |   |      | 2,766      |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Net cash provided by financing activities                                                                                                                        |  | 68,742      |   |      | 9,660      |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Effect of
              exchange rate changes on cash                                                                                                            |  | (294        | ) |      | (1,316     | )   
|                                                                                                                                                                 |  |             |   |      |            |     
|Net
              (decrease) increase in cash and cash equivalents                                                                                               |  | 191,558     |   |      | (47,656    | )   
|Cash and
              cash equivalents, beginning of year                                                                                                       |  | 159,422     |   |      | 207,078    |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Cash and
              cash equivalents, end of year                                                                                                             |  | $  350,980  |   |      | $  159,422 |     
|                                                                                                                                                                 |  |             |   |      |            |     
|Cash paid
              (refunds received) during the year for:                                                                                                 
|Income taxes                                                                                                                                                     |  | $    (5,349 | ) |      | $  (28,706 | )   
|                                                                                                                                                                 |  |             |   |      |            |     




See
            accompanying notes to consolidated financial
            statements.





CABLETRON SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS





Note
            (1)    Business Operations





Cabletron
            Systems, Inc. (the Company) has established four
            subsidiaries; Aprisma Management Technologies, Enterasys Networks,
            GlobalNetwork Technology Services and Riverstone Networks;
            to focus on providing solutions for specific customer needs in the
            infrastructure management software market, the enterprise network
            solutions market, professional services and consulting and service
            provider network solutions customers.





Note
            (2)    Summary of Significant Accounting
            Policies





(a)  Principles of
            Consolidation





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





(b) 
             Investments





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





(c) 
             Inventories





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





(d)  Property, Plant
            and Equipment





Property,
            plant and equipment are stated at cost. Depreciation is provided on
            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. The
            Company reviews its long-lived assets for impairment whenever
            events or changes in circumstances indicate that the carrying
            amount of an asset may not be recoverable. If it is determined that
            the carrying amount of an asset cannot be fully recovered, an
            impairment loss is recognized.





(e)  Intangible
            Assets





Intangible
            assets consist of goodwill and other intangible assets acquired in
            business combinations at cost less accumulated amortization.
            Amortization of these intangible assets is provided on a
            straight-line basis over the respective useful lives which range
            from three to ten years. Purchased in-process research and
            development without alternative future use is expensed when
            acquired. The carrying amount of intangible assets is reviewed
            quarterly for impairment or whenever events or changes in
            circumstances indicate that the carrying amount of an asset may not
            be recoverable. The measurement of possible impairment is based
            primarily on an evaluation of undiscounted projected cash flows
            through the remaining amortization period.





CABLETRON
            SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(f)  Income
            Taxes





The Company
            accounts for income taxes under the asset and liability method.
            Under this method, deferred tax assets and liabilities are
            recognized for the future tax consequences attributable to
            differences between the financial statement carrying amounts of
            existing assets and liabilities and their respective tax bases and
            operating loss and tax credit carryforwards. Deferred tax assets
            and liabilities are measured using enacted tax rates expected to
            apply to taxable income in the years in which those temporary
            differences are expected to be recovered or settled. The effect of
            a change in tax rates on deferred tax assets and liabilities of a
            change in tax rates is recognized in income during the period that
            includes the enactment date. A valuation allowance is recognized if
            it is anticipated that some or all of a deferred tax asset may not
            be realized.





The Company
            has reinvested earnings of its foreign subsidiaries and, therefore
            has not provided income taxes that could result from the remittance
            of such earnings. The unremitted earnings at February 29, 2000 and
            February 28, 1999 amounted to approximately $184.6 million and
            $175.1 million, respectively. Furthermore, any taxes paid to
            foreign governments on those earnings may be used, in whole or in
            part, as credits against US tax on any dividends distributed from
            such earnings. It is not practicable to estimate the amount of
            unrecognized deferred US taxes on these undistributed
            earnings.





(g)  Net Income (Loss)
            Per Share





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





(h)  Foreign Currency
            Translation and Transaction Gains and Losses





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





(i)  Statements of Cash
            Flows





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





(j)  Revenue
            Recognition





The Company
            generally recognizes revenue upon shipment of products. In the case
            of design, consulting, installation and support services, revenues
            are recognized upon completion and acceptance of such products and
            services. The Company recognizes software revenue after the
            delivered software no longer requires significant production,
            modification, or further customization and collection of the
            related receivable is deemed probable. Revenues from service
            contracts are deferred and recognized ratably over the period the
            services are performed. Estimated warranty costs and sales returns
            and allowances are accrued at the time of shipment based on
            contractual rights and historical experience. The Company extends
            limited product return and price protection
          rights to certain distributors and resellers. Such rights are
            generally limited to a certain percentage of sales over primarily a
            three month period.





(k) 
             Reclassifications





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





(l) 
             Derivatives





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





(m)  Use of
            Estimates





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





(n)  New Accounting
            Pronouncements





In December
            1998, the AICPA Accounting Standards Executive Committee issued
            Statement of Position (SOP) 98-9, Modification of Software
            Revenue Recognition which requires revenue recognition of
            revenue using specific methods and amends SOP 98-4 (Deferral of the
            Effective Date of a Provision of SOP 97-2) and amends certain
            paragraphs of SOP 97-2. The Company adopted SOP 98-9 for its year
            ended February 29, 2000, beginning on March 1, 1999. The adoption
            of SOP 98-9 did not have a material impact on the Companys
            results of operations for the year ended February 29,
            2000.





In June
            1998, the FASB issued Financial Accounting Standard No. 133,
            Accounting for Derivative Instruments and Hedging
            Activities (SFAS 133) which requires companies to record
            derivative instruments on the balance sheet as assets or
            liabilities, measured at fair value. Gains or losses resulting from
            changes in the values of those derivatives would be accounted for
            depending on the use of the derivative and whether it qualifies for
            hedge accounting. SFAS 133 will be effective for the Companys
            first quarter of fiscal year ending March 2, 2002. Management is
            currently evaluating the potential effects of this pronouncement on
            its consolidated financial statements. However, management does not
            expect the impact to be significant.





CABLETRON
            SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Note
            (3)    Business Combinations





Acquisitions





For
            acquisitions accounted for as purchases, the Companys
            consolidated results of operations include the operating results of
            the acquired companies from their acquisition dates. Acquired
            assets and liabilities were recorded at their estimated fair market
            values at the acquisition date and the aggregate purchase price
            plus costs directly attributable to the completion of acquisitions
            has been allocated to the assets and liabilities
            acquired.





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





Cabletron
            recorded the cost of the acquisition at approximately $77.8
            million, including direct costs of $4.2 million. This acquisition
            has been accounted for under the purchase method of accounting. The
            cost represents 6.4 million shares at $9.9375 per share, in
            addition to assumed options and direct acquisition costs. Based on
            an independent appraisal, approximately $29.4 million of the
            purchase price was allocated to in-process research and
            development. Accordingly, Cabletron recorded a special charge of
            $29.4 million for this in-process research and development, at the
            date of acquisition. The excess of cost over the estimated fair
            value of net assets acquired of $35.6 million was allocated to
            goodwill and other intangible assets and is being amortized on a
            straight-line basis over a period of 5-10 years. Cabletrons
            consolidated results of operations include the operating results of
            NetVantage, Inc. from the acquisition date.





On September
            9, 1998, Cabletron acquired all of the outstanding stock of
            FlowPoint Corp., (FlowPoint) a privately held
            manufacturer of digital subscriber line router networking products.
            Prior to the agreement, Cabletron owned 42.8% of the outstanding
            shares of stock. Pursuant to the terms of the agreement, $20.6
            million was to be paid in four installments, within nine months
            after the merger date. Each installment would be paid in either
            cash or Cabletron common stock, as determined by Cabletron
            management at the time of distribution. During the year ended
            February 28, 1999, the Company paid the first installment in the
            form of cash and issued approximately 0.4 million shares of common
            stock in payment of the second installment. During the year ended
            February 29, 2000, the Company issued approximately 1.0 million
            shares of common stock in payment of the third and fourth
            installments. In addition, Cabletron assumed 494,000 options,
            valued at approximately $2.7 million.





Cabletron
            recorded the cost of the acquisition at approximately $25.0
            million, including direct costs of $0.4 million. This acquisition
            has been accounted for under the purchase method of accounting.
            Based on an independent appraisal, approximately $12.0 million of
            the purchase price was allocated to in-process research and
            development. Accordingly, Cabletron recorded a special charge of
            $12.0 million for this in-process research and development, at the
            date of acquisition. The excess of cost over the estimated fair
            value of net assets acquired of $11.9 million was allocated to
            goodwill and other intangible assets, and was amortized on a
            straight-line basis over a period of 5-10 years. Cabletrons
            consolidated results of operations include the operating results of
            FlowPoint from the acquisition date through December 18, 1999, the
            date that FlowPoint was sold to Efficient Networks, Inc. (see
            below)





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





Cabletron
            recorded the cost of the acquisition at approximately $45.1
            million, including direct costs of $1.1 million related to the
            acquisition, which consisted of cash payments of $33.5 million and
            other assumed
          liabilities. This acquisition has been accounted for under the
            purchase method of accounting. Based on an independent appraisal,
            approximately $26.0 million of the purchase price was allocated to
            in-process research and development. Accordingly, Cabletron
            recorded a special charge of approximately $26.0 million ($15.8
            million, net of tax) for this in-process research and development,
            at the date of acquisition. The excess of cost over the estimated
            fair value of net assets acquired of $18.2 million was allocated to
            goodwill, and was amortized on a straight-line basis over a period
            of 10 years. Cabletrons consolidated results of operations
            include the operating results of the DSLAM division of Ariel
            Corporation from the acquisition date. Cabletron ceased operations
            of the Ariel division in the fourth quarter of the year ended
            February 29, 2000. (see below)





On March 17,
            1998, Cabletron acquired Yago Systems, Inc. (Yago), a
            privately held manufacturer of wire speed routing and layer-4
            switching products and solutions. Under the terms of the merger
            agreement, Cabletron issued 6.0 million shares of Cabletron common
            stock to the shareholders of Yago in exchange for all of the
            outstanding shares of Yago, not then owned by Cabletron. Prior to
            the closing of the acquisition, Cabletron held approximately 25% of
            Yagos capital stock, calculated on a fully diluted basis.
            Cabletron also agreed, pursuant to the terms of the merger
            agreement, to issue up to 5.5 million shares of Cabletron common
            stock to the former shareholders of Yago in the event the shares
            originally issued in the transaction do not attain a market value
            of $35 per share eighteen months after the closing of the
            transaction. On September 8, 1999, Cabletron issued approximately
            5.2 million shares of Cabletron common stock to the former
            shareholders of Yago, pursuant to the terms of the merger
            agreement.





Cabletron
            recorded the cost of the acquisition at approximately $165.7
            million, including direct costs of $2.6 million. This acquisition
            has been accounted for under the purchase method of accounting. The
            cost represents 11.2 million shares at $14.1875 per share, in
            addition to direct acquisition costs. Based on an independent
            appraisal, approximately $150.0 million of the purchase price was
            allocated to in-process research and development. Accordingly,
            Cabletron recorded a special charge of $150.0 million for this
            in-process research and development, at the date of acquisition.
            The excess of cost over the estimated fair value of net assets
            acquired of $16.3 million was allocated to goodwill and other
            intangible assets and is being amortized on a straight-line basis
            over a period of 5-10 years. Cabletrons consolidated results
            of operations include the operating results of Yago from the
            acquisition date.





On February
            7, 1998, the Company acquired certain assets of the Network
            Products Group of Digital Equipment Corporation (DNPG).
            Under the terms of the agreement, the purchase price was
            approximately $439.5 million, consisting of cash, product credits
            and liabilities resulting from the acquisition. Based on an
            independent appraisal, approximately $199.3 million of the purchase
            price was allocated to in-process research and development.
            Accordingly, Cabletron recorded a special charge of $199.3 million
            for this in-process research and development at the date of
            acquisition. The excess of cost over the estimated fair value of
            $161.8 million was allocated to goodwill and other intangible
            assets and is being amortized on a straight-line basis over a
            period of 5 to 10 years. The Companys consolidated results of
            operations include the operating results of the acquired business
            from the acquisition date. During the third quarter of the year
            ended February 28, 1999, the Company sold buildings that it had
            purchased in the acquisition for $24.5 million. The gain from the
            sale of the buildings of $2.5 million was recorded as a reduction
            in goodwill.


CABLETRON
            SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS(Continued)








The following
            unaudited pro forma financial information is not necessarily
            indicative of results of operations that would have occurred had
            the aforementioned transactions taken place at the beginning of
            each fiscal year or of the future results of the combined
            companies. The special charges, related to these acquisitions, were
            not included in the results as these charges are unusual and not
            indicative of results of normal operating results.





|                                      |  | 1999       |   | 1998
|------------------------------------- |  | ---------- | - | ----
|
|Net
              sales               |  | $1,426,322 |   |     
|Operating
              income (loss) |  | (107,651   | ) |     




The purchase
            price for each acquisition, completed during the years ended
            February 28, 1999 and 1998, was allocated to assets acquired and
            liabilities assumed based on fair market value at the date of each
            acquisition. The total cost of acquisitions completed during the
            years ended February 28, 1999 and 1998, is summarized as
            follows:





|                                             |  | 1999      |  | 1998    
|-------------------------------------------- |  | --------- |  | --------
|
|Cash paid
              for acquisitions     |  | $  38,656 |  | $129,107
|Less cash
              acquired             |  | 6,463     |  |        
|                                             |  |           |  |         
|Net cash
              paid for acquisitions |  | 32,193    |  | 129,107 
|Product
              credits granted        |  |          |  | 302,500 
|Discount
              on product credits    |  |          |  | (11,691 
|Common
              stock issued            |  | 239,748   |  |        
|Installment payments and assumed options     |  | 15,239    |  |        
|Assumed
              liabilities            |  | 26,391    |  | 19,581  
|                                             |  |           |  |         
|Purchase price                               |  | $313,571  |  | $439,497
|                                             |  |           |  |         




The
            following are supplemental disclosures of noncash transactions in
            connection with the NetVantage, FlowPoint, Ariel, Yago and DNPG
            acquisitions.





|                                                  |  | 1999        |   | 1998
|------------------------------------------------- |  | ----------- | - | ----
|
|Fair value
              of assets acquired       |  | $    80,982 |   |     
|In-process
              research and development |  | 217,350     |   |     
|Assumed
              liabilities                 |  | (26,391     | ) |     
|Common
              stock issued                 |  | (239,748    | ) |     
|Product
              credits                     |  |            |   |     
|                                                  |  |             |   |     
|Cash portion of acquisition                       |  | $    32,193 |   |     
|                                                  |  |             |   |     




Dispositions





On December
            17, 1999, the Company sold its FlowPoint subsidiary to Efficient
            Networks, Inc. (Efficient). From March 1, 1999 through
            the date of the sale, FlowPoints net sales were approximately
            $34.5 million. Under the terms of the sale, the Company received
            7.2 million shares of Efficient common stock and 6,300 shares of
            Efficient convertible preferred stock, in exchange for all of the
            outstanding capital stock of FlowPoint. The preferred and common
            stock are subject to various restrictions on resale.


CABLETRON
            SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Based upon an
            independent valuation of the Efficient stock (which resulted in a
            10% discount from the closing price of the Efficient stock on the
            Nasdaq as of the sale date), the transaction was valued at
            approximately $946.2 million, resulting in a pre-tax gain of
            approximately $893.7 million. As a result of this transaction
            Cabletron held approximately 24% of the outstanding common stock of
            Efficient on an as converted basis. Accordingly, Cabletron deferred
            24% of the pre-tax gain ($235.9 million) since through its
            ownership percentage of Efficient, it effectively still had a 24%
            interest in FlowPoint. Because the Company has 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 (Note 4). As the company sells the
            Efficient shares, this deferred gain will be recognized into income
            adjusted for any unrealized gain or loss in proportion to
            Cabletrons reduction in its percentage ownership of
            Efficient. On February 8, 2000, the Company sold approximately 2.0
            million shares of Efficient common stock for net proceeds of
            approximately $135.3 million and recognized approximately $47.3
            million of the deferred gain into income.





During the
            fourth quarter of the year ended February 29, 2000, the Company
            finalized its decision to abandon research and development on
            digital subscriber line technology. This decision resulted in the
            aforementioned sale of FlowPoint and the abandonment of research
            and development efforts acquired in the Ariel acquisition. The
            cessation of the Ariel operations resulted in the write-off of the
            remaining $12.2 million of goodwill recorded from the Ariel
            acquisition.





Other
            transactions





On February
            29, 2000, the Company sold its manufacturing and repair services
            operations located in Rochester, New Hampshire and Limerick,
            Ireland to Flextronics International (Flextronics) for
            approximately $78.6 million in cash. Flextronics purchased, at net
            book value, approximately $18.1 million of the Companys
            manufacturing related fixed assets including buildings, assumed
            leases on certain leased buildings, and hired approximately 970 of
            the Companys manufacturing related employees. As part of the
            separation agreement with the manufacturing employees, the Company
            accelerated certain stock option vesting resulting in a $4.7
            million compensation charge. In addition, Flextronics purchased the
            Companys inventory with a cost of approximately $65.1 million
            for $60.5 million. Simultaneously, the Company entered into an
            agreement with Flextronics to manufacture most of its products as
            an original equipment manufacturer (OEM).





Subsequent events





On May 23,
            2000, the Company entered into a definitive agreement to sell DNPG.
            The agreement is subject to customary closing
            conditions.





On April 12,
            2000, the 6,300 shares of Efficient preferred stock were converted
            into 6.3 million shares of Efficient common stock.





The market
            for shares of Efficient common stock has been volatile. As of May
            23, 2000, the shares of Efficient have decreased to $38.43 per
            share from a per share price of $161.25 at February 29, 2000. The
            Company had 11.5 million shares of Efficient common stock as of May
            15, 2000.


CABLETRON
            SYSTEMS, INC.





NOTES TO
            CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Note
            (4)    Investments





Investments
            are summarized as follows at February 29, 2000 and February 28,
            1999:





|                                                                                                      |  | Amortized
            
            Cost |  | Gross
            
            Unrealized
            
            Gains |  | Gross
            
            Unrealized
            
            Losses |   | Fair
              Value
|----------------------------------------------------------------------------------------------------- |  | --------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------------------------------------------------------------------- | - | ------------------------
|
|February 29, 2000                                                                                     |  |                                        
|U.S.
              Government and Agency Obligations                                                  |  | $    199,655                            |  | $       
               70                                               |  | $    (169                                                                 | ) |                         
|U.S.
              Corporate Obligations                                                              |  | 5,596                                   |  | 2                                                                        |  | (50                                                                       | ) |                         
|Asset-Backed Securities                                                                               |  | 4,468                                   |  |                                                                         |  | (13                                                                       | ) |                         
|State,
              Municipal and County Government Notes and
            
                 Bonds    |  | 200,101                                 |  | 81                                                                       |  | (873                                                                      | ) |                         
|Corporate
              Equity Securities                                                             |  | 804,331                                 |  | 861,383                                                                  |  |                                                                          |   |                         
|Foreign
              Deposits                                                                        |  | 12,000                                  |  |                                                                         |  |                                                                          |   |                         
|                                                                                                      |  |                                         |  |                                                                          |  |                                                                           |   |                         
|Total                                                                                                 |  | $1,226,151                              |  | $861,536                                                                 |  | $(1,105                                                                   | ) |                         
|                                                                                                      |  |                                         |  |                                                                          |  |                                                                           |   |                         
|                                                                                                      | 
|
|February 28, 1999                                                                                     |  |                                        
|State,
               Municipal and County Government Notes and
             
                  Bonds |  | $    282,386                            |  | $    2,001                                                               |  | $      (43                                                                | ) |                         
|Foreign
               Deposits                                                                       |  | 12,647                                  |  |                                                                         |  |                                                                          |   |                         
|                                                                                                      |  |                                         |  |                                                                          |  |                                                                           |   |                         
|Total                                                                                                 |  | $    295,033                            |  | $    2,001                                                               |  | $      (43                                                                | ) |                         
|                                                                                                      |  |                                         |  |                                                                          |  |                                                                           |   |                         




The
             contractual maturities of debt securities at February 29,
             2000:





|                                  |  | Amortized
             
             Cost |  | Fair
               Value
|--------------------------------- |  | ----------------------------------------- |  | -------------------------
|
|Less than
               one year |  | $222,029                                  |  | $221,982                 
|Due in
               1-2 years   |  | 153,959                                   |  | 153,304                  
|Due in
               2-3 years   |  | 45,832                                    |  | 45,581                   
|                                  |  |                                           |  |                          
|Total                             |  | $421,820                                  |  | $420,867                 
|                                  |  |                                           |  |                          




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





|                   |  | Current   |  | Long-Term     |  | Total       
|------------------ |  | --------- |  | ------------- |  | ------------
|
|February 29, 2000  |  |          
|Held-to-Maturity   |  | $199,341  |  | $      39,312 |  | $    238,653
|Available-for-Sale |  | 22,640    |  | 1,825,289     |  | 1,847,929   
|                   |  |           |  |               |  |             
|Total              |  | $221,981  |  | $1,864,601    |  | $2,086,582  
|                   |  |           |  |               |  |             
|
|February 28, 1999  |  |          
|Held-to-Maturity   |  | $  61,255 |  | $      87,376 |  | $    148,631
|Available-for-Sale |  | 52,677    |  | 95,683        |  | 148,360     
|                   |  |           |  |               |  |             
|Total              |  | $113,932  |  | $    183,059  |  | $    296,991
|                   |  |           |  |               |  |             

CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Net unrealized
             gains (net of tax) on available-for-sale investments are reported
             as a separate component of stockholders equity until
             realized and amounted to $516.5 million and $1.2 million at
             February 29, 2000 and February 28, 1999, respectively.





The Company
             also has investments in certain non-public companies accounted for
             using the cost method of accounting. The carrying amount of these
             investments was $39.2 million and $21.9 million at February 29,
             2000 and February 28, 1999, respectively. These investments are
             reflected in long-term investments in the accompanying
             consolidated balance sheets.





The fair
             value of the February 29, 2000 corporate equity securities,
             $1,665.5 million, relates to the Companys investment in
             Common and Preferred Stock of Efficient Networks, Inc.





Note
             (5)    Inventories





Inventories
             consist of the following at February 29, 2000 and February 28,
             1999:





|                              |  | 2000    |  | 1999     
|----------------------------- |  | ------- |  | ---------
|
|Raw
               materials  |  | $20,503 |  | $  64,603
|Work-in-process               |  | 3,416   |  | 16,033   
|Finished
               goods |  | 61,097  |  | 148,876  
|                              |  |         |  |          
|Total                         |  | $85,016 |  | $229,512 
|                              |  |         |  |          




The
             reduction in inventory was partially a result of the outsourcing
             of manufacturing to Flextronics (Note 3).





Note
             (6)    Property, Plant and
             Equipment





Property,
             plant and equipment consist of the following at February 29, 2000
             and February 28, 1999:





|                                                              |  | 2000         |   | 1999 |              | Estimated
             
             useful lives
|------------------------------------------------------------- |  | ------------ | - | ---- | ------------ | -------------------------------------------------
|
|Land and
               land improvements                     |  | $      1,699 |   |      | $      1,855 |                                                  
|Buildings
               and building improvements            |  | 25,342       |   |      | 40,177       |                                                  
|Construction in progress                                      |  | 1,654        |   |      | 841          |                                                  
|Equipment                                                     |  | 258,872      |   |      | 325,021      |                                                  
|Furniture
               and fixtures                         |  | 13,710       |   |      | 13,333       |                                                  
|Leasehold
               improvements                         |  | 15,553       |   |      | 17,751       |                                                  
|                                                              |  |              |   |      |              |                                                  
|                                                              |  | 316,830      |   |      | 398,978      |                                                  
|Less
               accumulated depreciation and amortization |  | (191,838     | ) |      | (210,499     | )                                                
|                                                              |  |              |   |      |              |                                                  
|                                                              |  | $  124,992   |   |      | $  188,479   |                                                  
|                                                              |  |              |   |      |              |                                                  




For the
             years ended February 29, 2000, February 28, 1999 and 1998,
             depreciation expense was $78.1 million, $87.5 million and $64.8
             million, respectively.





The
             reduction in property, plant and equipment at February 29, 2000
             compared to February 28, 1999 was partially a result of the
             outsourcing of manufacturing to Flextronics (Note 3).





In the
             fourth quarter of the year ended February 28, 1999, the Company
             performed a physical inventory of manufacturing equipment and
             fixtures in preparation for the planned outsourcing of its
             manufacturing operations. As a result of this inventory, the
             Company wrote off approximately $17.6 million of net book value of
             assets. The writeoff consisted of equipment and fixtures that
             could not be located and equipment that had been recently idled
             and of no future use. The writeoff was recorded in the caption
             special charges in the consolidated statements of
             operations.


CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Note
             (7)    Intangible Assets





Intangible
             assets consist of the following at February 29, 2000 and February
             28, 1999:





|                                                                          |  | 2000      |   | 1999 |           | Estimated
             
             useful lives
|------------------------------------------------------------------------- |  | --------- | - | ---- | --------- | -------------------------------------------------
|
|Goodwill                                                                  |  | $  38,912 |   |      | $  82,358 |                                                  
|Customer
               relations                                         |  | 97,000    |   |      | 97,000    |                                                  
|Assembled
               work force                                       |  | 7,380     |   |      | 7,380     |                                                  
|Patents
               and technologies acquired in business acquisitions |  | 41,200    |   |      | 41,652    |                                                  
|                                                                          |  |           |   |      |           |                                                  
|                                                                          |  | 184,492   |   |      | 228,390   |                                                  
|Less
               accumulated amortization                              |  | (54,208   | ) |      | (28,971   | )                                                
|                                                                          |  |           |   |      |           |                                                  
|Total                                                                     |  | $130,284  |   |      | $199,419  |                                                  
|                                                                          |  |           |   |      |           |                                                  




The
             reduction in goodwill was a result of the Companys sale of
             FlowPoint, its decision to close all of the operations acquired in
             the Ariel acquisition (Note 3) and utilization of acquired net
             operating losses in purchase transactions (Note 11).





Note
             (8)    Accrued Expenses





Accrued
             expenses consist of the following at February 29, 2000 and
             February 28, 1999:





|                                   |  | 2000      |  | 1999     
|---------------------------------- |  | --------- |  | ---------
|
|Salaries
               & benefits |  | $  31,724 |  | $  27,777
|Other                              |  | 100,977   |  | 96,349   
|                                   |  |           |  |          
|Total                              |  | $132,701  |  | $124,126 
|                                   |  |           |  |          




Note
             (9)    Other Obligations





As a term
             of the Asset Purchase Agreement between the Company and Digital
             Equipment Corp., Digital received product credits of $302.5
             million, which were subsequently adjusted to $288.4 million with
             the final valuation of the assets acquired. In April 1998, Compaq
             Corporation (Compaq) acquired Digital and Compaq
             assumed these product credits. The product credits were used by
             Compaq to purchase products that were ordered under a reseller
             agreement. At February 29, 2000 all product credits had been
             consumed, while $129.7 million of product credits remained at
             February 28, 1999.


CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Note
             (10)    Leases





The Company
             leases manufacturing and office facilities under noncancelable
             operating leases expiring through the year 2020. The leases
             provide for increases based on the consumer price index and
             increases in real estate taxes. Rent expense associated with
             operating leases was approximately $22.7 million, $18.1 million
             and $14.6 million for the years ended February 29, 2000, February
             28, 1999 and 1998, respectively.





Total
             future minimum lease payments under all noncancelable operating
             leases as of February 29, 2000, are as follows:





|Year       |  | (in
               thousands)
|---------- |  | -----------------------------
|2001       |  | $15,409                      
|2002       |  | 12,119                       
|2003       |  | 11,031                       
|2004       |  | 9,789                        
|2005       |  | 9,628                        
|Thereafter |  | 18,187                       
|           |  |                              
|           |  | $76,163                      
|           |  |                              




Note
             (11)    Income Taxes





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





|                                                               |  | 2000      |  | 1999       |   | 1998
|-------------------------------------------------------------- |  | --------- |  | ---------- | - | ----
|
|Total US
               domestic income (loss)                 |  | $730,784  |  | $(315,428  | ) |     
|Total
               foreign subsidiaries income (loss)        |  | 28,237    |  | 38,901     |   |     
|                                                               |  |           |  |            |   |     
|Total
               income (loss) before income taxes         |  | $759,021  |  | $(276,527  | ) |     
|                                                               |  |           |  |            |   |     
|                                                              
|Tax
               expense (benefit) is summarized as follows:
|                                                              
|Currently
               payable:                             
|Federal                                                        |  | $  32,483 |  | $  (29,939 | ) |     
|State                                                          |  | 6,400     |  |           |   |     
|Foreign                                                        |  | 5,951     |  | 13,254     |   |     
|Deferred
               tax expense (benefit)                  |  | 249,916   |  | (14,451    | ) |     
|                                                               |  |           |  |            |   |     
|Tax expense (benefit)                                          |  | $294,750  |  | $  (31,136 | ) |     
|                                                               |  |           |  |            |   |     

CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








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





|                                                                      |  | 2000 |   | 1999 |       | 1998
|--------------------------------------------------------------------- |  | ---- | - | ---- | ----- | ----
|Statutory
               federal income tax (benefit) rate            |  | 35.0 | % |      | (35.0 | )%  
|State
               income tax, net of federal tax benefit           |  | 4.9  |   |      | (1.9  | )   
|Exempt
               income of foreign sales corporation, net of tax |  |     |   |      | (1.7  | )   
|Research
               and experimentation credit                    |  | (0.4 | ) |      | (0.7  | )   
|Municipal
               income                                       |  | (0.4 | ) |      | (1.6  | )   
|Rate
               differential on foreign operations                |  | (0.5 | ) |      | (1.2  | )   
|Nondeductible goodwill & intangibles                                  |  | 0.5  |   |      | 27.5  |     
|Other                                                                 |  | (0.3 | ) |      | 3.3   |     
|                                                                      |  |      |   |      |       |     
|                                                                      |  | 38.8 | % |      | (11.3 | )%  
|                                                                      |  |      |   |      |       |     




The tax
             effects of temporary differences that give rise to significant
             portions of deferred tax assets and deferred tax liabilities at
             February 29, 2000 and February 28, 1999 are presented
             below:





|                                                                                       |  | 2000         |   | 1999
|-------------------------------------------------------------------------------------- |  | ------------ | - | ----
|
|Deferred
               tax assets:                                                    |  |              |   |     
|Accounts receivable                                                                    |  | $      2,107 |   |     
|Inventories                                                                            |  | 34,282       |   |     
|Property, plant and equipment                                                          |  | 3,806        |   |     
|Other reserves and accruals                                                            |  | 38,806       |   |     
|Acquired research and development                                                      |  | 104,521      |   |     
|Domestic net operating loss carryforwards                                              |  | 12,854       |   |     
|Foreign net operating loss carryforwards                                               |  | 23,079       |   |     
|                                                                                       |  |              |   |     
|Total gross deferred tax assets                                                        |  | 219,455      |   |     
|Less valuation allowance                                                               |  | (26,672      | ) |     
|                                                                                       |  |              |   |     
|Net deferred tax assets                                                                |  | 192,783      |   |     
|Deferred
               tax liabilities:                                               |  |              |   |     
|Financial basis in excess of tax basis in
               available-for-sale securities |  | (569,833     | ) |     
|Property, plant and equipment                                                          |  |             |   |     
|                                                                                       |  |              |   |     
|Total gross deferred liabilities                                                       |  | (569,833     | ) |     
|                                                                                       |  |              |   |     
|Net deferred tax (liabilities)
               assets                                   |  | $(377,050    | ) |     
|                                                                                       |  |              |   |     




At February
             29, 2000, the Company had domestic net operating loss (NOL)
             carryforwards for tax purposes of $33.6 million expiring in fiscal
             2005 through fiscal 2018. Almost all of the above stated NOL
             amount is subject to a §382 limitation due to prior ownership
             changes.





The net
             change in the total valuation allowance for the year ended
             February 29, 2000 was a decrease of $8.0 million, of which $11.7
             million of the gross decrease represented a reduction to goodwill
             due to utilization of acquired net operating losses in purchase
             transactions. The net change in total valuation allowance for the
             year ended February 28, 1999 was a decrease of $11.3 million.
             Based upon the level of historical taxable income and projections
             for future taxable income over the periods which the deferred tax
             assets are deductible, management believes it is more likely than
             not the Company will realize the benefits of these deductible
             differences, net of the existing valuation allowance at February
             29, 2000.


CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Note
             (12)    Comprehensive Income
             (Loss)





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





|                                                                       |  | 2000       |   | 1999 |           | 1998
|---------------------------------------------------------------------- |  | ---------- | - | ---- | --------- | ----
|
|Net
               income (loss)                                       |  | $  464,271 |   |      | $(245,391 | )   
|Other
               comprehensive income                              |  |            |   |      |           |     
|Unrealized gain/(loss) on available-for-sale
               securities |  | 858,473    |   |      | 1,958     |     
|Foreign currency translation adjustment                                |  | (1,041     | ) |      | (1,574    | )   
|Income tax expense                                                     |  | (343,134   | ) |      | (772      | )   
|                                                                       |  |            |   |      |           |     
|Total comprehensive income (loss)                                      |  | $  978,569 |   |      | $(245,779 | )   
|                                                                       |  |            |   |      |           |     




Income tax
             expense in the years ended February 29, 2000 and February 28,
             1999, respectively, relate to unrealized gain on
             available-for-sale securities.





Note
             (13)    Net Income (Loss) per
             Share





The
             Companys reported net income (loss) per share was as
             follows:





|                                                                        |  | 2000        |  | 1999         |   | 1998
|----------------------------------------------------------------------- |  | ----------- |  | ------------ | - | ----
|
|                                                                       
|Weighted
               average number of shares outstandingbasic      |  | 177,541     |  | 167,432      |   |     
|Dilutive
               effect:                                         |  |             |  |              |   |     
|Contingent shares per acquisition
               agreement              |  | 2,672       |  |             |   |     
|Incremental shares upon exercise of common stock
               options |  | 8,405       |  |             |   |     
|                                                                        |  |             |  |              |   |     
|Weighted
               average number of shares outstandingdiluted    |  | 188,618     |  | 167,432      |   |     
|                                                                        |  |             |  |              |   |     
|Net
               income (loss)                                        |  | $464,271    |  | $(245,391    | ) |     
|                                                                        |  |             |  |              |   |     
|Basic
               income (loss) per share amount                     |  | $      2.62 |  | $      (1.47 | ) |     
|                                                                        |  |             |  |              |   |     
|Diluted
               income (loss) per share amount                   |  | $      2.46 |  | $      (1.47 | ) |     
|                                                                        |  |             |  |              |   |     




For 1999
             and 1998, stock options to purchase shares of common stock
             totaling 4.5 million and 4.1 million, respectively, were
             outstanding but were not included in the calculation of diluted
             earnings per share since the effect was anti-dilutive. In
             addition, the effect of the 5.5 million shares that were
             contingently issuable related to the acquisition of Yago, as of
             the end of the years ended February 28, 1999 and 1998, was not
             included since the effect was anti-dilutive.





Note
             (14)    Financial Instruments and
             Concentration of Credit Risk





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





At February
             29, 2000 and February 28, 1999, the Company had forward exchange
             contracts and purchased option contracts, all having maturities
             less than two years, with a notional amount of $31.9 million
             (forward contracts were $3.9 million and option contracts were
             $28.0 million) and $47.0 million (forward contracts were $8.0
             million and option contracts were $39.0 million),
             respectively.





The
             estimated fair value of the Companys option and forward
             contracts reflects the estimated amounts the Company would receive
             or pay to terminate the contracts at the reporting dates, thereby
             taking into account the current unrealized gains and losses on
             open contracts. These contracts did not have a material fair value
             at February 29, 2000 and February 28, 1999.





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





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





For the
             year ended February 29, 2000, one customer, Compaq, accounted for
             approximately 16% of net sales and sales to the United States
             federal government accounted for approximately 14% of net sales.
             For the year ended February 28, 1999, one customer, Compaq,
             accounted for approximately 11% of net sales and sales to the
             United States federal government accounted for approximately 15%
             of net sales. For the year ended February 28, 1998 no single
             customer represented more than 4% of net sales, however, sales to
             the United States federal government accounted for approximately
             13% of net sales.





Note
             (15)    Segment and Geographical
             Information





The Company
             provides a broad product line and services for the computer
             networking industry. Substantially all revenues result from the
             sales of hardware and software products and professional services
             (training, installation, maintenance, etc.). During the year ended
             February 29, 2000, sales of switched products were $948.4 million,
             sales of shared media products were $66.3 million, sales of other
             older legacy products and Spectrum were $177.0 million and sales
             from professional services and maintenance were $267.9 million
             compared to sales of switched products of $810.2 million, sales of
             shared media products of $165.8 million, sales of other various
             legacy products and Spectrum of $165.3 million and sales from
             professional services of $270.0 million during the year ended
             February 28, 1999. During the year ended February 28, 1998, sales
             of switched products were $680.6 million, sales of shared media
             products were $317.6 million and sales of software, professional
             services and other were $379.1 million. The Companys
             reportable segments are based on geographic area. All intercompany
             revenues and expenses are eliminated in computing revenues and
             operating income. Operating income excludes other income (net),
             interest income, interest expense, taxes and special charges.
             Long-lived assets consist primarily of the net book value of
             property, plant and equipment, long-term investments and goodwill.
             The long-term investments and goodwill were attributable to the
             United States. The Other segment includes Canada and Latin
             America.





All revenue
             amounts are based on product shipment destination and asset
             balances are based on location. The United States operating income
             amount for the year ended February 29, 2000 excludes the $21.1
             million of
           special charges related to the restructuring recorded during that
             fiscal year. The United States operating income amount for the
             year ended February 28, 1999 excludes special charges of $17.6
             million related to fixed asset loss and the $217.4 million related
             to acquisitions completed during that fiscal year. The United
             States operating income in the year ended February 28, 1998
             excludes the $199.3 million of special charges related to
             acquisitions completed during that fiscal year and the $35.0
             million of special charges related to the realignment.





|                                                        |  | 2000                           |   | 1999 |              | 1998
|------------------------------------------------------- |  | ------------------------------ | - | ---- | ------------ | ----
|
|Sales to
               unaffiliated customers (trade): |  |                                |   |      |              |     
|United States                                           |  | $    951,319                   |   |      | $    829,381 |     
|Europe                                                  |  | 342,226                        |   |      | 430,283      |     
|Pac Rim                                                 |  | 116,417                        |   |      | 114,174      |     
|Other                                                   |  | 49,631                         |   |      | 37,441       |     
|                                                        |  |                                |   |      |              |     
|Total trade sales                                       |  | $1,459,593                     |   |      | $1,411,279   |     
|                                                        |  |                                |   |      |              |     
|Operating
               income (loss):                 |  |                                |   |      |              |     
|United States                                           |  | $       
                1,648 |   |      | $    (68,027 | )   
|Europe                                                  |  | 15,913                         |   |      | 32,829       |     
|Pac Rim                                                 |  | (2,905                         | ) |      | (7,422       | )   
|Other                                                   |  | 665                            |   |      | (14,076      | )   
|                                                        |  |                                |   |      |              |     
|Total operating income (loss)                           |  | $      15,321                  |   |      | $    (56,696 | )   
|                                                        |  |                                |   |      |              |     
|                                                       
|
|Assets:                                                 |  |                                |   |      |              |     
|United States                                           |  | $2,941,082                     |   |      | $1,326,929   |     
|Europe                                                  |  | 154,672                        |   |      | 173,937      |     
|Pac Rim                                                 |  | 44,620                         |   |      | 37,586       |     
|Other                                                   |  | 26,133                         |   |      | 28,048       |     
|                                                        |  |                                |   |      |              |     
|Total assets                                            |  | $3,166,507                     |   |      | $1,566,500   |     
|                                                        |  |                                |   |      |              |     
|Long-lived assets:                                      |  |                                |   |      |              |     
|United States                                           |  | $2,035,246                     |   |      | $    438,864 |     
|Europe                                                  |  | 15,560                         |   |      | 19,453       |     
|Pac Rim                                                 |  | 3,784                          |   |      | 5,828        |     
|Other                                                   |  | 2,233                          |   |      | 2,503        |     
|                                                        |  |                                |   |      |              |     
|Total long-lived assets                                 |  | $2,056,823                     |   |      | $    466,648 |     
|                                                        |  |                                |   |      |              |     




The Company
             has announced that it plans to establish four separate operating
             subsidiaries during the year ended March 3, 2001. During the years
             ended February 29, 2000, February 28, 1999 and February 28, 1998
             information was not available for each of these new operating
             subsidiaries. The Company is in the process of completing a
             historical carve-out of financial information for these operating
             subsidiaries. The Company expects to provide such information in
             future filings.





Note
             (16)    Legal Proceedings





As
             previously disclosed in Cabletrons annual reports on Form
             10-K for the years ended February 28, 1999 and 1998, a
             consolidated class action lawsuit purporting to state claims
             against Cabletron and certain officers
           and directors of Cabletron was filed in the United States District
             Court for the District of New Hampshire and, following transfer,
             is pending in the District of Rhode Island. The complaint alleges
             that Cabletron and several of its officers and directors
             disseminated materially false and misleading information about
             Cabletrons operations and acted in violation of Section
             10(b) and Rule 10b-5 of the Exchange Act during the period between
             March 3, 1997 and December 2, 1997. The complaint also alleges
             that certain of the Companys alleged accounting practices
             resulted in the disclosure of materially misleading financial
             results during the same period. More specifically, the complaint
             challenged the Companys revenue recognition policies,
             accounting for product returns, and the validity of certain sales.
             The complaint does not specify the amount of damages sought on
             behalf of the class. Cabletron and other defendants moved to
             dismiss the complaint and, by Order dated December 23, 1998, the
             District Court expressed its intention to grant Cabletrons
             motion to dismiss unless the plaintiffs amended their complaint.
             The Plaintiffs timely served a Second Consolidation Class Action
             Complaint, and the Company has filed a motion to dismiss this
             second complaint. A ruling on that motion is not expected earlier
             than June 2000. The legal costs incurred by Cabletron in defending
             itself and its officers and directors against this litigation,
             whether or not it prevails, could be substantial, and in the event
             that the plaintiffs prevail, the Company could be required to pay
             substantial damages. This litigation may be protracted and may
             result in a diversion of management and other resources of the
             Company. The payment of substantial legal costs or damages, or the
             diversion of management and other resources, could have a material
             adverse effect on the Companys business, financial condition
             or results of operations.





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





Note
             (17)    Stock Plans





(a)  Equity Incentive
             and Directors Plans





The Company
             has an Equity Incentive Plan which provides for the availability
             of 25,000,000 shares of common stock for the granting of a variety
             of incentive awards to eligible employees. As of February 29,
             2000, the Company had issued 9,132,816 stock options under the
             Equity Incentive Plan, which were granted at fair market value at
             the date of grant, vest over a three to five year period and
             expire within six to ten years from the date of grant. In
             addition, the Company has assumed approximately 7.0 million of
             stock options related to certain business acquisitions. (Note
             3)





Prior to
             February 28, 1999, the Company maintained a Directors Option Plan
             which provided for 2,500,000 shares of common stock for purchase
             by nonemployee directors of the Company. The Directors Option Plan
             provided for issuance of options at their fair market value on the
             date of grant. The options vest over a period of three years and
             expire six years from the date of grant. A total of 435,000 stock
             options are outstanding under the Directors Option Plan at
             February 29, 2000. Since March 1, 1999, the nonemployee directors
             of the Company were granted options to purchase shares of common
             stock in accordance with the Companys 1998 Equity Incentive
             Plan.


CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








A summary of
             option transactions under the two plans follows:





|                                                        |  | Number
               of
             
             Options |   | Weighted-Average
             
             Exercise Price
|------------------------------------------------------- |  | ----------------------------------------------------------- | - | ----------------------------------------------------------
|Options
               outstanding at February 28, 1997 |  | 13,595,418                                                  |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               exercisable at February 28, 1997 |  | 3,356,372                                                   |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Granted
               and assumed                      |  | 5,015,000                                                   |   |                                                           
|Exercised                                               |  | (1,762,565                                                  | ) |                                                           
|Cancelled                                               |  | (1,968,762                                                  | ) |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               outstanding at February 28, 1998 |  | 14,879,091                                                  |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               exercisable at February 28, 1998 |  | 4,134,623                                                   |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Granted
               and assumed                      |  | 20,023,369                                                  |   |                                                           
|Exercised                                               |  | (497,696                                                    | ) |                                                           
|Cancelled                                               |  | (15,421,085                                                 | ) |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               outstanding at February 28, 1999 |  | 18,983,679                                                  |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               exercisable at February 28, 1999 |  | 4,518,681                                                   |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Granted                                                 |  | 6,030,560                                                   |   |                                                           
|Exercised                                               |  | (4,158,603                                                  | ) |                                                           
|Cancelled                                               |  | (4,857,380                                                  | ) |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               outstanding at February 29, 2000 |  | 15,998,256                                                  |   |                                                           
|                                                        |  |                                                             |   |                                                           
|Options
               exercisable at February 29, 2000 |  | 2,916,651                                                   |   |                                                           
|                                                        |  |                                                             |   |                                                           




*In
             September 1998, employees holding outstanding stock options with a
             value exceeding $7.25 per option were given the right to have
             their options canceled and repriced to $7.25 per option. The
             repriced options will vest over a period of four to six years. In
             December 1997, employees holding outstanding stock options with a
             value exceeding $14.6875 per option were given the right to have
             their stock options canceled and repriced to $14.6875 per option.
             The repriced options will vest over a period of one to five
             years.





The
             following table summarizes information concerning currently
             outstanding and exercisable options as of February 29,
             2000:





|Range
               of
             
             exercise prices |  | Options
             
             Outstanding |  | Weighted-average
             
             remaining
             
             contractual life
             
             (years) |  | Weighted-average
             
             exercise price |  | Options
             
             exercisable |  | Weighted-average
             
             exercise price
|------------------------------------------------------------------ |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------------------
|$ 0.00   6.30                                                     |  | 175,450                                        |  | 5.8                                                                                                                                  |  | $  0.78                                                    |  | 107,164                                        |  | $  1.06                                                   
|6.31   7.85                                                       |  | 8,656,435                                      |  | 7.0                                                                                                                                  |  | 7.25                                                       |  | 1,721,549                                      |  | 7.25                                                      
|7.86   9.85                                                       |  | 1,055,252                                      |  | 7.5                                                                                                                                  |  | 8.77                                                       |  | 239,350                                        |  | 8.73                                                      
|9.86  11.85                                                       |  | 620,256                                        |  | 6.6                                                                                                                                  |  | 10.54                                                      |  | 278,623                                        |  | 10.44                                                     
|11.86  13.85                                                      |  | 2,900,654                                      |  | 9.0                                                                                                                                  |  | 13.43                                                      |  | 170,968                                        |  | 12.93                                                     
|13.86  23.85                                                      |  | 934,765                                        |  | 8.4                                                                                                                                  |  | 16.73                                                      |  | 151,715                                        |  | 16.42                                                     
|23.86  33.85                                                      |  | 1,482,084                                      |  | 8.4                                                                                                                                  |  | 26.26                                                      |  | 232,642                                        |  | 30.16                                                     
|33.86  56.74                                                      |  | 173,360                                        |  | 9.5                                                                                                                                  |  | 36.38                                                      |  | 14,640                                         |  | 40.34                                                     
|                                                                   |  |                                                |  |                                                                                                                                      |  |                                                            |  |                                                |  |                                                           
|                                                                   |  | 15,998,256                                     |  | 7.6                                                                                                                                  |  | $11.16                                                     |  | 2,916,651                                      |  | $10.26                                                    
|                                                                   |  |                                                |  |                                                                                                                                      |  |                                                            |  |                                                |  |                                                           

CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








The weighted
             average estimated fair values of stock options granted and assumed
             during the years ended February 29, 2000 and February 28, 1999 and
             1998 were $16.25, $7.69 and $9.19 per share,
             respectively.





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





|                                  |  | 2000        |  | 1999         |   | 1998
|--------------------------------- |  | ----------- |  | ------------ | - | ----
|
|Net
               income (loss)  |  |             |  |              |   |     
|As reported                       |  | $464,271    |  | $(245,391    | ) |     
|Pro forma                         |  | $413,280    |  | $(299,654    | ) |     
|Diluted earnings (loss) per share |  |             |  |              |   |     
|As reported                       |  | $      2.46 |  | $      (1.47 | ) |     
|Pro forma                         |  | $      2.19 |  | $      (1.79 | ) |     




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





The fair
             value of each option grant was estimated on the date of grant
             using the Black-Scholes option pricing model, with the following
             assumptions used for grants in the years ended February 29, 2000,
             February 28, 1999 and 1998:





|                                        |  | 2000                     |  | 1999                     |  | 1998                    
|--------------------------------------- |  | ------------------------ |  | ------------------------ |  | ------------------------
|Risk-free
               interest rates |  | 6.59%                    |  | 5.1%                     |  | 6.13%                   
|Expected
               option lives    |  | 3.7
               Years |  | 3.7
               years |  | 3.8
               years
|Expected
               volatility      |  | 70.14%                   |  | 76.32%                   |  | 60.37%                  
|Expected
               dividend yields |  | 0.0%                     |  | 0.0%                     |  | 0.0%                    




(b)  Employee Stock
             Purchase Plans





The Company
             maintains a broad-based employee stock purchase program to
             encourage employee ownership of Common Stock on a tax-benefited
             basis. Participation is generally open to all employees as of the
             first participation period enrollment subsequent to date of hire.
             The program permits participants to apply up to 20% of pay,
             accumulated through payroll deductions, toward the purchase of
             shares at a discount to market price at the end of each six-month
             participation period. Shares are issued under two
             shareholder-approved plans which together make up the program.
             Purchases for each participation period are subject to a maximum
             dollar amount divided by the value of a share of stock at the
             beginning of the participation period. In the year ended February
             29, 2000, 1,043,962 shares were purchased at a weighted average
             price of $7.49 (572,087 at $9.41 and 231,326 at $27.00, for the
             years ended February 28, 1999 and 1998, respectively). The
             remaining balance of both ESPPs for purchase by employees at
             February 29, 2000 was 3,100,558 shares.





Note
             (18)    Restructuring





In the year
             ended February 29, 2000, the Company recorded $21.1 million of
             special charges for the restructuring initiative undertaken during
             March 1999. These charges reflect the closure of the Companys
           manufacturing facility in Ohio, the planned closure of 40 sales
             offices worldwide (37 of which were closed as of February 29,
             2000), the consolidation and outsourcing of manufacturing
             operations, the write-off of certain assets that were not required
             subsequent to the restructuring and the planned reduction of
             approximately 1,000 individuals from the Companys global
             workforce. The reduction in the global workforce is expected to be
             principally manufacturing and distribution personnel but will also
             include targeted reductions impacting most functions within the
             Company. The exit costs which the Company expects to incur relate
             primarily to long-term lease commitments and repayments of
             economic development grants resulting from the closing of the Ohio
             facility. This initiative is intended to reduce the expense
             structure of the Company; lower cost of goods sold; increase cash
             reserves; provide higher return on assets and revenue per
             employee; enable aggressive asset reduction and consolidation
             initiatives and increase net income. As of February 29,
             2000, 418 employees have been terminated in accordance with the
             plan and an additional 260 employees were terminated under the
             plan subsequent to February 29, 2000. An adjustment to the
             original severance benefits charge was required, because the
             Company signed an agreement to outsource its manufacturing assets
             to a different OEM than originally planned. This OEM, Flextronics,
             hired more personnel than originally estimated.





The
             following table summarizes the recorded accruals and uses of the
             restructuring initiative from inception through February 29,
             2000:





|                                              |  | Asset
             
             Impairments |   | Severance
             
             Benefits |          | Exit
             
             Costs |  | Total   
|--------------------------------------------- |  | -------------------------------------------- | - | --------------------------------------------- | -------- | ------------------------------------- |  | --------
|
|Total
               charge                   |  | $  7,869                                     |   |                                               | $11,657  |                                       |  | $  4,210
|Cash
               payments since inception  |  |                                             |   |                                               | (6,634   | )                                     |  | (1,162  
|Non-cash
               items since inception |  | (7,947                                       | ) |                                               |         |                                       |  |        
|Adjustments to original charge                |  | 78                                           |   |                                               | (2,939   | )                                     |  | 221     
|                                              |  |                                              |   |                                               |          |                                       |  |         
|Accrual balance as of February 29, 2000       |  | $                                           |   |                                               | $  2,084 |                                       |  | $  3,269
|                                              |  |                                              |   |                                               |          |                                       |  |         




The
             December 16, 1997 realignment plan was intended to better align
             the Companys business strategy with its focus in the
             enterprise and service provider markets. The realignment was
             intended to better position the Company to provide more
             solutions-oriented products and service; to increase its
             distribution of products through third-party distributors and
             resellers; to improve its position internationally and to
             aggressively develop partnership and acquisition opportunities.
             The Company incurred a charge in the year ended February 28, 1998
             of $35.0 million related to the realignment. The realignment
             included general expense reduction through the elimination of
             duplicate facilities, consolidation of related operations,
             reallocation of resources, including the elimination of certain
             existing projects, and personnel reduction. During the year ended
             February 28, 1999, all initiatives and cash payments required
             under the realignment were completed.





Note
             (19)    Compaq Agreement





As
             previously discussed in Note 3, the Company acquired certain
             assets of the Network Products Group of Digital Equipment
             Corporation, on February 7, 1998. With this acquisition, Digital
             Equipment Corporation (Digital) entered into a
             reseller agreement with the Company pursuant to which Digital
             committed to purchase from the Company a minimum amount of product
             bearing the Digital brand name. The reseller agreement was
             scheduled to expire on June 30, 2001. On June 11, 1998, Digital
             was acquired by Compaq Computer Corporation (Compaq).
             On May 25, 1999, Compaq entered into an OEM agreement with the
             Company pursuant to which Compaq committed to purchase from the
             Company a minimum amount of networking product bearing the Compaq
             brand name as well as product bearing the Digital brand name. The
             OEM agreement contained, among other things, a pricing rebate that
             compensated the Company for Compaq purchase shortfalls. The OEM
             agreement was scheduled to expire on June 30, 2001.





CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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





In
             addition, Compaq paid the Company $25.0 million to eliminate
             Compaqs quarterly purchase commitments going forward. This
             $25.0 million has been recorded in other income since the payment
             is not refundable under any circumstances.





Additionally, as part of the transition from the OEM
             agreement, Compaq has returned to the Company certain networking
             product inventory, previously purchased and paid for, that can be
             reworked and resold as Cabletron branded product. The Company has
             no further obligation to compensate Compaq for this returned
             product. The original cost, less estimated rework, of this
             inventory is $12.2 million and has been recorded as other
             income.





As part of
             the alliance agreement, Compaq has agreed to continue to act as a
             reseller of Cabletron hardware and software products over the next
             two years; pursuant to this agreement, Compaq issued $34.0 million
             of prepaid purchase orders for Company product of which $8.2
             million has been shipped by February 29, 2000. The remaining $25.8
             million has been recorded as deferred revenue as of February 29,
             2000 and will be recorded in sales as Compaq accepts the product
             over the next two-year period.





In
             addition, the parties have agreed to pursue a strategic alliance
             focused on Cabletrons Spectrum network management software.
             Compaq, in furtherance of this alliance, has committed to make a
             $14.0 million equity investment in Cabletrons recently
             formed subsidiary, Aprisma, which markets Spectrum
             products.


CABLETRON SYSTEMS, INC.





NOTES TO
             CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Note
             (20)    Quarterly Financial Data
             (unaudited)





|                              |  | Net
               Sales |  | Gross
             
             Profit |  | Income
             
             (Loss) from
             
             Operations |      | Net
               Income
             
             (Loss) |            | Net
               Income
             
             (Loss) Per
             
             Share(a)
|----------------------------- |  | ------------------------ |  | --------------------------------------- |  | ----------------------------------------------------------------------------------- | ---- | ----------------------------------------------------------- | ---------- | ---------------------------------------------------------------------------------------------------
|
|2000                          |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    
|First
               Quarter  |  | $    349,533             |  | $136,918                                |  | $  (39,977                                                                          | )(b) |                                                             | $  (22,525 | )(b)                                                                                               
|Second
               Quarter |  | 356,639                  |  | 160,948                                 |  | 5,881                                                                               |      |                                                             | 13,009     |                                                                                                    
|Third
               Quarter  |  | 371,653                  |  | 172,517                                 |  | 20,239                                                                              |      |                                                             | 42,598     |                                                                                                    
|Fourth
               Quarter |  | 381,768                  |  | 171,366                                 |  | 8,082                                                                               | (c)  |                                                             | 431,189    | (c)                                                                                                
|                              |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    
|Total Year                    |  | $1,459,593               |  | $641,749                                |  | $      6,374                                                                        |      |                                                             | $  464,271 |                                                                                                    
|                              |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    
|1999                          |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    
|First
               Quarter  |  | $    365,747             |  | $149,635                                |  | $(161,360                                                                           | )(d) |                                                             | $(154,569  | )(d)                                                                                               
|Second
               Quarter |  | 370,591                  |  | 171,791                                 |  | 5,030                                                                               |      |                                                             | 6,393      |                                                                                                    
|Third
               Quarter  |  | 329,868                  |  | 126,627                                 |  | (113,027                                                                            | )(e) |                                                             | (84,477    | )(e)                                                                                               
|Fourth
               Quarter |  | 345,073                  |  | 151,876                                 |  | (22,259                                                                             | )(f) |                                                             | (12,738    | )(f)                                                                                               
|                              |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    
|Total Year                    |  | $1,411,279               |  | $599,929                                |  | $(291,616                                                                           | )    |                                                             | $(245,391  | )                                                                                                  
|                              |  |                          |  |                                         |  |                                                                                     |      |                                                             |            |                                                                                                    




|(a) | Due to
               rounding some totals may not add.
|--- | -------------------------------------------------------




The
             following items were included in special charges, in the
             corresponding fiscal quarter:





|(b) | Includes
               $23.7 million related to the restructuring initiative that was
               announced in March 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes
               $2.6 million adjustment to decrease the aforementioned
               restructuring initiative.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(d) | Includes
               $150.0 million of in-process research and development charges
               related to the acquisition of Yago.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(e) | Includes
               $67.4 million of in-process research and development charges
               related to the acquisitions of Ariel, FlowPoint and
               NetVantage.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Includes
               $17.6 million related to fixed asset loss for idle, obsolete and
               discarded equipment.
|--- | ----------------------------------------------------------------------------------------------------------------------------







INDEPENDENT AUDITORS REPORT





The Board
             of Directors and Stockholders


Cabletron
             Systems, Inc.:





We have
             audited the accompanying consolidated balance sheets of Cabletron
             Systems, Inc. and subsidiaries as of February 29, 2000 and
             February 28, 1999, and the related consolidated statements of
             operations, stockholders equity and cash flows for each of
             the years in the three-year period ended February 29, 2000. These
             consolidated financial statements are the responsibility of the
             Companys management. Our responsibility is to express an
             opinion on these consolidated financial statements based on our
             audits.





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





In our
             opinion, the consolidated financial statements referred to above
             present fairly, in all material respects, the financial position
             of Cabletron Systems, Inc. and subsidiaries as of February 29,
             2000 and February 28, 1999, and the results of their operations
             and their cash flows for each of the years in the three-year
             period ended February 29, 2000, in conformity with generally
             accepted accounting principles.





| | 
| | 

| | /s/ KPMG
               LLP
| | ---------------------------




Boston,
             Massachusetts


March 28,
             2000, except for the last three paragraphs of Note 3, as to which
             the date is May 23, 2000





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





Not
             applicable.





PART
             III





ITEM
             10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE
             REGISTRANT





Information
             relating to the Directors of the Company is set forth in the
             section entitled Proposal 1: Election of Class II
             Directors, appearing in the Companys Proxy Statement
             for its 2000 Annual Meeting of Stockholders (Proxy
             Statement), which is incorporated herein by reference.
             Information relating to the executive officers of the Company is
             included in the section titled Executive Officers of the
             Registrant, appearing in Part I hereof. Information with
             respect to directors and executive officers who failed to timely
             file reports required by Section 16(a) of the Securities Exchange
             Act of 1934 may be found in the Proxy Statement under the caption
             Section 16(a) Beneficial Ownership Reporting
             Compliance. Such information is incorporated herein by
             reference.





ITEM
             11.    EXECUTIVE COMPENSATION





See the
             information set forth in the section entitled Executive
             Compensation, appearing in the Companys Proxy
             Statement for its 2000 Annual Meeting of Stockholders, which is
             incorporated herein by reference.





ITEM
             12.    SECURITY OWNERSHIP OF CERTAIN
             BENEFICIAL OWNERS AND MANAGEMENT





See the
             information set forth in the section entitled Securities
             Ownership of Certain Beneficial Owners and Management,
             appearing in the Companys Proxy Statement for its 2000
             Annual Meeting of Stockholders, which is incorporated herein by
             reference.





ITEM
             13.    CERTAIN RELATIONSHIPS AND RELATED
             TRANSACTIONS





See the
             information set forth in the section entitled Certain
             Transactions, appearing in the Companys Proxy
             Statement for its 2000 Annual Meeting of Stockholders, which is
             incorporated herein by reference.





PART
             IV





ITEM
             14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
             AND REPORTS ON FORM 10-K





(a)
               Documents filed as part of this report:





| | 1.  Consolidated financial statements (see
               item 8)
| | -----------------------------------------------------------------




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




|                                                                                                    |  | page(s)
|--------------------------------------------------------------------------------------------------- |  | -------
|Independent Auditors Report                                                                        |  | 66     
|Consolidated Balance Sheets at February 29, 2000 and
               February 28, 1999               |  | 41     
|Consolidated Statements of Operations for fiscal years
               2000, 1999 and 1998           |  | 42     
|Consolidated Statements of Stockholders Equity for
               fiscal years 2000, 1999 and 1998 |  | 43     
|Consolidated Statements of Cash Flows for fiscal years
               2000, 1999 and 1998           |  | 44     
|Notes to
               Consolidated Financial Statements                                           |  | 45-65  




| | 2.  Consolidated financial statement
               schedule
| | ------------------------------------------------------------




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




|                                                             |  | page(s)
|------------------------------------------------------------ |  | -------
|Independent Auditors Report                                 |  | 66     
|Schedule
               IIValuation and Qualifying Accounts |  | 70     




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




| | 3.  Exhibits
| | ------------




| | The
               following exhibits unless herein filed are incorporated by
               reference.
| | -------------------------------------------------------------------------------------------------------




|3.6   |  | Amended
               and Restated By-Laws of Cabletron Systems, Inc.
|----- |  | ----------------------------------------------------------------------
|10.25 |  | Promissory Note with Piyush Patel                                     
|10.26 |  | Promissory Note with Earle S. Humphreys                               
|10.27 |  | Promissory Note with Enrique P. (Henry) Fiallo                        
|10.28 |  | Promissory Note with Enrique P. (Henry) Fiallo                        
|22.1  |  | Subsidiaries of Cabletron Systems, Inc.                               
|23.1  |  | Consent
               of Independent Auditors                        
|27    |  | Financial
               Data Schedule                                




(b)
               The Company filed one report on Form 8-K during the
             last quarter of the fiscal year ended February 29, 2000. On
             January 14, 2000, the Company announced that it had entered into
             Agreement and Plan of Merger and Reorganization with Efficient
             Networks, Inc., a Delaware corporation (Efficient),
             Fire Acquisition Corporation, a California corporation and
             wholly-owned subsidiary of Efficient, and FlowPoint Corporation, a
             California corporation and wholly-owned subsidiary of the Company,
             pursuant to which, on December 17, 1999, FlowPoint merged with and
             into Merger Sub and became a wholly-owned subsidiary of
             Efficient.





INDEPENDENT AUDITORS REPORT





The Board
             of Directors and Stockholders


Cabletron
             Systems, Inc.:





Under date
             of March 28, 2000, except for the last three paragraphs of Note 3,
             as to which the date is May 23, 2000, we reported on the
             consolidated balance sheets of Cabletron Systems, Inc. and
             subsidiaries as of February 29, 2000 and February 28, 1999, and
             the related consolidated statements of operations,
             stockholders equity and cash flows for each of the years in
             the three-year period ended February 29, 2000. 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.





| | 
| | 

| | /s/ KPMG
               LLP
| | ---------------------------




Boston,
             Massachusetts


March 28,
             2000





CABLETRON SYSTEMS, INC.





VALUATION AND QUALIFYING ACCOUNTS


For
             Years Ended February 29, 2000, February 28, 1999 and
             1998


(in
             thousands)





|Description                                    |  | Balance at
             
             beginning
             
             of period |  | Charged to
             
             expense |  | Amounts
             
             attributable
             
             to changes in
             
             foreign
             
             currency rates |   | Amounts
             
             written off |           | Balance
             
             at end
             
             of period
|---------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | --------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------- | --------- | ------------------------------------------------------------------------------
|Allowance
               for doubtful accounts
|February 29, 2000                              |  | $23,260                                                                              |  | $17,650                                       |  | $                                                                                                                                                                    |   |                                                | $(19,226  | )                                                                             
|February 28, 1999                              |  | $21,043                                                                              |  | $10,784                                       |  | $                                                                                                                                                                    |   |                                                | $  (8,567 | )                                                                             
|February 28, 1998                              |  | $15,476                                                                              |  | $11,615                                       |  | $(81                                                                                                                                                                  | ) |                                                | $  (5,967 | )                                                                             




SIGNATURES





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





| | CABLETRON
             SYSTEMS
             , INC
             .
| | ----------------------------------------------------------------




| | /S
             /    PIYUSH
             PATEL
| | ----------------------------------------------

| | By:
| | ---

| | Piyush
               Patel
| | ---------------------------

| | Chairman, President and Chief Executive
               Officer
| | --------------------------------------------------------------




May 30,
             2000





Date





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





|Signature                                                                                      |  | Titles                                                                                                                                                                                                                                             |  | Date                         
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|                                                                                               | 
|/S
              /    PIYUSH
              PATELPiyush Patel                                   |  | Chairman, President and Chief
              
              Executive Officer                                                                                                                                                                       |  | May 30,
                2000 
|                                                                                               | 
|/S
               /    DAVID
               J. KIRKPATRICKDavid J. Kirkpatrick                 |  | Corporate Executive Vice
               
               President of Finance and
               
               Chief Financial Officer
               
               (Principal Financial and
               
               Accounting Officer) |  | May 30,
                 2000
|                                                                                               | 
|/S
               /    MICHAEL
               D. MYEROWMichael D. Myerow                       |  | Secretary and Director                                                                                                                                                                                                                             |  | May 30,
                 2000
|                                                                                               | 
|/S
               /    PAUL
               R. DUNCANPaul
                 R. Duncan            |  | Director                                                                                                                                                                                                                                           |  | May 30,
                 2000
|                                                                                               | 
|/S
               /    DONALD
               F. MC
               GUINNESSDonald F. McGuinness |  | Director                                                                                                                                                                                                                                           |  | May 30,
                 2000

EXHIBIT INDEX





|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Restated Certificate of Incorporation of Cabletron
                 Systems, Inc., a Delaware corporation,
               
               which is incorporated by reference to Exhibit 3.1 of the
                 Companys Registration
               
               Statement on Form S-1, No. 33-28055, (the First Form
                 S-1).
|            | 
|3.2         |  | Certificate of Correction of the Companys
                 Restated Certificate of Incorporation, which is
               
               incorporated by reference to Exhibit 3.1.2 of the Companys
                 Registration Statement on
               
               Form S-1, No. 33-42534 (the Third Form S-1).                        
|            | 
|3.3         |  | Certificate of Amendment of the Restated Certificate of
                 Incorporation of Cabletron
               
               Systems, Inc., incorporated by reference to Exhibit 4.3 of the
                 Companys Registration
               
               Statement on Form S-3, No. 33-54466, (the First Form
                 S-3). 
|            | 
|3.5         |  | Certificate of Amendment of the Restated Certificate of
                 Incorporation of Cabletron
               
               Systems, Inc. filed with the Secretary of State of the State of
                 Delaware on July 7, 1995                                                                                                         
|            | 
|3.6         |  | Amended
                 and Restated By-laws of Cabletron Systems, Inc.                                                                                                                                                                                                                                                                             
|            | 
|4.1         |  | Specimen stock certificate of Cabletron Stock
                 (incorporated by reference to Exhibit 4.1 of
               
               Cabletrons Registration Statement on Form S-1, No.
                 33-28055.                                                                                                                            
|            | 
|10.1        |  | 1989
                 Restricted Stock Purchase Plan, which is incorporated by
                 reference to Exhibit 10.1
               
               of the First Form S-1.                                                                                                                                                                      
|            | 
|10.2        |  | 1989
                 Restricted Stock Plan, which is incorporated by reference to
                 Exhibit 10.2 of the First
               
               Form S-1.                                                                                                                                                                               
|            | 
|10.3        |  | 1989
                 Equity Incentive Plan, as amended, which is incorporated by
                 reference to Exhibit 4
               
               of the Companys Registration Statement on Form S-8, No.
                 33-50454.                                                                                                         
|           
|            | 
|10.5        |  | 1989
                 Stock Option Plan for Directors, as amended, which is
                 incorporated by reference to
               
               Exhibit 10.5 of the Third Form S-1.                                                                                                                                                         
|            | 
|10.6        |  | 1998
                 Equity Incentive Plan, which is incorporated by reference to
                 Exhibit 4.1 of the
               
               Companys Form S-8 filed on July 29, 1999.                                                                                                                                                     
|            | 
|10.7        |  | Agency
                 Agreement between the Registrant and International Cable
                 Networks Inc., which
               
               is incorporated by reference to Exhibit 10.6 of the First Form
                 S-1.                                                                                                           
|            | 
|10.8        |  | Lease
                 dated October 19, 1992 between the Registrant and Heidelberg
                 Harris, Inc., relating
               
               to leased premises in Durham, New Hampshire, which is
                 incorporated by reference to
               
               Exhibit 10.9 of the First Form S-3.                    
|           
|            | 
|10.17       |  | Amendment No. One to Reseller Agreement dated as of
                 February 7, 1998 by and between
               
               the Registrant and Digital (Incorporated by Reference to Exhibit
                 10.2 of the Registrants
               
               Form 8-K/A of March 4, 1998).                                          
|            | 
|10.19       |  | Employment Agreement with Piyush Patel, which is
                 incorporated by reference to Exhibit
               
               10.19 of the Form 10-Q filed on July 15, 1999.                                                                                                                                                                 
|            | 
|10.20       |  | Employment Agreement with Romulus Pereira, which is
                 incorporated by reference to
               
               Exhibit 10.20 of the Form 10-Q filed on July 15,
                 1999.                                                                                                                                             
|            | 
|10.21       |  | Change-in-control severance benefit plan for key
                 employees, which is incorporated by
               
               reference to Exhibit 10.21 of the Form 10-Q filed on October 15,
                 1999.                                                                                                                         




|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                   |  | 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|10.22       |  | Standstill and Disposition Agreement, dated as of
                 December 17, 1999, between Efficient
               
               Networks, Inc. and the Company, which is incorporated by
                 reference to Exhibit 2.4 of
               
               the Companys Current Report on Form 8-K, No.
                 001-10228. |  | 
|            | 
|10.23       |  | Manufacturing Services Agreement (the Flextronics
                 Agreement), dated as of February
               
               29, 2000, between the Company and Flextronics International USA,
                 Inc.                                                                                                                           |  | 
|            | 
|10.24       |  | Agreement by Cabletron Systems, Inc. to Furnish Copies
                 of Omitted Schedules and
               
               Exhibits to the Flextronics Agreement.                                                                                                                                                                                |  | 
|            | 
|10.25       |  | Promissory Note with Piyush Patel.                                                                                                                                                                                                                                                                                                                    |  | 
|            | 
|10.26       |  | Promissory Note with Earl S. Humphreys.                                                                                                                                                                                                                                                                                                               |  | 
|            | 
|10.27       |  | Promissory Note with Enrique P. (Henry)
                 Fiallo.                                                                                                                                                                                                                                                                                      |  | 
|            | 
|10.28       |  | Promissory Note with Enrique P. (Henry)
                 Fiallo.                                                                                                                                                                                                                                                                                      |  | 
|            | 
|22.1        |  | Subsidiaries of Cabletron Systems,
                 Inc.                                                                                                                                                                                                                                                                                              |  | 
|            | 
|23.1        |  | Consent
                 of Independent
                 Auditors                                                                                                                                                                                                                                                                                     |  | 
|            | 
|27          |  | Financial Data Schedule                                                                                                                                                                                                                                                                                                                               |  | 

DIRECTORS AND OFFICERS


---




Board of Directors





Piyush
               Patel


Chairman
               of the Board, President


and Chief
               Executive Officer





Craig
               R. Benson


Director





Paul
               R. Duncan


Executive
               Vice President


Reebok
               International, Ltd.





Donald
               F. McGuinness


Chairman
               of the Board


Electronic Designs, Inc.





Michael D. Myerow


Partner
               in law firm of Myerow & Poirier





Officers





Thomas
               D. Bunce


Executive
               Vice President, Product Development





Enrique P. Fiallo


President
               of Enterasys Networks and former Senior Vice President and Chief
               Information Officer





Thomas
               N. Gleason


Executive
               Vice President, North American/South American Sales





Earle
               S. Humphreys


President
               of GlobalNetworkTechnology Services and former Executive
               Vice President, Global Services





Eric
               Jaeger


Executive
               Vice President of Corporate Affairs





David
               J. Kirkpatrick


Corporate
               Executive Vice President of Finance and Chief Financial
               Officer





Piyush
               Patel


Chief
               Executive Officer and President





Romulus S. Pereira


President
               of Riverstone Networks and former Chief Operating
               Officer





John
               J. Roese


Chief
               Technology Officer





Joseph
               H. Solari


President
               of Europe, Middle East and Africa





Michael A. Skubisz


President
               of Aprisma Management Technologies, Inc. and former Chief
               Technology Officer





Gary
               M. Workman


President
               of Operations, Asia Pacific


STOCKHOLDER INFORMATION


---




Annual
               Meeting of Stockholders





The
               Annual Meeting of Stockholders will take place at 10:00 a.m. on
               Tuesday, July 11, 2000 at the Frank Jones Center, 400 Route One
               By-Pass, Portsmouth, NH 03801.





Stockholder Inquiries





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





| | Cabletron Systems, Inc.
| | -----------------------

| | Investor Relations
| | ------------------

| | PO Box
                 5005
| | ----------------------------

| | Rochester, NH 03866-5005
| | ------------------------

| | Telephone: (603) 337-2247
| | -------------------------

| | Facsimile: (603) 337-2654
| | -------------------------




Listing





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





Transfer Agent





State
               Street Bank and Trust Company is the Transfer Agent and
               Registrar of the Companys common stock. Inquiries
               regarding lost certificates, change of address, name or
               ownership should be addressed to:





| | BankBoston, NA
| | --------------

| | EquiServe
| | ---------

| | P.O.
                 Box 8040
| | ------------------------------

| | Boston,
                 MA 02266-8040
| | --------------------------------------




Independent Auditors





KPMG
               LLP


99 High
               Street


Boston,
               MA 02110





Legal
               Counsel





Ropes
               & Gray


One
               International Place


Boston,
               MA 02110